Russia's Physical and Social Infrastructure: Implications for Future Development

December 2000

This seminar series was sponsored by the National Intelligence Council (NIC) and the Bureau of Intelligence and Research of the US Department of State. The NIC routinely sponsors unclassified conferences with outside experts to gain knowledge and insight and to sharpen the level of analysis and debate on critical issues. The views expressed are those of individuals and do not represent official US intelligence or policy posistions.

Executive Summary

Introduction

During the past two years, the National Intelligence Council and the Bureau of Intelligence and Research of the US Department of State sponsored a working group and four seminars with experts from outside the Intelligence Community to examine the impact of societal and infrastructural factors on Russia's future over the next two decades. The factors identified--demography, health, intellectual capital, and physical infrastructure--all pose great challenges to Russia. The purpose of the project was to begin to think through in systematic fashion the difficulties and opportunities confronting Russia's leadership in these four specific areas.

Key questions with which participants grappled included: What is the extent of the challenge in each of these areas? What are the trends, and to what extent are the outcomes of these trends over the next 20 years already determined? What are the key drivers that can influence these trends? When could government policy intervention or outside assistance be expected to have payoff, and how costly would it be? Is there a logical sequence of priorities for attention? What are the implications of alternate paths?

This report consists of three substantive sections. This Executive Summary is the first; it captures the main findings of the presentations and discussions at the seminars. The second is an essay by Marcus Noland, Senior Fellow at the Institute of International Economics and project adviser, who explores these themes in greater detail. The third section contains brief summaries of the papers presented at the seminars. The agendas of the seminars and lists of speakers follow in the appendixes.

Key Findings

Most of the challenges confronting Russia in the spheres of social and physical infrastructure are not unique. It is the confluence of so many challenges all at once--initiated by the abnormal existence and then the breakup of the Soviet Union, intensified by the stormy transition in Russia over the past decade, and then exacerbated by the collapse of the ruble in August 1998--that makes the Russian case extreme.

Demographic Trends

Experts noted that demography is one of the most reliable factors that can be used to make projections about a specific country. Demographics can help answer some narrow questions--such as likely pension burdens--and can sometimes be helpful with "middle-gauge" questions, such as future health care costs or housing markets. Demographics generally are not reliable or insightful for other questions, such as homicide rates or generational conflict. In Russia's case the unique nature of the demise of the Soviet empire may place Russia outside the normal range of historical experience, moreover, and limit the predictive value of demographics.

Experts agreed that the combination of high Russian mortality rates and low birth rates will affect Russia profoundly in the coming decades.

Internally, population growth among Islamic peoples of Russia, many concentrated in Russia's south, continues to outpace that of ethnic Russians, while Northern and Far Eastern regions are slowly being depopulated as state-owned industries close and people move to European Russia. As a factor in population growth, immigration has outweighed emigration since the breakup of the former Soviet Union; barring civil wars or other disasters in the near abroad, it has probably peaked.

By 2020, Russia's population is most likely to be smaller--according to Feshbach, it is very likely to decline from 146 million to 130 million in this timeframe--and with a higher median age than today's. Russia's State Committee for Statistics recently forecast that the population will shrink to 134 million by 2015. As Russia's population ages, an increase in the dependency ratio is certain: by 2015 the ratio will be just four workers for every three nonworkers, with a dramatic shift among the nonworking population toward the elderly. The aging of the population and the increase in the dependency ratio suggest that domestic public and private capital available to refinance new investments may decline over the next two decades, underscoring and increasing the importance of creating the necessary conditions to attract investment from abroad.

Among Russia's labor force, unemployment as a result of economic decline has hit the female work force disproportionately. This increasingly unused resource could compensate for Russia's dwindling number of males, should a Russian economic recovery require additional labor.

Seminar participants saw both positive and negative implications of Russia's declining population.

Health Trends

Another factor influencing Russia's future demographic path for the worse--possibly making today's grim predictions appear optimistic--is the Russian health crisis. Seminar participants agreed that the list of Russia's health woes is extensive: continuing high rates of alcohol abuse with a resulting abundance of new fetal alcohol syndrome cases; pharmaceutical shortages; poor reproductive health and continuing high rates of abortion; rising rates of infertility; high rates of sexually transmitted diseases; cardiovascular diseases; anemia; poisoning from heavy metals and other toxic materials; environmentally associated cancers; high rates of injury; and malnutrition. One speaker pointed to the toll on health resulting from growing inequality in Russian society and associated stress, deprivation, and breakdown in social cohesion; another, however, warned of the methodological difficulty of differentiating causality from correlation in assessing the root of some health problems.

Experts noted that infectious diseases with the potential to spread beyond Russia's borders are growing rapidly.

Russia's medical establishment is badly positioned to cope with the challenges it faces. It is still overcentralized, overspecialized, hierarchical, and strongly shaped by the beliefs and practices of the Soviet era. Health expenditures are treated as a residual claimant on the Russian budget, a problem compounded by the inefficiency of Russian health care delivery. "Therapeutic anarchy" and a reliance on what one speaker euphemistically called "non-evidentiary-based medicine" are widespread. Most key decisionmakers in Russian medicine have strongly resisted change and Western advice, even when practitioners accepted such advice, they have lacked the organizational capacity and resources to carry through on treatments, as in the case of tuberculosis.

Russia's economic crisis has exacerbated many of the health problems. Shortage of resources has led to cuts in health spending and low salaries only irregularly paid to health-care workers, whose morale has plummeted. Russia's experiment with a medical insurance scheme has met with uneven success to date, although it has succeeded in keeping the decline in health expenditures to a lower rate than that experienced by other sectors such as education and culture. In addition, frequent bureaucratic shakeups have resulted in eight different health ministers since 1995, making consistent policy difficult to sustain.

A few seminar participants thought that a new generation of medical leaders will be more open to change. The majority, however, appeared unconvinced that an attitudinal shift could take place with sufficient magnitude and speed to prevent a serious deterioration in Russia's already abysmal health picture.

Finally, experts agreed that the trends in Russian health are of significance not simply for their negative demographic ramifications, but also for their probable strong negative impact on the future productivity of Russia's work force and its overall quality of life.

Trends in Intellectual Capital

Experts agreed that Russian intellectual capital is under a high degree of stress.

Significant recent growth in some forms of education will prove critical to Russia's emerging market economy. Enrollment in newly created business schools and management training courses is thriving and could result in significant future payoff. In addition, the growth of the Internet and global communications has provided new opportunities for more effectively organizing education across Russia's wide expanses as well as for absorbing knowledge from abroad. Recent tightening of controls over information flows--such as media, publications, and computer mail--raise questions, however, about Russia's future ability to benefit from greater interchange with other countries.

Russia's ability to recover from the damage to its intellectual capital during the last decade will play a key role in its ability to compete in future world markets. Given that the majority of Russians who will be in the labor force for the next two decades have already received their formal education or will soon do so, many changes in educational policy today are likely to bear fruit only at a later date. Some experts argue, however, that the educational system is not a leading indicator of change and not the place to start. Globalization presents other paths to technological success through adaptation rather than innovation, and improvements in education tend to follow naturally upon economic growth.

Trends in Physical Infrastructure

Russia's physical infrastructure reflects the legacy of Soviet-era priorities and relative Soviet autarky, ensuring that the transition to a new, more globalized economy will be difficult. Although assessments vary, many experts believe that a large proportion of Russian capital stock will have to be written off over the next decade. Investments have been made in industries in which Russia is unlikely to ever be internationally competitive, either because of poor quality or because the capital stock embodies technologies incompatible with international standards. Considerable capital has been invested in remote regions where neither the government nor private industry is likely to provide funds for upkeep or modernization. Demonetization, lack of institutional capacity, and inadequate property rights protection discourage investment in both public and private spheres.

The picture is mixed, however. In industry, some studies, such as that by McKinsey Associates, have found the potential for productivity improvement in many sectors. In housing, privatization appears to have given a boost to new construction, although the 1998 financial crisis interrupted this trend. In the transport sector, the extensive shakeout of Soviet-era bureaucracies, enterprises, and infrastructure that has taken place and is still occurring was necessary, but the potential for new companies to find new niches also seems high, if economic recovery continues.

Conclusions

Participants found that while the impact of certain trends, such as worsening demographics, is largely unavoidable for the next two decades, the Russian Government does have the capability, if not yet the demonstrated determination, to reverse or slow other negative trends in this timeframe. In some cases, timely action is required to prevent long-term adverse consequences. For instance, public policy decisions and directed resource flows could make a difference in education and health. Regional policy--from the center or decided locally--can also have great impact, and, together with other factors such as geography and resource wealth, could serve as a magnet to concentrate Russia's population into a smaller number of "winner" regions. And as with most other problems in Russia, the new leadership's ability to establish a predictable legal and fiscal environment--essential for ensuring economic stability, attracting private investment, and ultimately, stimulating economic growth--would increase Russia's ability to reverse many of these negative trends.

 

Overview Essay

Marcus Noland
Institute for International Economics

Russia's Physical and Social Infrastructure: Implications for Future Development(1)

While much has been made of adverse trends in the health and size of Russia's population, even by Russian President Putin himself in his first State of the Union address, the implication of these and other trends in Russia's physical and social infrastructure--its human capital and physical infrastructure--is less well understood. This paper draws upon lessons learned from the recently concluded seminar series to draw some preliminary conclusions about how these factors and their interactions will affect Russia's future economic and political development.

