Yaroslav Shedov's blog

Part I. The Russian Dilemma: Who is to Blame and What Should Be Done? Path Dependence

May 14, 2021
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No occurrence is sole and solitary, but is merely a repetition of a thing which has happened before, and perhaps often (Mark Twain, 1865).

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TASS

1. Historic recurrence

The wheel turns, nothing is ever new. That is the first idea that may come up in somebody’s mind when looking at the data of the countries’ economic performances throughout history, as it will become clear that most states have been following a certain trend, their own trajectory. As an example, in 1890, Galicia and Eastern Hungary (parts of Austria-Hungary at that time) had slightly higher GDP per capita than Russian Empire (see Table 1). If we rewind the tape forward, we will be astonished at finding out that Russian and Hungarian GDP per capita is still relatively the same (see Figure 2)1. Hungary and Russia are now no longer empires; both countries had difficult and dramatic periods in their history in the XX century. However, there is no doubt that Russia (prior 1991- Soviet Union) achieved great scientific achievements during that times, but the most recent data of the GDP per capita suggests that it is still the same as Hungarian economic figures.

Table 1. GDP per capita ($ in 2010 prices) in 1890

GDP per capita ($ in 2010 prices) in 1890

Austria (as part of Austria-Hungary)

3005

Galicia (as part of A-H)

1947

Eastern Hungary (as part of A-H)

1824

Russian Empire

1550

Kingdom of Serbia

1295

Source: 1. Richard Sylla and Gianni Toniolo “Patterns of European Industrialization: The Nineteenth Century”; 2. Stephen Broadberry and Alexander Klein “Aggregate and per capita GDP in Europe, 1870-2000: Continental, Regional and National Data with Changing Boundaries.

There is a significant number of pieces of research have been made as an attempt to understand the ways of how countries may develop throughout the times, and find any possible trend for it (e.g., Paul Kennedy “The Rise and Fall of the Great Powers”). When we are analyzing the economic rise and decline of nations, proximate and ultimate causality should be considered (Maddison 1988). The ultimate proximate sources of economic growth and development are usually related to strictly economic elements; this type of causality is possible to quantify (e.g., total factor productivity and growth accounting are analyzed in the proximate scheme). Whereas the ultimate sources (e.g., social institutions, culture and attitudes, historical shocks and geographic conditions) are more likely to be evaluated from a historical perspective. This article will study and go over the ultimate sources of the country’s economic development to analyse the path dependence in Russia which does not allow to fully unlock its potential.

2. Path Dependence and Russia

Path dependence is the term that describes the situation where there is institutional inertia, which keeps the country in a certain political and economic trajectory. It happens when the errors caused by the past institutional choices have had impact on the social behavior. As these “defects” have become part of the country’s DNA, any attempts to get rid of them by institution’s modernization and transformation may trigger negative consequences for the country. The idea that each country has its own path and trajectory is illustrated by a distinguished British economist, Angus Maddison. He investigated the key economic indicators of the country: the gross domestic product (GDP), the population, and the GDP per capita. All this information was put into a single table and published in his book “The World Economy: Historical Statistics” (2003) and has been still updating by Groningen Growth and Development Centre, the University of Groningen.

Figure 1. The Real GDP per capita of Russian Empire, the Soviet Union and Russia, ($ in 1990 prices) 1885-2006

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Source: Centre for Economic Policy Research (2012)

Maddison Project Database offers GDP estimates of almost all countries as far back as XIX century and in some cases as early as I century. Maddison was interested in the big picture, but at the same time, he equally took extra care of the most recent countries’ economic indicators. One of the key advantages of Maddison’s data is that most of the economic series are adjusted for price differences between countries using multiple benchmark years. Thus, it can be used for cross-state comparisons of the income levels at various periods of time. The examination of historic data of countries’ economic performances is a crucial enterprise as it helps to find the correlation between the historic events that country has faced and its trajectory of the economic development.

Figure 2. GDP per capita, 1800 to 2016

GDP per capita adjusted for price changes over time (inflation) and price differences between countries-it is

measured in international- $ in 2011 prices.

