Russia and China are vast countries with different comparative advantages. Russia’s advantage lies in its rich natural resources, highly-skilled workforce, modern military and aerospace equipment and research and development base. Its relative disadvantage lies in its gradual demographic decline which is leading to a shortage of labor.
To solve the problem of its economic slowdown, China has adopted a strategy of encouraging innovation and high-tech industries. China is a world leader in consumer goods production and in other industries, including applied research, and the Chinese economy also enjoys an abundant and disciplined labor force, good distribution and logistics networks, etc. Is this new Chinese economic strategy also appropriate for Russia, which lacks some of the abovementioned features, but can still count on good fundamental science and research results?
First a few words about China.
To begin with, the “innovative development strategy” itself is the subject of some debate in scholarly circles. Innovative, high-tech industries are capital-intensive and do not need the huge human resources that China possesses.
In economic theory there is a notion called the "Lewis turning point" and experts in China are currently in heated debates over whether China has already reached this point. Has the era of cheap labor come to an end? If the answer is “yes,” then the supply of labor in China really is decreasing and there is no doubt that labor costs will continue to rise, in which case China will have no other option but to resort to an “innovative development strategy.”
But if the answer is no (which means that China still has an excessive workforce), how will this strategy resolve the employment problem? After all, it is no easy task retraining and employing the workforce in high-tech industries. If China does not provide jobs to workers who are being released from the labor-intensive manufacturing industries, the country will be threatened with social upheaval.
That said, China is a large country and has one advantage – it can develop a parallel strategy. In other words, without abandoning labor-intensive production for the sake of employment, it can simultaneously encourage innovation and develop high-tech industries. The key issue is how to distribute human resources – should “the hand of the market” be visible or not?
Now about Russia.
Russia and China are vast countries with different comparative advantages. Russia’s advantage lies in its rich natural resources, highly-skilled workforce, modern military and aerospace equipment and research and development base. Its relative disadvantage lies in its gradual demographic decline which is leading to a shortage of labor.
Russia can get rid of this disadvantage by implementing an innovative development strategy based on higher labor productivity. It is with this aim in mind that President Vladimir Putin has long been planning Russia's innovative development strategy. He is hoping to support the development of high-tech industries and attract foreign investment into them by introducing tax benefits and reducing administrative barriers.
In our view, Russia’s innovative strategy is being hampered from two directions – from outside and from inside. Many countries, especially the United States, do not want to see an innovative and dynamic Russia and will do all they can to prevent this using a variety of political and socioeconomic means.
There are obstacles inside Russia as well. We all know that innovation is expensive and requires huge investment. The question is how to use the tools of the market to attract money for research and development. This is a difficult task for Russia. If Putin wants to guarantee the success of his innovative strategy he needs to find ways of developing venture capital and corporate funding channels. He must consolidate the financial sector and upgrade banking services, reduce funding costs, improve the business and investment climate, develop entrepreneurial ethics, protect intellectual property rights and so on. One of the key challenges is how to cultivate new national competitive advantages out of the stockpiled petrodollars.