Demographic Trends
Although Russia has been below zero population growth for over 30 years, its population has been in a decline so steep over the past decade that it is outside the range of its previous historical experience except for wartime.

The Total Fertility Rate (TFR)--the average number of children a woman would have over her lifetime if she reflected the age-cohort adjusted fertility rates for a specific year--is considered the best indicator of the birthrate, with simple population replacement--or zero population growth--equating to a TFR of just over 2.14. Russia's TFR dropped sharply between the late 1950s and the early 1960s, then began to fall precipitously in 1991, reaching 1.17 in 1999. In the core ethnic Russian areas of the country, TFR is even lower, standing at just above 1.0 with some major urban areas reporting TFR below 1.0. The TFR in non-Russian ethnic areas, by contrast, exceeds replacement, sometimes by a wide margin. It should be noted, however, that infant mortality rates in these areas (in the 30-35 per 1,000 range) also exceed the already-high rates in ethnic Russian areas (17 per 1,000 in 1998 for Russia as a whole), so the differences in TFR across ethnic groups may overstate effective differences in population growth rates.

Continuation of TFR differentials across ethnic groups implies long-run shifts in the ethnic composition of the population. Between now and 2015, of Russia's 89 federal regions, only 12 areas--with substantial non-Russian populations--are projected to show population growth, though actually observed growth may be reduced by regional outmigration.(2) Given the relatively small percentage of total population that ethnic minorities represent in today's Russia, however, the impact will not be very large over the twenty-year horizon of this paper.

The causes of the decline in Russia's TFR, especially over the past decade, have been the subject of considerable argument.

Another factor that should be considered in assessing the likelihood of a rebound in Russia's TFR is the apparent increase in both reproductive health problems and infertility, which affect an estimated 15 percent of Russian couples. The broader scientific community is conducting research to gain a better understanding of the extent of reproductive health problems in Russia and their causes.

Russian TFR Relative to Other Countriesa
Country
TFR in 1998
Uzbekistan
2.9
Kazakhstan
2.1
Austria
1.5
Belgium
1.5
France
1.6
United Kingdom
1.6
Ukraine
1.4
Germany
1.3
Russia
1.23b
Italy
1.2

aBrian Carnell, "Total Fertility Rates for Europe and the NIS," www.carnell.com.population/tft_europe
bRussia's TFR in 1999 fell to 1.17

The consensus among experts consulted is that Russia's TFR is likely to remain in the range of 1.5 (roughly equivalent to today's Western European levels) to 1.0, but it must be conceded that demographers do not have particularly good models of the social determinants of fertility. Thus, barring a large influx of population from elsewhere, the Russian population is expected to continue its numeric decline over the next 20 years. Moreover, given current mortality rates (see below), by 2030 the median age of the Russian population will be over 40, with half the population having been born before the year 2000.

Mortality Rates and Public Health. While fertility rates have been declining, mortality rates have been rising. As with the fall in fertility, the fall in Russian life expectancy began in the Soviet period and accelerated after 1989. The period through 1993 saw a steep rise in age-specific death rates for both genders and for all age groups with the increase among working-age males particularly dramatic. By 1999, Russian statistics show life expectancy for men at 59.3 years and for women at 71.7 years.

As with fertility rates, regions vary considerably with respect to mortality rates, with death rates among the working-age populations of Siberia and the Far East 20 to 30 percent higher than the national average. Moreover, across Russia rising mortality rates are statistically correlated with relative economic inequality, not just with absolute declines in real income. The leading causes of death among Russia's working-age males are accidents, other trauma, and poisonings, including those associated with the consumption of alcohol and alcohol substitutes.

More broadly, deteriorating living standards--declining water quality and other environmental degradation, a worsening diet, less accessible health care--along with unhealthy lifestyle choices such as smoking, abusing alcohol, and practicing unsafe sex, have had a profound impact on the health of both males and females in Russia and have contributed to growing rates of infectious diseases. Only scientific research can determine whether the population's exposure to environmental pollution has weakened their immune systems.

 
Four Models of Russia's Population to 2010a

In 1995-96, Russia's State Statistical Agency (GOSKOMSTAT) developed four alternative models of Russia's population through 2010. Each of the four models made different assumptions regarding fertility and mortality rates and migration, and the estimated range of their 2010 populations ranged from 134.7 million to 143.7 million. Comparing the intermediate forecast produced by each model for the end of the year 2000 with actual population as of February 2000 reveals that actual population development over the period 1995-2000 lies somewhere between the most pessimistic and the next-most-pessimistic model. Of the four models, only the most pessimistic correctly postulated that TFR would continue to fall rather than rise over the period. The other three models postulated increases in TFR beginning in 1995 and running through 2000.

a "A Prognosis of Population Size for the Russian Federation Through 2010," published in Voprosy Statistiki, October 1997.

 

Tuberculosis and sexually transmitted diseases are especially worrisome. TB is well above epidemic proportions with both the very large prison population and medical personnel exhibiting extremely high infection rates. The apparent inability of the Russian health care establishment to handle the TB problem has contributed to the widespread fear that Russia is emerging as the prime incubator of drug-resistant strains of the disease. The number of reported cases of sexually transmitted diseases, including HIV/AIDS, is growing rapidly, and Russian authorities admit that the number of reported cases is but a fraction of the actual number. Even regions far from metropolitan centers report rapidly growing rates of infection. In Irkutsk, for example, reported cases jumped from 68 to more than 2,000 during the course of 1999.

The interaction between TB and HIV/AIDS, the flourishing sex trade in Russia and certain other NIS countries, and the growing rates of IV drug use all magnify the rate at which these diseases may spread. With an estimated 1.75 million children abandoned by their families in recent years, large numbers of very young females engaged in the sex trade, and IV drug use concentrated among younger people, the impact of these twin epidemics will fall most heavily on Russia's relatively small cohort of young people, further narrowing the demographic base.

In addition to the rise in infectious diseases, Russia faces other serious health problems:

The multiple and complex causes of Russia's increased mortality rates suggest that it would be exceedingly difficult to design public policy interventions to reverse these trends. Nonetheless, there are grounds for guarded optimism. In Russia, the antialcohol campaign of the late 1980s appears to have had a demographically significant effect on health status and mortality. Examples from other countries--the United States' experience with tobacco or successful government-backed anti-AIDS campaigns in some countries, some of which have lower incomes and social capacities than Russia--demonstrate the positive impact that public policy intervention can have. Today's high rates of infant and maternal mortality, for example, are problems that could be addressed by concerted government policies.

Increased Dependency Ratios. As Russia's population ages, statistics show a likely increase in the dependency ratio (the ratio of the noneconomically active to economically active population) beginning around 2010. By 2015 there will be just four workers for every three nonworkers, with a dramatic shift among the non-working-age population toward the elderly. Indeed, the net increase to the working-age population will continue only until just after 2005, at which point, barring a very large net gain of working-age people through immigration, the size of that population will begin to decline. Given the declines in births over the past decade (from 2.1 million in 1989 to 1.2 million in 1999), the decline in the working-age population is unlikely to bottom out before 2017 at the earliest.

However, for a bottoming out to occur, a very large and rapid increase in the number of births and/or significant immigration from abroad would have to occur. Ironically, a rapid rise in the number of births would exacerbate the dependency ratios over the short term, as both the below-working-age and the above-working-age populations grow. The rising dependency ratio under either scenario may depress the national savings rate and reduce future domestic resources available for investment. Moreover, increasing cross-regional variation in the dependency ratio is likely as a result of economic restructuring and internal migration. This increased variability in the dependency ratio in various locales could intensify internal political tensions.

Migration. Cross-border population movement could offset or exacerbate demographic trends in Russia. During the period immediately following the breakup of the Soviet Union, Russia experienced relatively high levels of both legal and illegal immigration and emigration, with net immigration peaking at nearly 900,000 in 1994. A majority of outward-bound migrants were ethnic Germans or Jews joining communities abroad. Inward-bound migrants, who tended to be somewhat older than the Russian population as a whole, were largely ethnic Russians leaving parts of the former Soviet Union, often fleeing civil strife. This ethnicity-based cross-border population movement appears to have largely played itself out, and since a spike following the ruble crisis of August 1998, Russia has experienced reduced levels of both immigration and emigration, with annual in-migration running below 400,000--a contributor to population size, but not enough to offset the decline in the natural population.

That said, a very large Russian diaspora remains in the other countries of the former Soviet Union, and political instability in those countries or the appearance of a large and growing gap in economic well-being in Russia's favor could generate considerably higher levels of immigration. Conversely, a worsening of political or economic conditions in Russia could lead to increased emigration, especially of the highly skilled.

One other demographic factor that will have an impact on the shape of Russia in 2020 is internal migration. Since the end of the Soviet Union and its system of heavy subsidies to encourage people to move to otherwise undesirable regions, there has been a large and continuing out-migration from climatically harsh or economically depressed regions, especially from the Far North, the Far East, and Siberia. This out-migration is expected to continue over the next 20 years: from 1995 to 2010 the majority of administrative regions in the Far East and Siberia is expected to suffer major population loss, some as much as 30 percent. In the case of the geopolitically sensitive Far East, the fact that the exodus is heavily weighted toward young adult males and young families has potentially serious economic and security consequences. Increasing concentrations of the elderly in these regions will place additional economic stress on local governments.

