Is this the end of BRIC’s as we know them?! Or was it all just a dream anyway?! Pt II

Russia (continued)

To these eyes, Russia is suffering from an economic phenomena, called the Dutch Disease. Wikipedia:

In economics, the Dutch disease is the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector (or agriculture).

The mechanism is that an increase in revenues from natural resources (or inflows of foreign aid) will make a given nation's currency stronger compared to that of other nations (manifest in an exchange rate), resulting in the nation's other exports becoming more expensive for other countries to buy, making the manufacturing sector less competitive.

Wikipedia shows here the “romantic view” on Dutch disease.

In my view, however, the constantly high cash flow, coming from oil, gas and other natural resources, can make people and countries 'lazy', egocentric and self-satisfied. “Why should we work hard to rebuild and maintain our manufacturing industry and why should we ask other countries to help us in the process, when our wealth is litterally flowing from the earth?”

In Russia a large share of the middle and lower class people still works in (semi-) government jobs and (low-qualified) service-oriented jobs, like ticket collector, museum usher, safety guard, street cleaner, shop assistant, bank employee and civil servant in state and community service. 

These are all labour-intensive and useful jobs from a societal and safety point of view and they give numerous Russians a daily job, who else might have been unemployed.

Nevertheless, these jobs add very little to the Russian GDP in general, as these are not productive jobs. Most western countries can do the same amount of work with a fraction of the employees that Russia has contracted for it. Therefore most of these jobs would probably have been dismissed, when the oil and gas industry would not have yielded so much money for the Russian state and the average incomes in Russia would still not have been so low. The low wages therefore enable the possibilities to maintain these kinds of unproductive jobs.

Of the total Russian population of 143 million people, only about 10% works in the Russian manufacturing industry, which is not quite much for a modern and developing country, which is not particularly services-oriented yet. 

The country, with its overload of old ‘Soviet-style’ plants and very few modern factories, has been put asleep initially by the wealth, created by its oil and gas industry. As a consequence, it ‘forgot’  to modernize its manufacturing industries, as great sources of income.

Especially in the Boris Yeltsin-years (1991-1999), the blatant breakdown of the Russian industry was worrisome, as the following chart shows.

The Russian y-o-y growth from 1991-2010
Source: Wikipedia
Click to enlarge

Since the reign of President Vladimir Putin started in 1999, the Russian manufacturing industry went through a kind of revival with some impressive growth figures during the last 15 years. 

Nevertheless, the country is still lagging far behind industrial behemots, like France, Germany, Japan and the US; countries, which all earn a much higher GDP per capita than Russia. Although I can’t prove it, it is my firm opinion that the Dutch Disease added to this lagging behind of Russia’s manufacturing industry.

Russia’s defence industry, the biggest employer of Russian manufacturing and the second largest defence industry in the world, is of course still a force to be reckoned with. This industry hosts about 3 million workers or 20% of the total population of manufacturing workers and it produces some state-of-the-art weaponry, which is firmly on the short list of many countries. This is an industry in Russia that will remain flourishing in years to come; not only because of the quality of their products, but also due to the simple fact that many countries cannot or simply don’t want to buy western weaponry. On the other hand, the 3 million workers in this industry only represent 2% of the total Russian population.

In the Russian automotive industry, the picture is mixed. This industry, in combination with related, subcontracting industries, hosts a total of about 3 million workers (650,000 direct jobs and 2-3 million jobs among subcontractors), according to Wikipedia, and is therefore also a very important employer in Russia.

After the credit crisis started in 2008, the production of automobiles dropped to 595,000 vehicles in 2009 from 1,5 million vehicles in 2008. However, the introduction by the Russian government of a cash-for-clunkers program in 2010, in combination with additional customs duties on foreign-built vehicles, was able to turn this trend around, towards 1.2 million vehicles in 2010 and 1.6 million vehicles in 2011 (see chart). 

The additional sales from this cash-for-clunkers program alone was estimated to 585,000 vehicles. So, everythings’s well in the end, you might say.

The Russian car production 2004-2011
Source: www.usrbc.org
Click to enlarge

Well, not exactly. First, state programs like cash-for-clunkers have the habit of moving sales forward in time. Today’s extra sold cars are tomorrow’s declining sales.

And there is more. The share of the traditional Russian brands among the domestically produced cars is declining rapidly to 25% in 2011 from 31% in 2010 (see chart). If this decline continues at the same speed, the genuine Russian car industry will be down and out in five or six years. Russia will turn into a country that only builds ‘other people’s cars’.

Share of domestic brands in Russian car production 2010-2011
Source: www.usrbc.org
Click to enlarge

Where other former ‘iron-curtain’ brands, like Škoda (Czechia) and Dacia (Romania) are currently flourishing in the hands of respectively Volkswagen and Renault, the ex-Soviet brands Lada, Moskvitch and Volga lead a comatose existence with rapidly declining sales and a total lack of competitive, new models. The South-Korean, Japanese and West-European car-brands almost completely ‘took over the joint’ in Russia, irrespective whether this was with domestically produced or imported cars. In my opinion, this is bad news for Russia.

The aviation industry in Russia – especially the military branch, but also civil aviation – is quite successful and innovative and through a series of joint ventures, it is getting back some of its old luster from the Soviet era. Nevertheless, its size on a national scale is still just too small to be very important for the GDP of Russia as a whole.

Looking at the whole manufacturing industry in Russia, you see the strange phenomena that the old, communist Soviet Union was seemingly much more capable as an industrial nation than modern, capitalist Russia. 

