Restructuring, Efficiency and Output Decline of Russian Industries and Regions

Improvements in economic efficiency and productivity are the most important sources for economic growth and will play a major role in the process of industrial restructuring in the Russian Federation which has yet to occur. The Soviet Union left an institutional vacuum and large economic distortions behind, which set the stage for an established elite to systematically exploit factors of production for their personal benefit. Economic agents lacked the resources and incentives to increase efficiency of the markets they operated in. This paper generates some empirical highlights of the outcomes of industrial transformation from 1987 to 1997 and focuses on one of the most popular theoretical explanations for output industrial output decline during transition, which proves that the initial need of restructuring causes output decline but brings with it efficiency improvements. Despite large uncertainties on the accuracy of Russian industrial statistics, the following results are worth mentioning: (1) Early steps of liberalization, macro-economic stabilization and the launch of the privatization package did not bring about improved economic efficiency in industrial production in absolute and relative terms, widening the economic distance to the rest of the world; (2) Less concentrated and highly localized industries performed better, which can mainly be explained by the performance of the resource extracting industries; (3) Price liberalization revealed increasing returns in industrial production and the contribution of capital to output declined rapidly, while the contribution of labor increased. It can be concluded that the increasing domination of resource extractive industries, combined with the economies of scale production of its allied processing industries, will increasingly widen the disparity of wealth among regions and social layers leading to further economic and political disintegration of Russia.