The exodus of young males and young families from the Russian Far East also means that the region would soon encounter a labor shortage that probably would have to be overcome through the importation of labor from Asia, especially from China and North Korea. There is already some use of Korean labor in the region, and even today's modest Chinese presence has stirred up anti-Chinese sentiments, which have been exploited by local politicians. A much larger foreign presence would be fraught with social consequences. The sizable population losses that are projected for the Far East, and especially the loss of young males, also will have an impact on Russian military planners. The shortage of mobilizable manpower in this vast and strategically important region will mean that, if required, military manpower will have to be mobilized well to the West and transported into the Far East.

Labor Force and Human Capital
For a decade we have observed the decline of the Soviet economic system without the creation of a robust alternative. The ongoing transformation of the Russian economy has had profound effects. Overall employment has declined, though Soviet-era practices encouraged some overemployment. The regional, sectoral, and occupational pattern of employment has changed considerably. As discussed above, outmigration from the Russian Far East and North have left those regions either dependent on foreign workers or forced to accept labor shrinkage. Industrial employment has declined while service sector employment, especially in business and finance, has increased. Women's employment has fallen disproportionately, even though the sectors of greatest employment reduction--industry and construction--were the sectors where women were most underrepresented relative to their overall labor force participation. New entrants to the labor force are far more likely to seek careers in business than in public-sector occupations or in science or industry. Not surprisingly, changes in the demand for labor have also been manifested in changes in wage rates.

These labor market trends reflect a combination of transition away from the Soviet-era economy and worldwide technological changes. To a certain extent, policy measures might be undertaken to offset these trends, for example, by subsidizing the consumption of products produced in Russian industrial enterprises or providing subsidies to enterprises in distant regions. Whether such measures could succeed in reversing such fundamental forces is doubtful, however. The relevant questions may be how much longer can this process--essentially driven by the decay of the old system--continue, and how rapidly can an effective alternative system be built?

Globally, technological change has increased the wage premium associated with educational attainment and the acquisition of economically relevant skills, which may or may not be narrowly "technical" in nature. Russia is no exception. Technological change and the transition from the Soviet-era economy have generated increased wage and wealth inequality, increasing income to those well placed to meet the new demands of the marketplace and reducing income in absolute terms to the low-skilled and those in declining sectors. Throughout Russia, unemployment is inversely correlated with educational attainment. Skill formation is absolutely essential to success in the 21st century economy at both the national and personal levels.

The existing Russian educational system provides high-quality education for the elite but mediocrity for the masses. State subsidies to elite education are quite large. In terms of indicators such as years of schooling and per-pupil expenditure, Russia is firmly among the ranks of middle-income countries such as the Philippines, Thailand, and Uruguay.

The Russian work force currently appears to have enough engineering talent to efficiently adapt technological innovations produced abroad--a hallmark of economic development among "follower" countries--but this may not continue to be true. School enrollment rates at all levels have trended downward since 1989, though there is some evidence of bottoming out or trend reversal since 1995. State expenditure on education has similarly fallen. Even for elites the quality of education has deteriorated, as skilled instructors have emigrated or left teaching for other pursuits. This phenomenon has affected not only the universities but also other state-supported scientific institutions as well. At the same time, a reorientation of education toward more relevant skills--business and accounting, for example--has occurred as well as a growth in market-responsive private educational and training institutions. A small number of the elite is educated abroad.

That said, changes in educational policy may have a relatively limited impact on the labor force over the twenty-year horizon of this paper. The vast majority of Russians in the labor force of 2020 have already received their formal education or will soon do so. As a consequence, changes in the quality of schooling, for better or worse, may have only a marginal impact on the skills embodied in the work force of 2020.

Labor market and human capital development should not be viewed solely through the narrow prism of educational policy. Labor market outcomes can be affected by a range of policy interventions. For example:

Physical Capital
Much of Russia's existing capital stock reflects the highly distorted economic incentives embodied in the Soviet system. Geographically, considerable investments have been undertaken in remote regions. Sectorally, investments have been made in industries in which Russia is unlikely ever to be internationally competitive. Technically, some of the capital stock either embodies technologies incompatible with international standards or is dominated by technology developed elsewhere. Indeed, some plants are "value-subtractors," and their decommissioning would actually contribute to economic output, especially if environmental degradation--or, alternatively, future cleanup costs--were assigned any value. Although the magnitude of this problem is subject to extensive debate, perhaps half of the Soviet-era capital stock is worthless under current market conditions.

Expenditures on infrastructure have trended downward, and as a consequence Russia's public infrastructure is in increasing disrepair. Financing problems reflect the underlying irrationality of the fee structure. The use of public infrastructure, including housing, and public utilities, such as water, priced at rates well below their actual cost, encourages over-usage and generates little revenue for maintenance and expansion. Maintenance of existing plants is hampered by Russia's inability to collect taxes and fees as well as by demonetization and the tendency for in-kind payment by industrial users. Introduction of more appropriate incentive structures without generating social upheaval is an ongoing political-economic problem. Reform is hampered by inadequate management capacity at the local level. More innovative financing schemes, such as quasi-equity investment, have not been introduced widely, in part because of investor skepticism about the protection of property rights. Increasing differentiation is occurring between those localities which are able to deliver services on a relatively reliable basis and those that cannot. This differentiation will presumably reinforce the trend toward concentrating economic activity in certain regions such as Moscow, St. Petersburg, and Nizhniy Novgorod.

Inadequate property rights discourage new investment at the aggregate level. Moreover, the aging of the population and the increase in the dependency ratio suggest that domestic public and private capital available to refinance new investments may decline over the next two decades. Lack of property rights also can distort investment incentives at the macroeconomic level. The lack of a real market for land hinders restructuring of existing investments and discourages new development, for example, the construction of new housing in regions that would naturally attract more residents and greater economic vitality.

Much of the useful capital stock and new investment are concentrated in extractive industries. In the oil and gas industries, the capital stock was designed primarily to facilitate domestic consumption, not export. In this regard, Russia faces two problems: first, the need to address bottlenecks in the export pipeline system, and second, the extraction of rents by intermediaries, such as Ukraine, which lie between Russia and the ultimate consumers of these exports. Russia will need to make significant investments over the next two decades to maintain the existing network, to relieve physical bottlenecks, and to develop alternative routes of export supply. Russian extractive industries are relatively well placed to do this for two reasons. First, they earn hard currency directly. Second, the import content of the pipeline maintenance and expansion is low and can be self-financed through ruble earnings domestically.

Ironically, the relative vitality of the extractive sector may pose problems for the manufacturing sector. The existence of a functioning extractive sector contributes to putting a floor under wage rates. As a consequence, real wages in Russia are unlikely to ever drop to, say, Indian subcontinent levels and thus discourage the development of highly labor-intensive manufacturing. But even the prospects of medium-tech manufacturing could be discouraged by the extractive sector due to what is known as "Dutch Disease"--the process whereby commodity booms tend to lead to exchange rate appreciations that price other economic activities out of world markets. It must be noted here, however, that the recent sharp increase in world oil prices and the consequent increase in Russia's hard-currency earnings have not caused the ruble to appreciate, perhaps because of offsetting capital flight.

Falling expenditures have led to a "hollowing out" of the Russian transportation system. Given the underlying economic irrationality of the geographic distribution of economic activity in the Soviet era, however, a certain withering away or redeployment of the existing capital stock may actually be desirable, at least from a market perspective. The Soviet-era transport system devoted excessive resources to servicing remote areas, and a decline in service to these areas is not necessarily an undesirable development--abstracting from geostrategic considerations. Like the extractive resource sector, much of the maintenance of the transportation network, largely rail, could be financed internally through tariffs and fees.

Improvement of the telecommunications infrastructure and the spread of the Internet in Russia could greatly facilitate the development of a market economy in Russia. Virtual connections across Russia's eleven time zones could create new connections previously impossible or impractical. The potential positive impact of the new technologies, however, will be mitigated if central or local authorities exercise too heavy a hand in attempting to control them.

Conclusions
A number of factors will influence the speed at which Russia converges with the West economically, if at all. Assuming that Russia's political development does not undercut continuing engagement with the West, it should be able to exploit what Alexander Gerschenkron called the "advantages of backwardness," or the ability to adopt technological innovations developed abroad without the costly and risky investments in discovery that innovation entails. This is related to the modern notion of income or productivity convergence--the tendency for relatively poor countries to experience more rapid increases in productivity and income than relatively rich countries.

In terms of innovation, the most obvious issue is the degree to which intellectual property rights (IPR) are protected, inasmuch as the rents conveyed to the innovator are a fundamental incentive for innovative activity. Moreover, the degree to which IPR are respected will affect the form and content of technological transfer that foreigners will be willing to undertake. In this regard, Russia's prospective accession to the WTO could affect how its IPR regime evolves, educational incentives, and its rate of productivity and income growth.

Since Russia is a "follower" country, technological diffusion is likely to be more important than innovation per se in boosting productivity. Efficient markets for labor and capital are critical in this regard, and Russia's markets for these factors are not very efficient. Progress in developing land markets and, hence, better housing markets could facilitate the movement of workers and improve the functioning of the labor market. Creating conditions conducive to foreign direct investment, especially outside the natural resources sector, could play a major role in encouraging technological diffusion. Again, accession to WTO is one development that could encourage such diffusion.

Finally, technological innovation and diffusion elsewhere in the world have been encouraged by the concentration of economic activities in particular locales, Silicon Valley being perhaps the most prominent example. The Soviet-era pattern of dispersing economic activities frustrated this process. Moreover, it endowed Russia with a number of one-factory towns that understandably form a locale of political opposition to restructuring. To a certain extent, Russia's economic activity is becoming concentrated. The regions around Moscow and St. Petersburg, in particular, have displayed increasing growth of new activities such as "finance."

