Russia and China in the Global Economy

IMGXYZ4078IMGZYXRussian efforts to reform education have significantly expanded investment in research and development, but the higher education sector faces continuing obstacles in developing the necessary human capital and environment for successful competition in an increasingly globalized marketplace. China, on the other hand, has quickly become a leading knowledge-based economy, with a dynamic research foundation. It has embraced the development of international education programs, and has significantly improved the diversity and modernization of its economy. What lessons can Russia take from China’s investments? Does the Chinese experience provide guide posts relevant for Russian efforts to diversify its currently commodities-dependent economy?

Harley Balzer of Georgetown University and Carnegie’s Yukon Huang discussed the challenges of creating diverse, knowledge-based economies in Russia and China. Carnegie’s Matthew Rojansky moderated.

Why China and Not Russia?

• Russia’s Growth Lags Behind China’s: Russia was the worst-performing G-20 economy after the global financial crisis, with a negative 9 percent growth rate in 2009, Balzer said. Importantly, Balzer added, Russia has been steadily losing capacity in education, science, and technology.
   
• Knowledge Economies: Balzer diagnosed several problems with Russia’s knowledge economy, including stagnant growth in research output, number of researchers, patent applications, and grants. In contrast, China has made progress in all these areas, despite its own problems of corruption, rigid incentives, and state-owned enterprises squeezing out more innovative small and medium private companies, he said.
   
• What Went Wrong? Russia’s decline relative to China came contrary to expectations, especially since China’s education, science, and technology systems were borrowed from the former USSR, Balzer said. He assessed existing explanations for the disparity in growth, such as initial conditions and policy, but said these explanations do not stand up to comparative tests.

The Importance of Internationalization

• International Integration: Balzer argued that the main reason for Russia’s declining science and technology environment was its poor quality of involvement with the global economy. Whereas Chinese elites have embraced globalization as an opportunity to catch up with and overtake other countries, Russian elites have regarded globalization with suspicion, Balzer said. Russia’s weak or “thin” engagement in the global science and technology community explains the lack of bottom-up development in the Russian knowledge economy, he added. 
   
• Globalizing Education: Corruption and cheating plague the Russian education system, and demographic changes are making mass tertiary education unsustainable, Balzer said. Chinese institutions are internationalizing and receiving higher returns on education investment, while Russia is losing out on competition for students and faculty, he argued. Balzer said that while emigration is a problem for both countries, Russian emigrants are reluctant to return to a country they perceive as having a lower quality of life and fewer opportunities. In contrast, Chinese local governments are competing fiercely to attract foreign-educated nationals to return to China.
   
• Institutional Weakness: Balzer concluded by saying that the root problems in developing Russia’s knowledge economy are weak incentive structures and competition, insular communities, and institutional problems and corruption. He recommended Russia follow China’s example and embrace globalization and loosen government control. 

Chinese Growth Story Success

• Export Investment: Huang noted that China and Russia have several similarities—they are both transition economies with similar levels of trade surplus, exports, and labor productivity. However, some key differences have allowed China’s growth rate to surpass Russia’s. In China, high levels of export-oriented investment concentrated in the coastal region led to large increases in labor productivity, Huang explained.
   
• Production Sharing: Huang argued that China’s role in the center of the East Asian processing trade network is crucial to its high growth rate. The spatial concentration of economic activity causes each Asian country to specialize in the production of individual parts and components, allowing countries to benefit from agglomeration and economies of scale, he said. Russia has no such opportunity, given the lack of a comparable production-sharing network in the EU.

Developmental Challenges

• Adopting Technology: Rapid growth has led to rent-seeking opportunities in China, Huang said. He argued that innovation must drive China’s future growth, as its production mix is still not technologically advanced enough. The country is struggling to develop more indigenous technology, but will benefit in the meantime from its extraordinarily high rate of technology adoption, Huang said.
   
• Shifting Incentives: Huang argued that Russia’s resource-driven economy has made it vulnerable to energy price fluctuations and given rise to problems of vested interests and state capture by powerful financial-industrial groups. He recommended that Russia nationalize the energy industry, as Norway has done, and redirect funds to incentivize education, science, and technology.