Surveys, News, Events
07.04.12

Why the Comparison Between Chinese and Russian Investment Levels Is Useless

Forbes

By Mark Adomanis

Russia’s level of investment is, and has been for the past decade, far closer to the levels of developed, wealthy countries than to China‘s. I don’t find this to be particularly alarming or surprising for three reasons. First, because Russian investment collapsed so catastrophically during the 1990′s the current levels are actually an improvement: as you can see from that chart, Russian investment has substantially increased from the depths it reached in 1999 and has done so during a time that overall GDP has grown dramatically (the actual expenditures on investment have thus exploded). Second, because on the basis of per-capita income, Russia is actually closer to developed Western countries than it is to China: China is quite simply much, much poorer than Russia and you would therefore, knowing nothing else about either country’s political or economic histories, expect its investment level to be somewhat higher. Third, because China’s level of investment has been roundly and repeatedly criticized as excessive, and even dangerous, by a bewildering array of Western and Chinese economists, bureaucrats, and pundits. Barely a day goes by without an article being published bemoaning China’s unprecedented level of investment, a level which has absolutely no parallel in economic history. Thus saying “why hasn’t Russia been investing as much as China?” is basically tantamount to saying “why hasn’t Russia been investing more than any other country in the history of mankind?”

Nonetheless, I am still surprised by just how often you will see mainstream news publications dismissively compare Russia’s level of investment with China’s. Take for example a story in yesterday’s Wall Street Journal about Russia’s slowing rate of economic growth:

    While Mr. Putin often tout’s his country’s performance as strong compared with neighbors in crisis-wracked Europe, it doesn’t stack up as well against other developing economies. Russia’s economy expanded by 4.3% last year, compared to 9.5% in China and India’s 7.8%.

    Mr. Putin also promised to transform Russia’s $1.9 trillion economy into the world’s fifth largest, lifting it out of the 11th place spot it currently occupies.

    To help achieve that, Mr. Putin has pledged to boost investment as a share of domestic product to 25% by 2015 from 20% now, which is less than half the rate in China. Friday’s revised figures see investments growing by 6.6% in 2012, short of the 8% annual growth needed to hit Mr. Putin’s target.

 

China’s level of investment, which Russia can achieve less than half of, is so massive and excessive that it is threatening to destabilize the entire global economy. Why would Russia possibly want to duplicate that? Why would we, or anyone else, want Russia to mimic the draconian elements of state economic intervention that allow China to suppress consumption and artificially inflate investment? To achieve anything remotely comparable to China-like rates of investment, Russia would have to become substantially less economically liberal than it is today (and, one would imagine, this level of increased state control would have deleterious political consequences as well). Lastly, considering Russia’s horrific history of forced saving and investment during Stalinist industrialization I think a Russian economy that is slightly too focused on consumption seems to me to be greatly preferable to the alternative.

Rather than comparing Russia to China, the far more enlightening comparison is between Russia and other post-Communist countries in Eastern Europe. It should be noted that this comparison is still not particularly flattering to Russia, but the gap is not nearly so dramatic or insurmountable as that between Russia and China.* So, yes, Russia should still seek to increase investment but it is beyond useless to compare it with China.

* I would note that Russia and Poland (by far the 2nd biggest economy of those in the group of countries analyzed on that graph) mirror each other almost exactly in their level of investment. Poland, of course, is widely considered to be a star performer and it has weathered the economic crisis better than any other country in Europe (including Germany!)

Source: Forbes

Post-Crisis World Institute