A key issue for the next twenty years is how far Russia is willing to go to facilitate this process of concentrating economic activities. The process would be encouraged by the development of better housing markets and better provision of local services on the one hand and by the closure of noneconomic enterprises on the other. Such developments would spur the reallocation of resources by increasing the capacity of receiving areas while pushing resources out of sending areas. Conversely, continued subsidies for non-economic activities and suppression of factor markets would discourage mobility and the efficient allocation of resources.

As noted previously, such a reallocation would promote greater variability among sub-national jurisdictions in income levels and demographic characteristics, contributing to divergence between areas with concentrations of relatively young and rich populations and those with relatively old and poor populations. Such developments would presumably pose political issues with regard to equitable sharing of social welfare burdens, for example.

The existence of a large natural-resource-based extractive sector ensures that Russia will inevitably have the characteristics of a rent-seeking society in which considerable resources are devoted to allocating rents generated by the extractive sector. The state remains an essential mechanism for distributing wealth. The highly interventionist character of Soviet and post-Soviet economic policy and the relatively weak and underdeveloped nature of Russian political institutions reinforce the importance of rent-seeking over more socially productive forms of innovative or entrepreneurial activity.

The broad issue of the state's relationship to the private sector and issues such as transparency and corruption are fundamental to Russia's development over the next twenty years. Lack of progress in establishing a more rules-based economic system would discourage the development of an indigenous entrepreneurial class. This, in turn, would slow the rate of innovation and diffusion internally and forestall the possibility of exploiting emigre technological assets or engineering a reverse brain drain.

Likewise, ill-gotten gains on the one hand and concerns about expropriation of legitimately accumulated wealth on the other contribute to capital flight. Regularization of economic relations in Russia would reduce incentives for capital flight and indeed could encourage repatriation of capital currently invested abroad. Were this to occur, it would create greater domestic capacity to finance infrastructure investments. Ironically, the elimination of capital flight could contribute to "Dutch Disease" by encouraging ruble appreciation and making the exchange rate movements more susceptible to terms of trade shocks. This could actually present an additional challenge to Russia's industrial sector.

 

Presentation Summaries

John Haaga
Population Reference Bureau
"The Predictive Value of Demographics"

Russian Demographic Trends and Their Implications

One needs to distinguish between two questions when discussing the predictive value of demographics: 1) Can demographers forecast the size and composition of populations? and 2) Would knowing the demographic future help us know the social, economic, or political future?

Population Projections
Demographers are excessively modest about their abilities--the purists insist on the term "projections" rather than "forecasts." When they prepare a projection, they are working out the algebraic consequences of various possible combinations of birth, death, and net migration rates. If you want to test some other combination you consider more plausible, then you do the math--put in some other combination and see what happens. The key idea in projections is the "cohort components" method, which has been in common use since the 1930s: Take a base-year population with a known age/sex structure, apply a set of age-specific fertility and mortality rates to it, and move it forward through time to any arbitrary future year. (For most countries, migration is not a major component of population change.) Population growth rates are calculated after you have finished adding up the separate age categories in a year; you don't try to forecast growth rates directly. The schedule of age-specific fertility and mortality rates need not be constant into the future, but one typically assumes gradual changes--a continued decline of fertility at all ages, for example, or a slowdown in the rate of improvement of mortality.

The usual practice for those making the projections is to present high-, medium-, and low-variants, which differ in the assumptions on one key component of population change. The usual practice for those using the projections is to toss out the high and low ones and use the medium-variant as a set of point estimates, the most likely forecast. In a way they are acting correctly, since other variables (growth rates of GNP per capita, per capita emissions of carbon dioxide or whatever) are usually forecast with greater uncertainty, so it is more important to test alternate scenarios in which they, rather than the population projections, vary. But in another way, they are setting themselves up for false conclusions, particularly if they take the medium variant to mean "what will happen utterly spontaneously, as a force of nature, without any further policy intervention." The more proper interpretation of the medium variant in most cases is "what will happen if trends, including policy trends, continue"--no change in policy, rather than no policy.

There is not a lot of theory underlying the commonly used projections. Users of projections of the Russian population ought to be aware that for the two fundamental processes, fertility and mortality, recent Russian trends are outside the range of historical experience. The columns and columns of numbers printed out on the Russian Federation page of the biennial UN volumes are misleadingly precise, and the people who produce them are the first to warn us about that.

Fertility Trends
First, let's look at fertility. The total fertility rate (TFR) is a kind of hypothetical average of age-specific fertility rates--the average number of children a woman would have if she went through life subject to the fertility rates for each age that prevailed in this particular year. Replacement-level fertility, allowing for some deaths of children before they themselves reach average childbearing ages, is just above two.

Russia and the Baltic Republics, during the last decades of the Soviet Union, were following a European trend, dropping below replacement-level fertility by about 1970.

Until the release of the most recent set of biennial projections prepared by the United Nations, the medium variant projections for every country assumed that there is something especially attractive about replacement-level fertility--fertility rates would converge on 2.1 or so within a few decades, no matter where they were starting from. The 1998 projections, for the first time, allowed medium variant projections to stay below replacement level for an indefinite future, including Russia. This represents an acceptance of a proposition that most European demographers think is correct, that below-replacement fertility will continue in Russia for a long time to come and cannot be easily reversed by policy.

How low can the TFR get? The lowest recorded value for the period TFR in a sizable, "free-range" population was 0.8 children per woman in the former East Germany during 1992-95. This was plausibly attributed by Nicholas Eberstadt and others to a severe disruption of life after the fall of the Berlin Wall--young people traveled or scrambled for jobs or apartments during those years and did not have babies. But there is little indication of things getting back to normal, if by "normal" we mean replacement-level fertility. Nor is low fertility limited to populations that have undergone severe shocks to their systems. Period fertility rates below one child per woman have persisted in the Basque country in Spain and in much of Italy during the 1990s. The Baltic countries, and many countries in Eastern and Southeastern Europe, on both sides of the former Iron Curtain, have total fertility rates below 1.5, and these low rates have persisted for several years. Much of Western Europe and Scandinavia lives with total fertility rates well below replacement level: Sweden is unusual in having had a rebound of sorts during the 1990s. There is some discussion in the demographic literature of whether there is a minimum long-term fertility rate for a large-scale population. A TFR below 1 is consistent with perhaps a quarter of women remaining childless, voluntarily or involuntarily, but most people experiencing parenthood.

The difference between high, medium, and low projections of fertility lead to different estimates of the size of the Russian population in 2030, ranging from 126 million to 150 million (the 1995 estimate was 148 million). This looks like a broad range, especially when we consider that under all three scenarios the median age of the population in Russia will be over 40. (In other words, the majority of Russians who will be alive in 2030 have already been born.) But in terms of the average growth rate over the course of 35 years, it's quite a small difference--roughly half a percent per year.

Trends in Life Expectancy
Russia had nearly caught up to the West in life expectancy in the early 1960s; in fact, Russia had caught up to Japan, a remarkable achievement. During the early 1960s, life expectancy leveled off and then started to fall in Russia, while it improved dramatically in the United States and especially in Japan. The gap grew steadily, except for a brief reversal of Russia's decline in the mid-1980s, during the years of Gorbachev's strenuous antialcohol campaign.

Two things are important to note:

Can We Use Population Projections To Forecast Social Change?
Our second question concerns the use of population projections for issues more directly concerning most policymakers.

Sometimes useful implications fall out of population projections quite handily. For example, for developed countries, we know fairly precisely how many people are going to be eligible under current rules for publicly funded old-age pensions for decades into the future. The old-age population is the easiest to forecast over reasonable time horizons, because all the ones we will have for the next six or more decades have already been born, so we have to forecast only mortality and net migration.

My middle category, the "maybe" questions here, are those for which there is a strong relationship between the size and age structure of a given population and the outcome of interest, but there is also an important behavioral or technological variable intervening as well, marring the accuracy of all forecasts. Housing is one of my favorite examples because one of my favorite former bosses, Barbara Torrey, as a young economist at OMB, wrote a chapter for an Appendix to the President's Economic Report in 1970 correctly predicting a big runup in house prices and new home construction during the coming decade. She saw the huge lump of Baby Boomers moving toward typical house-buying ages. Those same Baby Boomers are nearing the next sets of peak ages for changing houses, the years around retirement. Will there be a big selloff as we all try to sell large houses we no longer need to Generation X-ers? I hesitate to predict, in part because I have less nerve than Barbara, but also because there is a "per capita" variable that has changed greatly in the meantime, the number of square feet that a middle-class American expects to live in. Maybe we'll all stay put for awhile.

Finally, I believe there is a category of problems for which there are so many intervening behavioral and policy variables contributing to the outcome of interest that population projections are not of much use. This can be true even if the outcome in question is very highly correlated with standard demographic variables. Take murder, as an example. The pattern seen here is very typical, over time and across societies: murders are committed by young, draft-age men. Because of the Baby Boom followed by the Baby Bust and then an Echo Boom in the US in recent decades, there have been notable changes in the proportion of the US population in the murderous age/sex category. But homicide rates and the proportion of young men do not track well. Still less can we explain differences in homicide rates across nations by differences in the age structure of their populations. If your task is to forecast crime and social dissolution in Russia, you need much more information than the demographic projections will provide.

How To Use Projections
So what is my advice on how to use population projections in policy studies? How do we differentiate among these categories of problems?