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Source: Maddison Project Database (2018)

By analyzing Maddison’s data, it has become clear that most countries are divided into groups (see Figure 2). There are at least two groups that are visible to the naked eye. The first group (e.g., the United States, Germany, Japan, the United Kingdom, and France)2 follows the high trajectory and most of the time shows high economic results. While the second group (Poland, Russia, Hungary, Argentina, and many other states that are not included in this graph) is on a low trajectory. The trickiest bit of the second group is that there are some states (Russia is one of them) that are trying to get to the first group, but there are factors that hold them from reaching the top. Some would suggest that Figure 2 is an example of the gap between the developing and developed countries. In my opinion, this explanation is too simplistic, as there are more profound reasons for that economic gap between states.

There are only a few success stories when countries (e.g., Japan and South Korea) managed to complete that transition from the low to the high trajectory. However, most of the time when countries are trying to jump into the first group, they hit the ceiling and slide down again. This situation is similar to the plane’s aborted take-off. Nevertheless, it is crucial not to simply “play” in the comparison game of the countries’ economic performances, but evaluate the reasons for country’s failure to reach the high trajectory, if it has the aim to do it.

The path dependence can be identified in three ways: 1. Belongingness to a low trajectory (the country, as a natural satellite that orbits a planet, stays at the same political and economic trajectory and does not take any attempts to change it); 2. A state has many attempts but most of them led to “aborted take-off” and 3. Low level of happiness in the country (Auzan 2017)

John Rawls, an American moral and political philosopher, suggested that one of the key factors, which determines the happiness, is the realization of the life plan. He claims: “a person's good is determined by what is for him the most rational long-term plan of life given reasonably favorable circumstances. A man is happy when he is more or less successfully in the way of carrying out this plan. To put it briefly, the good is the satisfaction of rational desire. We are to suppose, then, that each individual has a rational plan of life drawn up subject to the conditions that confront him. This plan is designed to permit the harmonious satisfaction of his interests. It schedules activities so that various desires can be fulfilled without interferences (92-93: 1971).

Therefore, if the most population cannot fulfill its life potential in the country due to the reasons beyond their control (e.g., the government’s failure to sustain high standards of living), how corny it might be sound, but people will occur to be unhappy. According to the World happiness report, Russia is on the 73rd place (WHR 2020). Arguably, if people were unhappy, they would like to bring some changes. However, Geert Hofstede, a Dutch social psychologist, well-known for his pioneering research on cross-cultural groups, claims there is a high level of uncertainty avoidance in Russia. The uncertainty avoidance reveals the degree to which society and its members feel uncomfortable with changeability. As any potential change is a mystery and does not guarantee a successful result, transition costs are high, hence, the population and government will tend to maintain the status quo (Hofstede 2001). The history shows that most attempts to move Russia away from a low trajectory to a high one have failed, and the country has repeatedly returned to stagnation. In this case, the question can be raised: “Why is the stagnation repeated in Russia? Why cannot Russia solve the path dependence problem?” There are at least two main explanations of path dependence. First, it can be suggested that it can be at the “genetic level”, which simply means that it is highly likely that nothing can be done or it can be tackled but with the high risk of negative setbacks for the country; it can also be a long-term path dependence which means that the institutional inertia is not deeply rooted into society’s genetic code. Therefore, there is a higher chance for the window of opportunity to solve it.

2.1. The “Genetic” Path Dependence

The “Genetic” Dependence is one of the trickiest paths that country can be on. It may lead to unprecedented results, as by modernizing and bringing changes to country’s political and economic life, the government is not simply establishing new institutions but changing the social genetic code. It has to be done with caution because as any changes to social behavior may fire back and cause even more trouble in the country.

The best term to describe such changes is creative destruction. This term was coined by the economist Joseph Schumpeter in the early 1940s. It means the dismantlement of long-standing practices to make a way for innovation. However, the destructive change lies within the paradigm which rarely changes. The national identity is considered to be the countries’ paradigm. It sets rigid boundaries of the state’s development. Unless this paradigm is not changed, any efforts to modernize the country may be useless.

Japan is one of the few countries that managed to escape from the path dependence by using the creative destruction method. In the 1850s, Japan was an isolated economically backward country without any potential to be the leading world economic power. But in the 1850s the arrival of American and European ships forced the opening of the country to the outside world and the process of modernization has begun. In 50 years, Japan managed to expand the sphere of its interest in the region by having two victories wars with the Qing dynasty of China (The First Sino-Japanese War) and Russian Empire (the Russo-Japanese War). In the 1960s, Japan experienced the economic miracle. From Figure 3, it can be clearly seen that Japan managed to escape the low trajectory In the 1980s, it reached the same level GDP per capita as the UK.

