Doubling GDP and the Illusion of Growth

In his May 16 address to the State Duma, President Vladimir Putin outlined the ambitious goal of doubling the nation’s GDP in the next decade. Since then, this goal has become a minor preoccupation for Western analysts, who have spent a great deal of time trying to figure out if it is feasible. The concern, however, is not whether Putin can double GDP, but how he will actually do it. There is every reason to believe he can achieve his objective. Unfortunately, he will likely do so by resorting to old Soviet methods of cranking up production.

Doubling GDP as a means of mobilizing the nation is a throwback to the Soviet era, when leaders were fixated on growth and size. Soviet leaders regularly exhorted their countrymen to perform heroic feats in 10 years or so. Josef Stalin declared in the early 1930s, for example, “In order to survive we must accomplish in 10 years what the capitalists did in 100.” In 1960, Nikita Khrushchev, giddy from success in the space race, boasted, “We will catch and pass the Americans in 1970.” And in 1985, even Mikhail Gorbachev launched a campaign to double Soviet industrial production by 2000. (He gave himself an extra five years for good measure.)

Achieving a big quantitative goal in the Soviet Union was fairly straightforward. The crudest way was to manipulate the data to show growth.

A classic example was the prison labor camp system, the gulag. At its peak in the late 1940s and early 1950s, the gulag accounted for as much as 15 to 18 percent of all industrial output and employment on the territory of today’s Russia. Soviet statistics deliberately masked this fact. Forced labor camps exceeding 3,000 or 5,000 people (depending on their location) were classified as towns, which meant that remote regions in Siberia where many camps were located seemed to have had unprecedented urban, as well as industrial, growth.

Russia today is not Stalin’s Soviet Union. But it is still not a full-fledged market economy. The pressure persists to manipulate economic statistics—like GDP—that assume it is.

GDP by definition is supposed to measure the total market value of all goods and services purchased for final use during a given year. The key phrase is “market value.” Even without blatant statistical deception, a nation can increase its GDP if the government rather than the market decides what has value and what does not. This is precisely what the Soviet government did during the industrialization of Siberia under central planning.

In the 1970s, the intensive exploitation of energy reserves and some of the largest construction projects in Russian history made Siberia the motor for Soviet growth. These included the construction of the world’s biggest aluminum plant, a massive dam on the Yenisei River, the completion of the Baikal-Amur rail line, and gigantic power plants.

Western analysts were astounded by the magnitude of projects, the scale of investment in Siberia, and the rapid rate of growth. But neither the scale of projects nor the size of Soviet GDP meant that the allocation of resources involved was determined by market rules. Siberia’s growth was entirely driven by communist planners bent on creating an industrial utopia in this vast region.

Most of the Siberian endeavors would never have been undertaken under market conditions. Some of the largest construction projects were located in the harshest climatic zones of the so-called Russian North, where the costs of construction were extremely high. By the late 1980s, Siberian projects offered an extremely low return on their massive investment. Gorbachev’s economic advisers backtracked from commitments to huge construction ventures, criticizing giant outlays and postponing many projects indefinitely.

The Siberian industrial enterprise was brought to a screeching halt by the collapse of the Soviet Union. Today’s Russia has inherited the burdens of maintaining all the huge enterprises communist planners left for it in distant places. And millions of Russian citizens find themselves stuck in Siberian cities with bankrupt industries and dismal living conditions. Those who would like to move are prevented from doing so by persistent institutional barriers to mobility and insufficient jobs and housing in other parts of the country.

The case of Siberian development in the 1970s raises the question of opportunity costs—where the country grows, what it builds and with what long-term benefit. And who makes the decision to build something in the first place, the market or the government?

In the Soviet Union, central planners indulged in growth for growth’s sake, promoting construction projects in Siberia that defied nature and the market, and putting factories and people in some of the most inhospitable places on the planet. There is every indication that Putin and the government may choose to do the same again. Grandiose Soviet-style projects—like the giant Bureisky dam and hydroelectric station in the Far East—have already been revived and will certainly be used to boost GDP.

The Bureisky project was mothballed in the 1980s, then relaunched by Unified Energy Systems to address energy shortages in the Far East in 1998 and 1999, and financed by the government. It was opened in July by Putin, who used the occasion to stress, once again, the importance of stimulating economic growth. The press hailed the Bureisky dam as a return of the glorious traditions of the Soviet era.

Massive construction projects are extremely seductive for those setting out to increase GDP, but an obsession with size on an abstract level contrasts with the real value that GDP is supposed to measure.

Russia is already big—too big—in this raw quantitative sense. In the things that count, however, Russia is too small. Viewed from the perspective of the international economy and the country’s current engagement in it, the country’s economy is—with the important exception of its energy sector—vulnerable and thin.

Today, a decade into the market economy, more than 48 percent of industrial enterprises are still loss-makers. The stock market, which represents the profitable segment of the economy, is extremely narrow. A handful of oil and gas companies account for two-thirds of its market capitalization; and metals and other commodities for most of the other third.

The overall size of the stock market is only about twice that of Finland’s.

Even more telling than the total value of the companies is the fact that a mere six companies—four oil companies, UES and Norilsk Nickel—account for 90 percent of all shares traded on a typical day. This hardly serves the purpose of reallocating resources in the country, which is the rationale of any market.

In short, Russia does not need more construction and more production for the sake of growth. In referring to GDP as the ultimate indicator of the vitality of the economy, size is not the issue—it is quality that counts.

Russia needs to make industry outside the energy and commodities sectors truly value-creating and let the market, not the government, decide how factors of production—people and capital—will ultimately be used.

If Putin needs an appropriate economic goal to mobilize the population, then he should choose mobility itself.

The government should help people relocate to places and professions of their own choosing and out of the cities and factories that communist planners placed in Siberia.