First, do not overengineer the population projection in any real-life problem. This is especially so if your problem concerns adults and if your time horizon is a matter of decades and not centuries. (If your time horizon is centuries, I think I'd rather have your job.)

A second caveat is always to use five-year averages and smoother trends, looking for long-term changes. One should not get excited over spikes in time series or anomalous regional reports. The Russian statistical system (and the statistical systems of most countries, for that matter) does not yield to fine-tooth-combing.

The next bit of advice, which I have cribbed from a speech given by economist Alice Rivlin, is to always ask what will happen if the forecast is wrong.

Looking Into Russia's Future (or Peering Into Russia's Present)
Russia's population will not simply disappear. Will its population decline be halted by improving health, by a renewal of young people's confidence in the future, or by drastic curtailing of reproductive choice? All three are possible, but I don't see anything in either the fertility or the mortality trend that would force either rate back to "normal."

Nevertheless, looking at several different projections forces us to think about choices and allows us to understand their deep implications. Perhaps the greatest value of demography lies just in telling us what is happening now, under the surface, in any society, including our own, and what has been going on the recent past. I would like to title a future talk, "The Retrodictive Power of Demography."

 

Murray Feshbach
Georgetown University and The Wilson Center
"Demographic Trends"

In trying to estimate the population size of West Germany in 2002 (obviously done when there was a West Germany) demographers used three scenarios. The high included a Total Fertility Rate (TFR) of 2.5, medium was 2.1, and the low was 1.3. To put things in context, Russia's current real TFR is below the lowest scenario for West Germany. If Russia's current birth rate and death rate holds constant, the Russian population could decline by 30 percent by 2050.

The situation will not hold constant, however. In fact, it will get worse. The fertility rate will continue to decline because a third of all Russian women cannot have children (due to gynecological problems that are often the product of sexually transmitted diseases). The rate of syphilis has risen by 40 times among 10 to 14-year-old females. As many as a quarter of all women are sterile due to poor medical consequences of abortion. Anemia in pregnant women has increased threefold. If one is concerned about intellectual capital, one should be concerned by the percentage of mentally retarded and disabled children being born in Russia, often due to alcohol.

Demographers aren't interested in the number of deaths due to tuberculosis, multidrug resistant TB, and HIV. I believe, however, that the total number of deaths due to these causes will be greater than the total number due to cancer and heart disease combined.

It is true that there was an increase in average life expectancy for two years before 1999. The average life expectancy for men had risen from 58 to 60 years. However, this has turned again and in 1999 was below 60. The people being affected by this low rate of life expectancy are men in their working years. As a consequence, this has dramatic effects for the military and the economy as a whole (as opposed to older people dying or infants dying).

The current total fertility rate in Russia is 1.17 (well below replacement rate). It takes on average 10 years for fertility rates to turn upward. The peak was in 1987 at 2.2 children per woman. The Russians are now at 50 percent of their 1987 peak. They have never reached 2.5 children per woman--which is the typical high scenario in population projections.

Not only do the Russians suffer from infectious and parasitic diseases that affect the Third World, they also have first world diseases of cancer and heart disease--at two to three times higher than in the US.

The years to come in Russia will be grim indeed from a demographic standpoint. So also stated President Putin in his first State of the Union message in the summer of 2000.

 

Timothy Heleniak3
World Bank
"Migration Trends in Russia During the 1990s"

Migration as a component of population change and the impact that it has had on Russia and the Russian regions is often overlooked. This is not surprising given some of the dramatic fertility and mortality trends that have been occurring in Russia and some of the other transition states of Europe and Asia. Trends in both international and internal migration and the impacts that these trends have had are explored below. (International migration is defined as migration between Russia and other countries, even though at the beginning of the 1990s this type of migration was technically internal.)

External Migration

Internal Migration

Migration Patterns Following the August 1998 Ruble Devaluation

Implications of Migration Patterns

 

Michael Sacks
Trinity College
"Economic Decline and Shifts in the Labor Force"

The collapse of Russia's economy in the 1990s has been associated with a steady decline in the size of the employed population. There is considerable unevenness in the change both across regions and across sectors of the economy. Construction and sectors of industry, for example, have contracted most sharply, while areas of the service sector have been growing.

Data on the employment of workers in 14 branches of the economy for the period from 1990 to 1995 suggest that change in the labor force is contributing to increasing regional differences. Workers in the most dynamic sectors are becoming increasingly concentrated in a few regions. The important expanding area of credit, finance, and insurance shows this in particularly stark manner. The regions around Moscow and St. Petersburg together comprised nearly a quarter of all workers in this branch in 1995, up from one-eighth in 1990. The regions that showed the greatest growth in credit, finance, and insurance were the regions with the largest total labor force. Wage data revealed a surprising curvilinear pattern, rather than a steady growth in regional inequality. Regional variation in average monthly wages increased sharply between 1991 and 1992 and continued to rise through 1994. But in the next few years regional wage variation showed a small but consistent decline. A similar curvilinear pattern was apparent in the within-region of wages across 16 branches of the economy. The differences among branches increased sharply between 1990 and 1992, but between 1993 and 1995 the level of variation declined. This pattern can be attributed in large part to the precipitous rise and then decline in the relative wages of workers in credit, finance, and insurance--the most highly paid branch of the economy.

As in the Soviet period, gender remains one of the most significant dimensions of inequality. Women face more blatant discrimination and continue to be impeded by their far greater assumption of child care and other household responsibilities. The curtailment of subsidized social services has made their situation particularly difficult. A striking indicator of gender difference is the fact that, in July 1996, males comprised 82 percent of all the heads of small enterprises (defined as having between five and 100 employees).

Women were far more likely than men to be displaced from the labor force, and men appear to be shifting much more rapidly than women into newly expanding branches. Thus, regional variation is likely to be far more attributable to the employment patterns of men than of women. The study of gender differences in change, however, is seriously compromised by inconsistencies in statistical data and the sparse information on regional variation.

 

Susan Lehmann
American Councils for International Education
"The Societal Consequences of Demographic Trends"

At the end of every political era in Soviet history, scholars have been overwhelmingly inclined to believe that the policies of the new political leadership would be a continuation of the old. And scholars have been resoundingly wrong each time. This leads me to ask, "What if Russia's economy were to take off in the near future?"

Regional Variation in Age Structure
If one examines the percentage of the population which is currently under age 18, what jumps out is that, with the exception of St. Petersburg, the oblasts with the fewest young people are located in the Central Region less than 320 kilometers from Moscow. Conversely, the regions with the largest percentage of young people are generally several thousand kilometers from Moscow, much less ethnically Russian, and are home to major non-Christian religions.

Childbearing Patterns
Much has been made of the drop in the birth rate. The real question, it seems to me, is whether this drop is permanent or temporary. I see the Russian situation as parallel with that which prevailed in the United States in the early 1980s, when people feared a permanent drop in fertility rates. What we later discovered was that women were changing their behavior--having children later than previously. There was a small decline in the total fertility rate, but many births were postponed as opposed to precluded.

Our 1997 national survey in Russia showed that among currently childless young adults aged 24-32, 61 percent want two children. Only five percent of currently childless young adults want to end up with no children. A two-thirds majority of all respondents desired two children. If the new political regime is more successful in turning the economy around than the last, I think that a baby boom will occur.

 

Vladimir Kontorovich
Haverford College
"A Case Study: The Far East"

There are two important demographic trends in Russia today:

East Siberia and the Far East comprise 60.5 percent of Russia's territory and 11.2 percent of its population. Both regions are extremely sparsely populated (2.2 and 1.2 people per square km). Migration and natural decline will further reduce the already-low density of these regions. The most likely future for East Siberia and the Far East is the continued decline and aging of their populations, economic stagnation, and net subsidization by the rest of the country.

Attempts to resettle East Siberia and the Far East with Russians, Slavs, or Russian-speakers in general will be futile. These groups of population themselves will be shrinking in the future, and more attractive migration alternatives will be open to them.

Historically, societies that sustained population growth have conquered or otherwise absorbed their less-populous neighbors. East Siberia and the Far East have only two things between them and absorption by China: the Russian nuclear deterrent and their bad climate.

 

Jacob Kipp
Foreign Military Studies Office, US Army Training and Doctrine Command
"Russia's Demography and Its Military"

Throughout its modern history--from Peter the Great until the present--Russia's population has figured significantly in the calculation of national power. Peter's ability to raise a standing army from among the Empire's serf population and to staff it with competent officers played a significant role in Russia's victory in the Northern War and continued to be a decisive factor in Russia's place in the European balance during the wars of Elizabeth, Catherine the Great, and Paul.

In the 19th century, the military--which played a leading role in developing scientific methods of population counting--gathered information on the mobilization potential of the Russian state and its potential enemies. In 1874 Russia got its first law on general conscription of all estates, which provided the basis for a mass mobilization army. Russia could reduce the size of its standing army, as it passed cadres through shorter terms of service it kept them available for callup in case of mobilization. Scientific demographics lagged behind these military efforts. The Soviet Union conducted six censuses, the last one in 1989. Taking a census in Stalin's Soviet Union was a dangerous business: witness the repression of the census of 1937 and those who took it.

The rapid growth of Russia's population and the mechanism for mass mobilization created in Europe, especially in the German General Staff, the impression of a Russian "steamroller." But Russia's numbers, however imposing they may have seemed in Berlin, Vienna, London, or Paris, did not translate into a capability for the rapid projection of military power. This was due in part to low population density, which translated into a slower mobilization process.

