What digital can do for Russia’s growth

Should a country follow a top-down or a bottom-up economic policy to achieve fast and sustainable growth? Examples of top-down policies create national champions, favourable and selective tax regimes stimulating the adoption of foreign technologies in selected strategic sectors and the creation of special economic zones.

An early and perhaps most impressive case is the Meiji Restoration in Japan in the 19^th century. This was the first case when a non-Western country quickly decreased the gap with the leading countries and transformed from a feudal society with a medieval economy into a powerful industrialized nation. Examples of bottom-up policies create competitive and level playing fields, reducing barriers to opening new companies and increasing the flexibility of labour markets. Hong Kong with its super competitive and free economy is one of the most impressive recent cases of fast growth.

One of the most interesting results of recent economic research is that the factors determining the success of policies promoting growth depend on the distance to the technological frontier. Daron Acemoglu, Philippe Aghion and Fabrizio Zilibotti argue that for a relatively poor country that is typically far from the frontier, either the top-down approach or the bottom-up approach may work. When a country closes the technological gap and is closer to the frontier, the bottom-up approach yields much faster growth. The reason is that when the low-hanging fruits of following the leader are taken, a country has to create a new economic environment that is conducive to innovation.

Russia, despite its current economic difficulties, is already a relatively well off and developed country. In a series of three year-long projects conducted by the Global Agenda Council on Russia we argued that the potential of what economists call “catch-up” growth is exhausted. The effects of high commodity prices, a conservative fiscal and monetary policy, and decisions such as the administrative reform which lowered barriers to doing business and thus fuelled high growth in the first decade of the 2000s are no longer present. The main challenge for the country is how to create a new economic model that can lay the foundations of sustainable future growth.

The first in the sequence of the Council’s reports, Scenarios for the Russian Federation (2012), outlined a set of political, societal, and economic challenges that Russia would face in the near future. One of these scenarios indicated that regional growth may be an important driver for the national economy. The second report, Russia’s Regions Drivers for Growth: 4×4 (2013), built on this insight and focused on the best examples of Russians regions that were successful in fostering economic growth. The third report of the Council, Unknown Russia: Powered by Entrepreneurs (2014), descended to the level of the firms and their leaders and presented successful and innovative Russian firms, the barriers they have to overcome and the strategies in which they manage to do it.

This year we are embarking on the fourth part of the agenda of analysing the potential sources of sustainable growth. In contrast to the previous years, we decided not to focus on the concrete examples of the possible scenarios, successful regions or world-class companies. Instead, our Council commissioned a series of essays that describe the mosaic of changes happening in much less visible and often imperceptible ways. How all things digital are changing the society, culture, norms – and ultimately building intangible infrastructure that will create foundations for what economists call “growth at the frontier”.

The Digital Russia project launches on 20 October with the first series of seven essays. In this series, the members of the Council, leading academics, entrepreneurs and public figures argue that this transformation is already happening. These essays show an exceptional diversity and far-reaching implications of these foundational changes; how the digital life of Russian regions became “hyperlocal” and why the internet does not defy the notion of locality; how the social media landscape in Russia is distinct from other countries and how it has profoundly different social effects from other forms of online and traditional media; how one of the Russian regions succeeded in creating a volunteer project teaching thousands of elderly people to use computers; how Russian museums took to sharing art treasuries, cultural traditions and scientific heritage creating frontier digital technologies; how e-governance facilitates changes in the business climate and improves services provided by governmental organizations; and how the digital revolution influences everyday life and cognitive style of contemporary Russian society.

Each week for the next three months we will post new essays on the topics from the key factors of success of Russian internet and e-commerce companies to a new model of digital volunteering. This mosaic of changes unequivocally shows that the “growth at the frontier” is not only possible but actually may be already there.

Authors: Aleh Tsyvinski, Chair of the Global Agenda Council on Russia; Co-Curator of the Digital Russia project; Arthur M. Okun Professor of Economics, Yale University; Pavel Demidov, Member of the Global Agenda Council on Russia; Co-Curator of the Digital Russia project; Adviser to Chairman, Kudrin Foundation

Image: A man walks under an umbrella during a snowfall, with St. Basil’s Cathedral seen in the background, in Red Square in central Moscow March 31, 2014. REUTERS/Maxim Shemetov