This makes sense, due to the fact that the Soviet Union was always much more self-supporting than modern Russia. Still, it is a shame that today’s Russian manufacturing industry does not expand and improve to levels far beyond the old Soviet Union, although all potential is seemingly there. I blame this to the Dutch Disease that is holding Russia in its grip.

Thus, instead of a blessing, the natural resources became something of a burden. Although you can argue that it doesn’t matter where the GDP of a country comes from, believe me when I say that the US shale gas revolution probably sent shockwaves through the Kremlin. When your country is so dependent on natural resources for its national income, the price of these resources at the world markets act like a barometer: high prices mean good weather and low prices mean bad weather.

From this point of view, the presence of Russia in the BRIC’s always made a somewhat odd impression on me.

During my eleven visits to St-Petersburg, Russia, I saw this city change from an old ‘fleebag’ city, with incredibly old and rusty transport, thousands of shabby-looking blocks of flats, uncountable small kiosks and roads with potholes the size of truck-wheels, to a more modern metropole with slightly improved housing, numerous department stores and supermarkets and modernized city transport.

But still, you only have to scratch the modern surface and you see that very little has changed for most people:

• Most blocks of flats still look if they could collapse any moment;
• Most lower-class people yet have too few possibilities to develop themselves towards middle-class people;
• While the older Russians do have houses of their own, this is often impossible for young Russians, when they can't inherit their parents' house; 
• Alcohol-abuse is still one of the biggest causes for early mortality among Russian men.

And sometimes I doubt whether the potential for great, positive change and expanding economic growth is even there in Russia. 

For this change and growth to happen, the wealth should be more evenly divided over the country, but this does not happen yet. And there is still enormous lethargy and fatalism among the (still) shell-shocked Russian population, who think that they can't change the events and politics in their country. That is why Russia is not a real BRIC-country to me.

China

What can you say about China, besides it being the A.C.M.E brand of the world?! The economy in China grew at unbelievable speed during the last twenty-five years and a large number of Chinese people reached a level of wealth that many western people can only dream of.

Whether it is the low-tech clothing and manufacturing industry for cheap household products and office requisites, the hi-tech electronics industry, the automotive industry or the heavy duty and shipping industry, China is omnipresent. Chinese cities are growing at the speed of light and they glow in the dark from all the illuminated skyscrapers.

Chinese banks and insurance companies are expanding to all corners of the world and the country is leaving the rest of the world dazzled by its economic and hi-tech development.

But…:

• Why is the Chinese government so enormously afraid to give the Chinese middle and lower class population a little bit more personal freedom and the right of self-determination, instead of keeping EVERYTHING under tight control?
  
• Why is the government so anxious for low economic growth (i.e. below 7%(!)) or even a small decline in economic growth? Are they afraid of large-scale riots among the population, as soon as economic growth sets below 5%? And why are they so afraid for riots?
  
• Why does the Chinese government keep so quiet about the environmental changes and (sometimes) even catastrophies that the large-scale industrialization caused in their country?
  
• Do they think that rivers full of floating dead pigs and poultry are normal?
  
• Don’t they find it strange that the wealthy Chinese people only want to eat food that is produced abroad?
  
• Do they consider the dense smog in the cities Shanghai and Beijing to be the ‘new normal’?!
  
• Why seem the official Chinese macro-economic data always to be a bunch of lies, damn lies and (flawed) statistics?
  
• Why are the official Chinese growth, production, import and export data almost never in synch with the actual purchase and sales manager's data and the real production data of Chinese factories? And with the import and export data coming from the rest of the world? Just because the officially exported goods were produced by secret factories and subsequently exported to outer space?!
  
• Why do some scientists estimate that the real Chinese economy is about $1 trillion smaller than according to the official data from the Chinese National Bureau of Statistics? What is there to hide?
  
  Baseline Chinese economic data is unreliable. Taking published National Bureau of Statistics China data on the components of consumer price inflation, I attempt to reconcile the official data to third party data. Three problems are apparent in official NBSC data on inflation.
  
  First, the base data on housing price inflation is manipulated. According to the NBSC, urban private housing occupants enjoyed a total price increase of only 6% between 2000 and 2011. Second, while renters faced cumulative price increases in excess of 50% during the same period, the NBSC classifies most Chinese households has private housing occupants making them subject to the significantly lower inflation rate. Third, despite beginning in the year 2000 with nearly two-thirds of Chinese households in rural areas, the NSBC applies a straight 80/20 urban/rural private housing weighting throughout our time sample. This further skews the accuracy of the final data.
  
  To correct for these manipulative practices, I use third party and related NBSC data to better estimate the change in consumer prices in China between 2000 and 2011. I find that using conservative assumptions about price increases the annual CPI in China should be adjusted upwards by approximately 1%. This reduces real Chinese GDP by 8-12% or more than $1 trillion in PPP terms.

Nobody can deny that the Chinese economy has been an enormous success story, during the last 25 years. And nobody will deny that China captured its well-deserved position in the top two of largest economies in the world, only lagging to the USA.

Nevertheless, the kind of growth that China showed year-on-year seems unsustainable.

First, for the fact that the country itself seemingly can’t handle such growth anymore, without turning into an environmental death trap for the people that live in it.

And second, for the fact that some parts of this presumed growth have probably not even been achieved anyway: in this case the emperor has definitely clothes on, but it are not the clothes that everybody wants to see in them.

China has been and will be the leading BRIC-country in many years to come, is my presumption. The other BRIC-countries don’t seem to have the possibilities and stamina to outgun the Chinese for a long time. 

However, in my opinion some of the presumed magic of China has been based upon a mirage: something that was never really there in reality. When you exclude this, the development of China is still an economic miracle.

Tomorrow comes the third and final part of this series.