After the war, revolution, and civil war, the Soviet state and Red Army retained a keen interest in the calculation of mobilization potential--both domestic and foreign. As a rule of thumb, the Soviet General Staff assumed that a state could put under arms roughly ten percent of its population in case of general war. In actual fact, the Soviet war economy proved more effective than that in raising forces and sustaining domestic industrial production when tested during the Great Patriotic War. One of the great continuities of the Soviet military system was the retention of such mobilization potential throughout the Cold War, even after the introduction of nuclear weapons and intercontinental delivery systems. Demographics--the results of the population losses during the purges and World War II--was one of the factors that led Khrushchev toward manpower cutbacks and greater reliance on strategic nuclear forces. But the mobilization system survived, and even with the front load of active units deployed in Central and Eastern Europe, the Soviet strategic system still relied upon that mobilization system to provide follow-on strategic echelons for strategic-operational actions. By the late Soviet period, demographic trends--declining birthrates among Slavs and increasing birthrates among Central Asians--were raising serious questions regarding the effectiveness of the existing mobilization system, especially after the deployment of troops from Central Asia to Afghanistan.

One of the demographic consequences of the Soviet military economy was the mass movement of population--often as slave labor--to peripheral regions of the Union in order to provide a military-industrial base in those regions. Such policies created highly urbanized and industrial regions that were dependent upon the center for transfer payments to maintain the regions. With the collapse of the center and the loss of resources, these regions have become economically untenable and militarily vulnerable. Three particular military-industrial complexes deserve serious attention in this regard: that created to support the Northern Fleet on the Kola Peninsula; the Trans-Baikal complex that was supposed to provide industrial base and deployment area for operations against Manchuria; and the Far East complex, based on the maritime provinces and centered upon Vladivostok.

With the collapse of the Soviet Union, Russia lost a large share of the population base upon which the USSR's mobilization system depended, yet retained many of the peripheral areas that had been built up under the Soviet war economy. The continued decline of the national economy and the decline in the male draft-age population called into question the viability of the old mobilization system. Evidence suggests that this latter trend will only worsen. There will be no "Russian steamroller" in the 21st century.

Moreover, the potential military threats to Russia are radically different and raise very different force requirements than those of the Cold War. The old mobilization system is irrelevant to the current requirements for rapid deployment forces for crises on the periphery. The revolution in military affairs requires not masses of troops but well-educated and trained cadre who are at home with electronic and computer systems.

Russia has gone from a state where its population resources were perceived to be a clear and apparent manifestation of national military power to one in which regional imbalances and ecological-economic crises have made demographic trends into an explicit vulnerability. The acute problem of low density of population to area and the continued existence of multiple threat axes can only become more acute as Russia's population declines in the first half of the next century. A smaller, mobile, professional military would be a potential answer to these issues. However, the immediacy of the threats requiring ready-response forces and the inability of the national economy to provide the necessary funds for such forces precludes any such solution for the near future. In the absence of conventional mobilization potential and easy access to the precision-strike technologies of the revolution in military affairs, Russia's military, as we recently witnessed in "Zapad-99" exercise, is forced to rely upon nuclear weapons to "manage" regional conflicts. This is not a development that can be treated as a positive trend, precisely because it raises the risks of miscalculation in a crisis situation. Strategic nuclear weapons still may convey political status, but they are of marginal utility to deal with the peripheral crises facing Russia or the long-term implications of demographic decline.

 

Trends in Russian Intellectual Capital

Nancy Birdsall
Carnegie Endowment for International Peace
"Education, Globalization, and the Demands of the 21st Century"

I have been asked to talk about education, globalization, and the demands of the 21st century. I have three simple points. First, at the individual level, intellectual capital is the critical asset in a global world. By intellectual capital, I mean education and the ability to acquire knowledge. Second, at the country level, good education policy, though necessary, is not sufficient for economic growth. And third, the key to more relevant and better education for a nation is not only, or even primarily, the education system; the economic demand for education is what matters.

Education is the critical asset at the individual level
Private returns to education in the form of wages are up everywhere in the world. In the United States, the ratio of wages for college graduates to wages for high school graduates has increased tremendously since 1980. It is only in the last year or so that the ratio has begun to level off. It is the same story in Latin America, where skilled labor is relatively scarce. In almost all Latin American countries, real wage growth for skilled labor has far outpaced that for unskilled labor.

The general trend of market reform is behind this. As countries liberalize their economies, education becomes a more important asset. This is seen in Russia and other economies in transition, where the return to education has gone up in recent years. In Russia, the returns to a year of education more than doubled between 1991 and 1994.

Private returns to education are on the rise because education is becoming a scarce commodity in the market. With economic integration and technological change, opportunities for educated workers can increase faster than opportunities for the unskilled.

Finally, returns to education are not only going up on average: the premium to education is greater the more education a person has. This is a partial explanation for increasing wage inequality in the US and elsewhere.

Two theories are used to explain the increasing demand for skilled relative to unskilled labor and thus increasing returns to education (and increasing inequality of wages) around the world. The first blames trade and economic integration (globalization). The second blames changes in technology (the demands of the 21st century). It is no doubt some combination of the two--with trade and international investment at the least the vehicles for the rapid dissemination of new technology and thus new labor demands.

In the information age, the critical question is whether in the long run computers and the Internet will complement education and skill, as now seems to be the case, or substitute for education. In the US, technological changes seem to have been skill-biased, though in the case of computer and Internet use it could certainly be that more educated workers are a cause of more computer use.

Education is necessary but not sufficient for a country's growth
My main point at the country level is that though investment in education is necessary, it is not sufficient for increased growth or decreased inequality.

Education is an asset that can lead to higher growth. Additionally, education can have positive spillovers. Education enhances the value of other assets, including itself. This can lead to a virtuous circle, with more education leading to growth, which in turn leads to higher investment in education. Microeconomic evidence and high private returns suggest this to be the case. But there are a number of examples of high investment in human capital without high levels of growth. This was the case for the former Soviet Union, for Argentina, and for Ghana. Education alone doesn't contribute to higher income if uncertainty and market distortions undermine the harnessing of the potential skills in the labor market. In East Asia, for the decade prior to the recent crisis growth was the output of a combination of macroeconomic stability, markets that worked, and human capital investment.

Demand matters
In the former Soviet Union, wage compression distorted the market and decreased the incentive for people to invest in education. In Latin America, government-subsidized incentives for physical capital put education and other forms of human capital at a relative disadvantage and led to a lower return to investment in education. Labor market regulations that reward seniority rather than mobility and public programs that encourage rent-seeking and reward cronyism all decrease the return and thus the incentive for families and individuals to invest in education.

Concluding remarks
First, a caution about the reliance on natural resources. Such a reliance is associated with a concentration of wealth and political power, which is also associated with the reluctance among elites to finance the education of the poor majority. Second, labor rights are an inefficient vehicle for broad social justice. Third, vocational training, which is seen by many as a quick fix for lousy education systems, can be a sinkhole for wasteful public spending. Vocational training works when employers pay for it. This is because training is a complement, not a substitute, for general education. Last, there is a critical role for public-sector investment in basic education, in basic research, and in other quasi-public education goods.

 

Harley Balzer
Georgetown University
"Educational Patterns in Today's Russia"

Russia inherited an "elitist" 1930s educational system from the former Soviet Union. It is a system that spends disproportionately on higher education, and especially on a handful of prestigious institutions, while leaving basic education woefully underfunded. Thus, while Russia resembles much of the rest of the world at the university level, it does not do so at the other levels. Now that Russia realizes that its current educational system is not suited for the 21st century, it finds itself short of the resources needed to reform it.

Given that the Information Technology Revolution becomes possible only when it is widespread, one must ask about the likelihood of Russia being able to participate. All of today's qualitative indicators are bad. There is no "creative destruction" of antiquated institutions taking place, and the growing income gap among the population is leading to a socio-educational division, in which the new wealthy class (20 percent) will send their children abroad to be educated or will avail themselves of expensive private education in Russia, the broad middle (60 percent) will receive an education inadequate to the demands of the global economy, and a growing segment of the population at the bottom end (20 percent) will be functionally illiterate. It is that middle 60 percent that presents a serious obstacle for integration into the 21st century global economy. The country's skill levels are not going to be that of a superpower. While at some point technology can obviate the need for some skills, we are not yet at that point.

Russia's leadership does not appear to understand the value of spreading knowledge. Primary education has been reduced from five years to four, and the curriculum still focuses on providing data rather than on developing cognitive skills. In the "new economy" the key skill is the ability to learn new things and acquire new skills. Moreover, basic social conditions, especially child nutrition, reduce the effectiveness of any education. The result will be a work force that has basic literacy but which will be ill-suited for a market economy.

The current system is also elitist geographically in that the Moscow-based Russian elite does not perceive an interest in the quality of education in the provinces. The Soviet pattern, in which 80 percent of those studying at the (prestigious) Moscow and Leningrad institutions were from the provinces, has been reversed. Today, 80-90 percent of those studying in Moscow or St. Petersburg are natives of those cities.

In a country that can't provide clean drinking water for large segments of the population, the returns on which are enormous for the individuals receiving it, it would be a mistake to provide free higher education at public expense. Public funds should go into public goods.

One development worth noting is the shift of responsibility for education from the central government to local and regional governments, largely as a result of collapsing central government revenues over the past decade. That will have huge effects, mostly positive, and in that sense, the faster this change occurs, the better. It remains to be seen to what extent the Russian central government will move to be an agent of information and accommodation rather than seeking to do everything itself. There is an important role for the government as a supplier of information to make the Russian people better consumers of the educational "product."

