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The issue of industrial competitiveness is especially important for Russia. The coming years will see continued cost pressure on enterprises’ inputs and further real exchange-rate appreciation, which will have to be matched by productivity increases. The 1998 financial crisis remains a vivid reminder of what can happen when productivity fails to increase in line with input costs or an appreciating exchange rate, rendering a country’s industry increasingly uncompetitive.
Russian industry has recorded substantial improvements in productivity in recent years…
Fortunately, while the situation of many industrial sectors remains problematic, one must recognise the large improvements in productivity that have occurred in recent years. Industrial competitiveness, measured in terms of labour productivity, has been increasing strongly and steadily since 1997 (with the exception of 1998) at an average annual rate of around 8 per cent. The performances of different sectors have varied widely, but, apart from a couple of inglorious exceptions, there have been improvements in almost all of them. Moreover, there has been a tendency for these improvements to be larger in sectors with lower initial productivity. While rising overall productivity in 1997–2003 was partly achieved by reducing overall employment levels, a significant number of sectors increased employment. In most cases, these increases took place in dynamic sectors with strongly rising output and increasing productivity. The few exceptions turn out to be sectors in which there is still significant direct state control or at least extensive state interference. The productivity performance of the grain-processing and bread sectors, as well as oil (before 1999) and electricity (until 2002), are uninspiring, while the gas sector is clearly at the bottom of the league.
Employment and labour productivity
1997-2003
* Data for 1997-2002.
Source: Goskomstat and OECD calculations.
…While holding unit labour costs well below the levels of 1997-98
While increased productivity is an important benefit in itself, an assessment of industrial competitiveness must also look at indicators that take wage developments into account, such as unit labour costs (ULC). ULCs in Russian industry, which had fallen sharply after the 1998 devaluation, were still roughly 25 per cent below 1997 levels in 2003, despite the recovery of average wages to pre-crisis levels by 2002. This decrease in ULCs partly reflects the overall rise in productivity seen across almost all industrial sectors. In addition, there has been a tendency for labour-force reductions to be larger in sectors that had higher unit labour costs before the crisis, i.e. those that were a priori less competitive. However, increased competitiveness has also been achieved by better wage differentiation. While in the aftermath of the crisis wages in all sectors fell sharply, they subsequently recovered more slowly in less competitive sectors. As a result of these two developments, ULCs fell most in those sectors where they were highest before the crisis, and in almost all sectors unit labour costs in 2003 were below 1997 levels. The major exceptions were the electricity, oil and gas sectors. It is striking that gas-sector wages, which were already almost four times the average for industry as a whole, increased at exceptionally high rates during this period, even as labour productivity in the gas sector fell by over 20 per cent while increasing almost everywhere else. This suggests large-scale rent-seeking by gas-sector insiders.
Unit labour costs by industry 1
Relative to total industry, 1997=1
Note : The figures above columns represent percentage growth rate 1997-2003.
1. ULC calculated on the basis of data on sectoral employment, sectoral production volumes (in 2000 prices) and average wages (expressed in a hypothetical unit (UE) consisting of half a US Dollar and half a Euro).
Source: Goskomstat and OECD calculations.
Russia’s export base remains extremely narrow
While there have been important improvements both in the efficiency and competitiveness of most branches of Russian industry, few sectors have reached a degree of international competitiveness that would enable them to export on a significant scale. That, at least, is the picture that emerges when looking at Russia’s revealed comparative advantage (RCA). Russia’s major RCA is in hydrocarbons (oil, oil products and gas), together with some other resource- based (e.g. wood, pulp and paper) and energy-intensive products (non-ferrous metals, steel, fertiliser). The number of sectors in which Russia has some RCA, however small, is surprisingly short, and Russia indeed saw a further deepening of its major revealed comparative advantages and disadvantages between 1997 and 2003. In particular, Russia’s RCA in oil, which was already huge in 1997, has further increased. The increasingly narrow concentration of Russia’s revealed comparative advantage suggests that the authorities’ concern for economic diversification is well founded but at the same time highlights how difficult reducing Russia’s reliance on natural resource exports will be. However, the analysis of trends in labour productivity and ULCs in 1992–2003 points to at least some grounds for cautious optimism. One may reasonably hope that continued investment growth will lead gradually to the development of comparative advantage in areas other than mineral exports. This, however, will depend on the speed with which current handicaps can be overcome through further modernisation of production processes and products, better marketing, and more experience of international markets. An open economy, as well as increasing FDI levels, would be very helpful in this respect. Other structural reforms will also have a role to play, particularly reform of the banking and financial sectors. At the same time, the poor productivity performance of sectors characterised by a high degree of state intervention in enterprise affairs provides a cautionary reminder of the dangers of attempting to force the pace of diversification by means of dirigiste industrial policies.
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The full edition of the OECD Economic Survey for the Russian Federation is available from:
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