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Russia, China, and the need to step up investment

Image made by the author of the article

The current economic situation of Russia may force it to adopt a new economic model where there is room for a bigger government investment that led the economy toward an import-substitution process and product diversification. In other words, reindustrialization.

Before the «Special Operation» waged by Vladimir Putin, Russia has broadened its trade balance surplus by exporting mostly raw materials and importing capital goods. Exporting more than importing means that Russia had value accumulated to be invested in its economy to grow in the future.

 

Figure 1. Russia’s GDP from the demand side.

Figure made by the author of the article with data from Penn World Table 10.0

However, that value accumulated only can be turned into capital through the imports of the capital goods that Russia is not able to produce domestically. At this point, the economy has to deal with the trade restrictions set up by the western’s sanctions, and a way to avoid them lies in the close commercial relationship with China, a bigger and more diversified economy.

The Russian government must understand that economic growth does not come about thanks to consumption but investment, both its own Soviet experience and China are proof of it.

According to John Ross (click here), one of China’s economic differences from capitalists economies lies in the lever that each one can draw upon; while socialist China can drive investment through the state, capitalist western economies cannot due to the fact that the means of production and investment are in the hands of capitalists who decide when and where to invest based on their expectations of future profits.

 

Figure 2. China’s GDP from the demand side.

Figure made by the author of the article with data from Penn World Table 10.0

It is common knowledge that since the late 70s the Chinese officers drew upon capital (owners of assets seeking profits) to solve the inefficiencies of the planned economy, avoiding the supplier-consumer gap that the fully nationalized socialist economies suffered from (click here). Russia can learn from the Chinese experience and use pragmatically both the private and public sectors, keeping in mind that in Russia private property over the means of production already is allowed and the State has not withdrawn completely from the productive economy.

Above, Figure 1 and Figure 2 showed that although both Russia and China have held foreign trade surpluses in the last years (exports surpassing imports), investment in China has grown faster than its economy while in Russia it has been well below its economy. 

Russia will need to step up investment and to do so it will need the hand of the huge and diversified Chinese economy. On the other hand, it will require capitalists (the so-called oligarchs) to raise investment instead of hiding funds in the tax heavens, where some economic analysts think that Russian capitalists allocate their money away from Russia. It is likely the case given the sizeable international trade surplus and the relatively low investment rates delivered by the country in the last years. Paul Krugman wrote an interesting article about the topic (click here). 

Of course, if the government keeps the means of production in the private hands on a profit-based economic system, the investment will not speed up in the midst of a global crisis and economic sanctions, therefore,  the government has a key role to carry out investments. 

Medardo Alfonso Palomino Arias

Por Medardo Alfonso Palomino Arias

Economista y Magister en Gestión Pública graduado en la Universidad Santiago de Cali, Colombia. He sido Profesor desde el año 2014 en distintas universidades de Cali. En la actualidad me encuentro adelantando estudios y viajando en Australia. El proposito de mi blog es difundir conocimiento sobre economía y brindar un espacio para el debate.

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