That said, however, the educational system is not the leading indicator of change and is not the place to begin effecting change. The real spur to innovation is not education, but the economy. Russia needs to remove the country's underlying economic and social distortions before being able to successfully tackle the reform of the education system. In that regard, the likely attempts by the next Russian government to increase state involvement in the economy will only increase corruption and the waste of money.

Given the high productivity of the US economy in the face of widespread criticism of the American educational system, perhaps we are measuring the wrong things. There is some question as to whether official statistics capture the teaching of skills that may be taking place in non-traditional ways or the types of education that are encouraging innovation.

 

Mark S. Johnson
Colorado College
"Russian Educational Policy and Politics"

On the one hand, Russia is experiencing an unprecedented "pedagogical revolution." This explosion of institutional diversification, curricular reform, and instructional and technological innovation is particularly strong in the social sciences and especially pronounced in the major cities and elite institutions. On the other hand, however, the public educational system as a whole is profoundly threatened by the deepening financial and professional crisis that could permanentlydegrade Russia's intellectual and human capital. Such systemic degradation--which may already be near or past the "tipping point" of irreversible damage--directly threatens Russia's prospects for sustainable democratic and market reform and could contribute to political reaction, social disintegration, and regional fragmentation.

The past decade has witnessed an unprecedented array of international assistance programs for the reform of post-Soviet education. These programs have been vital to nurturing and sustaining the "pedagogical revolution" by supporting new institutions, faculty and student exchanges, conferences, publications, and the integration of at least part of the Russian educational system into the global network of information technology. Yet there have been several persistent problems with these assistance efforts. They have often been poorly coordinated and marked by parallelism, self-defeating rivalries, and unrealistic expectations. International donors seem to have paid the least attention to those sectors that have been the most severely degraded over the last decade: preschool and early childhood education, secondary vocational education, and rural and minority education. Furthermore, much of this international assistance focused either on nurturing new or private institutions or on supporting individuals outside of their institutional and professional contexts. Such strategies left many state or public institutions largely unreformed or returned individual researchers and educators to their conservative and stagnant institutions after the conclusion of their limited grant support or exchange experience.

Within the Russian educational system, virtually all of the actors seem to be struggling simply to sustain themselves, with few able or willing to address the imperatives of systemic reform. The Ministry of Education witnessed the steady erosion of its administrative capacity and budgetary resources throughout the 1990s. Nonetheless, the Ministry still plays an important role in setting and coordinating educational policy and academic standards. While several prominent reformers, such as Viktor Bolotov, remain within the Ministry, its now seems to be increasingly dominated by traditionalist and Communist elements tied to the Russian Duma and the Russian Academy of Education.

The Trade Union of Workers in Public Education and Science still includes more than a million members and continues to collect dues. Yet the Trade Union has seemingly also been largely paralyzed by the ongoing educational crisis and has confined itself to obstructing "reforms"--such as staff cutbacks and "privatization"--that threaten its members. The Union continues to lobby for the payment of wage arrears, and yet wages remain dismal and teachers' strikes persist. A draconian new labor code that is under discussion may cripple the "official" union movement, yet the potential remains for serious civil unrest and "wildcat" labor actions led by impoverished professionals and teachers.

Regional governments remain problematic actors at best in the politics of Russian education. Only a handful of so-called "donor regions" are able to adequately fund educational services. The regions are frequently accused of diverting or blocking federal expenditures earmarked for education and other social services. Most important, in the chaotic rush to decentralize financial and administrative responsibility in education, few safeguards were in place to prevent powerful regional or institutional interests from carving out authoritarian fiefdoms for themselves, or from partially "privatizing" educational property and services. While some regions have responded creatively in restructuring and consolidating institutions or in developing new, more local curricula and teaching materials, there has also been an upsurge of ethnocentrism and nationalism that threatens both local minority rights and national cohesion.

As for the educational institutions and the profession itself, there have been both enormousgains and catastrophic losses. On the one hand, many institutions have gained real autonomy and individual instructors and teachers a significant measure of educational and intellectual freedom. On the other hand,almost all are constrained by widespread institutional inertia and financial crisis. Ironically, the rush to decentralize often empowered rectors and administrative authority at the expense of faculty and staff. Despite some innovative new approaches to teacher education, there has been a catastrophic "internal brain drain" out of education, especially of younger faculty and those with the most urgently needed skills, such as computer literacy and foreign languages. The median age of the teaching corps is rising, and those faculty and staff members who remain are exhausted by having to hold multiple jobs.

Finally, there is the long-suffering public, especially parents, and students themselves. While some have flourished in the new conditions of expanded academic freedom, the vast majority of the Russian public has witnessed the steady erosion of both quality and equity in Russian public education. Student unrest and mobilization against mandatory tuition payments hold enormous potential both to destabilize the system and to paralyze needed reforms. More ominously, the catastrophic health and environmental problems facing Russian children and the dismalconditions in many preschools and elementary schools directly threaten the "readiness to learn" of virtually an entire generation.

It is hard to escape the impression that the fundamental premises of the "radical" educational reforms of the early 1990s were, in hindsight, fatally flawed. Rapid decentralization, chaotic "democratization," and involuntary privatization did not, in fact, foster sweeping institutional reform and spark an upsurge of professional activism.

So, what is to be done?

There is, of course, a real danger that such a drive for increased professional power could further entrench existing academic and administrative elites or that it could create new mechanisms to "trap" or monopolize federal, regional, and international funds intended for reform. One possible defense against this would be to creatively leverage international assistance to try to foster meaningful structural and professional "democratization " within the system; for example, by helping cultivate new mechanisms for faculty governance, new practices to protect academic freedom, meaningful new roles and resources for individual departments, and intra and inter-regional research and teaching networks--in other words, to help faculty and staff build mechanisms for professional development with which to empower themselves.

Most important, any foreign-sponsored approachto further educational "reform" that would openly triage educational opportunity will, ultimately, cripple the system's potential for excellence. Such harsh austerity measures would also be politically untenable, given the widespread public commitment to equity.

While being cautious about the use of foreign models, one could argue that recent American innovations in teacher education and professional development are directly relevant to Russia's crisis. Efforts to rethink "teaching as the learning profession" through expanded pre-service teaching, classroom-level research, team teaching, and professional empowerment may be a useful paradigm to frame a new generation of Russian-American cooperation in our mutual pursuit of systemic reform in public education.

 

Sheila Puffer
Northeastern University
"Russia's Managerial Corps: Skills and Attitudes"

Russia's new entrepreneurs often find themselves facing shortages of skilled labor suitable to the new activities and conditions. They also face difficulty in retaining skilled workers, and, in the case of managers of formerly state-owned and newly privatized enterprises, are finding it difficult to change the attitudes of the workers they acquired along with the physical plant. In response, they are having to resort to a variety of innovative approaches to human resource management.

In some cases they are investing in the skill-training of their existing employees, including management development programs in Russia and abroad. They also have to find ways to retain those in whom they have invested. Aside from the basic technique of improving overall working conditions, some enterprises have found it necessary to invest in new technology to create opportunities for innovation and creativity that will keep scientists from leaving for more interesting work, as well as in providing performance-based bonuses and stock ownership as rewards and incentives.

 

Steven Rosefielde
University of North Carolina, Chapel Hill
"Trends in the Russian Work Force, 1988-1998"

Civilian Labor Force
Thirteen years ago, Stephen Rapawy estimated that the Soviet civilian labor force would grow from 149 million people in 1985 to 163.7 million in 1998, an increase of 14.7 million job-seekers. His estimates were right on track until 1990. He predicted that the civilian labor force would be 152.2 million in 1990, and that is precisely what it was. But then something went haywire. Instead of the civilian labor force of the former Soviet Union increasing from 152.2 million on the eve of its collapse to 163.7 million eight years later, the number of job-seekers plummeted 30.6 million to a mere 133.1 million in 1998. The decline was unprecedented in the postwar era. In a twinkling of an eye in demographic terms, the civilian labor force had diminished 18.7 percent. The same story was replicated in the Russian Federation. There were 82 million Russian job-seekers in 1991, which was forecast to rise to 87 million in 1998. But the actual figure was 71.4 million--a 13 percent decline.

The transfer of civilian job-seekers into the armed forces does not account for the sharp contraction of Russia's labor force. Rather, the decline is attributable to three overlapping factors.

The official unemployment rate during the Soviet period was zero. The State provided paying jobs for all those legally obligated to work and for roughly 15 million others but without distinguishing whether this employment was voluntary, efficient, or even productive. The abandonment of administrative command planning and the emergence of product markets changed the labor market significantly. The potential labor force under these new conditions became the number of job-seekers willing to work at prevailing wages.

During the past decade, as regards employment, there has been a significant decline in the relative share of industrial activity and compensating gains for transport, communications, and other services. The latter can be interpreted partly as a progressive shift to demand-responsive activities, as can other qualitative improvements concealed by share statistics, but gains of these sorts, if any, have been few and far between in the industrial sector.

This brings us to the larger question of whither Russia? The big picture during the nineties has been one of diminished labor activity and even steeper declines in production, especially in industry. Labor productivity has plummeted catastrophically both in ruble terms and even more drastically from the perspective of purchasing power parity.