Figure 3. GDP per capita, 1850 to 2016

GDP per capita adjusted for price changes over time (inflation) and price differences between countries- it is measured in international- $ in 2011 prices

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Source: Maddison Project Database (2018)

As it has been said before in this article, the country might have to pay the price for dismantling the country’s long-standing principles and rules, if this process is done without extra caution. Arguably, that exactly happened with Japan. Manipulation with the country’s “genetic code” that was needed to make this leap led to the sacrifice of its paradigm, national identity, and it has backfired badly to the society. For a long time, English has been being introducing as the language of business to the Japanese companies, but it raised the concerns of the possible degradation of the knowledge of Japanese language and culture. As a result, the nation was caught between the need to exist in the globalized world and the idea of the importance of Japanese culture and language in the everyday life. This quasi-situation caused Japan dropping to 53rd in global English proficiency, “low proficiency band” (Margolis 2020).

Meanwhile, the suicide rate is extremely high in Japan (30th place in the suicides rates in the world and the highest among the countries which are on the high trajectory.) The country as a whole seems to be successful, but something is still wrong within the system. In order to become a successful country, it is inevitably that the state would have to reshape some of its national identity. Changing them is a difficult task which may lead to dramatic consequences and that what might has happen with Japan to some extent. However, the Russian economist, Alexander Auzan, claims that Russian path dependence problem does not have “genetic” roots, as the Russian national identity has not formed yet and it is hard to name the national characteristics that constitute Russian as a nation (2017)

Still, I would argue with that statement, as Peter the Great, the Russian Emperor, was the first leader in Russia who tried to reshape the nation’s DNA by creative destruction. It has led to the creation of tiny in terms of numbers to the rest of the population, but a significant social group of new Russians who had the European mindset. In 200 years, they managed to push Russia to the world political arena and created the cultural foundation that the modern Russians are still proud of. Meanwhile, the creative destruction caused a significant split inside the nation, as despite all reforms by Peter the Great, the national paradigm has not changed significantly, it stayed in a quasi-frozen condition. That is what is most dangerous about creative destruction. It may only work, if it is fully completed. Likewise, keeping the country in quasi-condition is a risky enterprise. It creates a lot of pitfalls which are hard to detect for a society, but they act as rust and cause corrosion, and at the worst possible time it may cause significant damage. The first sign of incompletion of those reforms was the split between Slavophiles and Westernizers. Two complete opposite ways of understanding how the country had to operate. Still, they both had one thing in common- any potential reforms had to be done by evolution methods. However, history has shown that it was done oppositely. In my opinion, the dramatic events of 1917 and later the Civil War have shown that there is a considerably deeper cultural divide in the country, and it is too shallow to believe that the Russian revolution was a mere class struggle. The analysis of another type of path dependence and its possible impact on Russian development trajectory will be discussed in the second part of this article.

To be continued…


1 - It is worth mentioning that GDP per capita based on Maddison datasets are in some cases can differ from the World Bank’s figures. According to Maddison Project Database, most of its recent figures are back to 2016 and it is estimated in that year Hungarian GDP per capita was $24,047 vs Russian GDP per capita-$23,064. While the World Bank data suggests that in 2016 there was a bigger gap between Hungarian ($15,213) and Russian ($11,356) GDP per capita, while in 2019 that gap became even bigger $17,527 vs $12,011. The reason for such difference as the World Bank significantly revised its data based on a new International Comparison Program (ICP) survey which has been being published since 2008 with its new purchasing power parity (PPP) data. However, Agnus Maddison was skeptical of the World Bank’s revision of that data. He argued that the price measures which were used by the World Bank for its revisions were debatable due to the difficulty of assessing the purchasing power of people who live in rural areas. Therefore, in his view, the World Bank’s methodology underrates the role of self-production in rural areas while gives more weight to urban consumption patterns and urban prices. To find out more on the revised World Bank methodology, read Maddison A., Wu H.X. (2008), “Measuring China’s Economic Performance”, World Economics 9(2), April-June. By using the case study of China Maddison has shown how the newly revised Word Bank methodology has changed the country’s economic estimates.

2 - There are other states (e.g., Italy, Netherlands, Switzerland, Belgium, Canada, Sweden, Norway, Finland) that are not included in this graph. It was done to avoid the chart clutter.

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