There appears to be a recognition that Russia's economic transition failed, at least in its first stage, and consequently that the fate of its workers depends predominantly on whether the Kremlin can succeed in modernizing and competitively integrating itself into the global economy. For the moment, bolstering aggregate effective competitive demand for Russia's products is key. Labor skills, training, and education are secondary considerations. If tomorrow merely replicates today, the Russian labor force will continue to be misemployed on a grand scale as it has been since the Bolshevik revolution, exacerbated by acute involuntary unemployment. And it is not out of the question that the situation could get worse. The possibility of a disciplined Chinese authoritarian-laissez faire solution stressing a new arms buildup and modernization likewise should not be excluded.

 

Glenn Schweitzer
National Academy of Sciences
"The Impact of Brain Drain"

While external brain drain of active Russian scientists and engineers has been limited during the past decade to 1,000-2,000 specialists per year, there has been a massive internal drain of technical talent away from R&D facilities into maintenance shops, commercial trading organizations, and other activities distant from their technical training and experience. Among the emigres, however, have been a few internationally known scientists and a significant number of highly talented young engineers. The impact of emigration on Russian research capabilities in a few specialties has been devastating, while the internal flight of specialists has been felt in almost all specialties. In addition to these traditional concepts of external and internal brain drain, new forms of brain drain have included the propensity of Russian scientists to publish reports in foreign journals that local colleagues can no longer afford and the hiring by foreign firms of top talent that remains in the country but must treat all discoveries as industrial secrets.

Most Russian specialists who come to the United States as emigres do not find positions in science, with the most successful using their language and entrepreneurial skills to find jobs in commerce. However, about 50 percent of Russian scientists and engineers who come to the United States as long-term (more than three months) exchange visitors or temporary skilled workers end up staying here, usually working in technical areas. During the past several years, a large number of computer software specialists have found permanent employment in the United States through this route.

The brain drain is rooted in the economic crisis that has dramatically reduced government funds available to support scientific activities and has forced industrial organizations to focus on meeting immediate financial requirements rather than making commitments to research activities with deferred payrolls. Thus, there has been a rapid decline in salaries in almost all sectors of the economy, much equipment is obsolete, and many research facilities are no longer operative. A few centers of excellence have survived, usually with the assistance of grants or contracts from abroad.

In 1992 there were about 900,000 active researchers in Russia. At present, 450,000 specialists are formally classified as researchers, but only about 100,000 spend more than one-half their time investigating unexplored terrain or developing new or improved techniques. While most of the remainder might like to continue their careers, they no longer have the supplies, facilities, and incentives to conduct serious research. Also, science and technology are no longer respected professions as in past decades.

About 60,000 scientists, engineers, and technicians have unique skills and experience that could be of interest to developing countries attempting to achieve advanced technology weapons capabilities. About 30,000 of them are in the aerospace sector, 20,000 in the nuclear sector, and 10,000 in the chemical and biological sector. An estimated one-third are no longer affiliated with defense-oriented institutions, having either retired or moved on to other careers; another one-third are continuing to devote the bulk of their time to military-related activities, and the final one-third is attempting to convert weapons-related skills to programs with civilian applications.

The future continues to look bleak although there has been an upswing in enrollment of university-level students in the science and engineering faculties throughout the country. The employment outlook for graduates is not good, and most graduates are attracted to the commercial sector. The situation is very serious in the applied sciences since the very best qualified specialists may be hired by foreign firms--often with overseas employment in mind--while the less fortunate are left to find other paying jobs that are very scarce in the science and technology sector. The aging of the work force is a major problem; the pension payments are so low that there is little incentive to retire and make way for an influx of new talent at technical institutions. On the positive side, many former weapons scientists are losing touch with defense developments. Although from the technical point of view they are becoming less of a proliferation concern, from the economic perspective they may become increasingly interested in foreign contract opportunities. They simply see no hope of early economic revival in Russia. Foreign contracts and grants, particularly those of longer duration, are very important in reducing the likelihood of expertise to states with hostile intentions.

If the Russian economy improves, in time the brain drain may slowly turn around. The likelihood that Russians currently working abroad could be enticed to return to Russia or would even be accepted by those who have stayed behind seems low, however.

 

Russian Health Trends and Their Implications

Marcus Noland
Institute for International Economics
"The Global Context: Health Trends and Economic Development"

Multiple drivers affect health status and economic outcomes in complex, interrelated ways. The difficulty of parsing the impact of various drivers impedes the design of effective public policies.

Cross-national studies indicate that there is generally robust, positive, statistical correlation between literacy, urbanization, life expectancy, infant mortality, and per capita income, to name five factors. But the causal relationships among these indicators are less clear. (Indeed there is a positive correlation between the rates of death due to cancer and per capita income, but no one believes that the former causes the latter.) Moreover, the parameters derived from these studies (on the impact of per capita income on infant mortality, for example) are typically larger than the actual changes observed over time in particular countries.

Detailed household level studies highlight two aspects of this phenomenon. First, the relationship between health status and economic income is subject to significant threshold effects. For example, nutrient intake, health status, and income are highly correlated for very low income populations, but there is a low income elasticity of demand for nutrients across whole populations. Second, there may be very strong interactions between household and environmental factors. For example, literate households may move to neighborhoods with access to safe drinking water, giving rise to a strong correlation between literacy and health status in particular communities.

As a consequence, much of what we think we understand in this area falls in the category of "stylized facts"--that is, suppositions that are usually, though not always true. Yet, these sorts of "rules of thumb," together with detailed understanding of particular circumstances, are critical for understanding how authorities might prioritize and optimally allocate limited public health resources.

 

Nancy Binkin
Centers for Disease Control and Prevention
"The Explosion of Tuberculosis"

The rate of TB infection in Russia has exploded over the past decade, rising from 34 cases per 100,000 population in 1990 to 83 per 100,000 in 1998 (as a point of comparison, the US rate in 1998 was 6.8 per 100,000). The normal expectation is that approximately 10 percent of those who are infected will develop the disease.

During the Soviet period there was an elaborate system for controlling TB with the entire population undergoing annual TB screenings (a practice abandoned in the U.S. some 30 years ago), forced hospitalization of up to two years, a system of special TB hospitals, a seven-year follow-up protocol, and frequent use of surgery (as many as 20,000 per year vice 25 per year in the United States.). There was even a "Sanitorium Effect"--a decline in the infection rate even prior to the advent of anti-TB drug therapies as a result of the mere removal of infected persons from the general population.

With the advent of drug therapies, however, Soviet drug shortages produced a form of "therapeuticanarchy" that continues into the present. The WHO-recommended Directly Observed Therapy-Short Course (DOTS) protocol has been implemented in only seven oblasts (out of 89 oblasts and republics within the Russian Federation), and cure rates remain very low (60-80 percent vice 95 percent in the West). Russian patients tend to come in late to be diagnosed, often drop out of the treatment program, or have (or develop) Multiple-Drug Resistant (MDR) strains of the disease. The treatment costs for MDR TB are quite high--$2500 per patient for the 18- to 24-month course of treatment (vice $50 per patient for regular TB).

There is a general lack of support from the Ministry of Health for the anti-TB effort, and the hierarchical medical system provides limited access to information. The implementation of DOTS will require changes in the laws of the individual oblasts and republics. Moreover, there is no support system for socially marginalized populations (the homeless, drug addicts, prostitutes, prison inmates - the most likely to become infected). The World Bank has provided some $100 million to Russia to expand the DOTS program, but even that sum will not cover the entire country with DOTS Plus; there is a shortage of trained personnel to spread the technique, and there is some concern over loss of jobs in hospitals as a result of the changeover to DOTS.

Money is clearly needed, and funding must be sustainable. A successful effort will also require a change in the mindset of the Russian TB community and significant prison reform. Most of the international TB community sees this as a generation-long process. The good news is that the Russian medical establishment is now working more closely with the World Bank. The bad news is that the risk of a truly explosive spread of the disease is very high, aided by the close environment in which many of those infected live. The prison system is an especially important breeding ground for TB, and infection rates there are in the 3,000-5,000 per 100,000 population range. Although the spread of HIV/AIDS into the general population presents yet another, and interconnected, health crisis, it may have the positive effect of drawing political support to the fight against TB.

 

Margaret Murray
National Institutes of Health
"The Continuing Struggle With Alcohol"

Russians continue to be plagued by alcoholism, an historical inheritance of the Soviet Union and the Russian Empire before that. Russians' alcohol dependency compounds Russia's other problems, such as high rates of divorce, mentally handicapped children, poor compliance with treatments for other diseases, etc. Treatment of alcoholism remains unsophisticated, based largely on aversion therapy. The effectiveness of such treatment is not sufficiently studied.

What should be done? Earlier efforts to limit alcohol consumption--most famously, Gorbachev's anti-alcohol campaign--failed because the Russians just were not ready for them. The Russians would benefit from a greater focus on prevention for adults and also for children and adolescents and more research studies about the problem. A greater recognition of the impact of drinking on pregnant women is required. More public education about the causes and impact of alcoholism could play a very useful role.

 

David Powell
Wheaton College and Harvard University
"The Ravages of HIV/AIDS"

HIV/AIDS is a rapidly growing and severely under-reported disease in Russia. While the number of registered cases as of late July 2000 stood at 53,170, even Russian officials admit that the real number is anywhere from 10 to 100 times that. What is important, however, is not the absolute number, but the rate of growth, which is very high.

Moscow City and Oblast, the city of St. Petersburg, and the Kaliningrad region report the highest number of cases. Russia is now one of only two places in the