Presentation on institutions, allocation of human capital, and economic growth in Russia. (June 2017)

1. Institutions, allocation of human
capital, and economic growth in
Russia
By
Michael Alexeev
Indiana University, Bloomington, IN, and RANEPA, Moscow

2. Outline
• Russian economic growth
• Educational human capital in Russia
• Institutional quality
• Institutions and the allocation of talent
• Concluding remarks

3. Economic growth in Russia in the last 20 years

5. Strategies for economic growth (2020, 2030)
• Strategy 2020 developed in 2011 proposed significant institutional
reforms in one of its scenarios (the document has been gathering
dust since then)
• Strategy 2030 outlined in a recent Presidential Decree also calls for
some institutional reforms although less radical
• The government doesn’t seem to be willing to undertake any of these
reforms
• Instead, the emphasis appears to be on stable macroeconomic
environment, technological advancements, and the enhancement of
educational human capital

6. Endogenous growth theory
• Human capital and innovations are viewed as the main drivers of
economic growth in the endogenous growth theory (Lucas 1988,
Romer 1990)
• However, human capital needs complementary factors such as
appropriate institutions
• Strong institutions imply high demand for talent and result in talent
being used to create wealth
• Weak institutions  low demand for talent and/or talent is used to
redistribute wealth – the latter effect seems prevalent in Russia and,
therefore, investment in human capital would not generate growth in
the current institutional environment

7. (Educational) human capital in Russia
Indicator Source Russia’s rank
Human capital Index Penn World Table 22
Human capital index UNDP 49
Human capital index World Economic Forum 28
Inequality-adjusted education index UNDP 23
Higher education and training World Economic Forum 38
Other educational attainment
measures
UNDP and WDI 20-25
Per capita GNI WDI 50

8. PISA scores and government spending
• Mathematics: 20th in the world
• Science: 29th
• Reading: 24th
• At the same time, government spending on education has been in 3-
4% of GDP range since 2000 (less than most countries above Russia in
HDI rankings)
• In absolute terms, approximately $1000/person in PPP terms in 2012,
which is half of Germany’s and France’s levels and about 40% of the
US level.

9. Institutional quality
Indicator Source Russia’s score or
rank
Rule of Law WGI 26th percentile
Rule of Law PRS 0.50 (rank: 79-100 out of 140)
Property Rights Protection Heritage Foundation 20 out of 100 points
Property Rights Protection World Economic Forum 122d out of 140 countries
Constraints on the Executive Polity IV 4 out of 7 possible points
Corruption Control WGI 20th percentile
Corruption Control PRS 0.25 (rank: 113-128 out of 140)

10. Institutions and Allocation of Talent
• Why doesn’t Russia’s high level of education translate into economic
growth (except when oil prices are high)?
• Potential reasons:
• Foreign “brain drain”
• Domestic “brain drain”
• Educated pirates

11. Foreign Brain Drain
• Relatively small
• Emigration rate of people with tertiary education: < 1.5% (in the
lowest decile, which has a threshold of 2.8%)
• Russian beneficiaries of H-1B visa program: 1200-1300/year (17
countries supply more beneficiaries)
• It is possible, of course, that even these relatively low rates harm
economic growth significantly, but we would need more evidence to
make that claim
• It seems more likely that slow growth causes emigration than the
other way around

12. Domestic Brain Drain
• Mismatch between the demand for high skills and their supply could
be a potentially bigger problem
• This would imply that educated people end up not using their skills
and, therefore, get relatively low returns to their education
• However, returns to education in Russia are quite high
• Belskaya et al. (2014): average marginal returns per year of college
(wage gain) in Russia ≈ 7.3% compared to ≈ 6.7% in the US
(Carniero et al. 2011)

13. Allocation of talent
• Interim conclusions: Russia has a lot of human capital at least in terms
of education and returns to education are relatively high
• Then why is growth so slow and wealth-creating innovation so low?
• Baumol (1990): it’s not the number of entrepreneurs that matters,
but whether they have incentives to create wealth
• North (1990): both a chemist and a pirate need much knowledge to
be good at what they do, but only a chemist raises social productivity
• Pritchett (2001): “...in some countries the expansion of schooling
meant the country just had better educated pirates”

14. Who are the modern ‘pirates’?
• Which occupations are more likely to be redistributive and which are
more likely to create wealth?
• Murphy et al. (1991): lawyers are more suited for redistribution and
engineers are more likely to be creating wealth
• Note: in a weak institutional environment, redistributive activities of
lawyers include both predation and private protection

15. Does Russia have too many lawyers?
• 𝐿𝑎𝑤𝑆ℎ𝑎𝑟𝑒 = .66−. 𝟎𝟏𝟓 × 𝑅𝑢𝑙𝑒 𝑜𝑓𝐿𝑎𝑤 + .148 × 𝐿𝑛 𝑃𝐶 𝐺𝑁𝐼
−.011 × 𝐸𝑛𝑒𝑟𝑔𝑦𝐷𝑒𝑝𝑙 − .050 × 𝑆𝑜𝑐 + 𝑒
R2 = 0.18
Russia has many more lawyers that is predicted by this kind of
regressions. (𝐿𝑎𝑤𝑆ℎ𝑎𝑟𝑒 in the above is normalized to 𝜇 = 0; 𝜎 = 1)
The share of lawyers among people with tertiary education in Russia
was 11.1% while the above regression predicts 1.6 percentage points
fewer (this is 1/3 of standard deviation in the cross-country sample)
Note: the residual almost doubles (to 2.8 p.p.) if we do not control for
the rule of law

16. Russian law schools attract talent
0
.01.02.03.04.05
kdensity
20 40 60 80 100
Unified State Examination test score
All Applicants Aviation and Space Technologies Law

17. Allocation of talent and institutions in Russia’s
regions
• Alexeev et al. (2017): pseudo panel of individuals who enroll in
colleges in Russia’s regions in 2011-2014
• Better institutions (lower investment risk; lower corruption) are
associated with a higher share of high USE (ЕГЕ) individuals enrolling
in STEM and a lower share of them enrolling in law and public
administration
• That is
𝜕2 𝑆𝑇𝐸𝑀𝑆ℎ𝑎𝑟𝑒
𝜕𝐼𝑛𝑠𝑡 𝜕ЕГЕ
> 0;
𝜕2 𝐿𝑎𝑤&𝑃𝐴𝑆ℎ𝑎𝑟𝑒
𝜕𝐼𝑛𝑠𝑡 𝜕ЕГЕ
< 0;

18. Survey of parents
• Russian parents:
• Question: What profession would you like your young children to
pursue?
1. Medical – 35%; 2. Military – 13%; 3. Law – 11%; ... 7. Engineer – 9%
• American parents:
• Question: Which occupations you would suggest a child think about
as a future profession and which would you discourage them from
pursuing?
1. Engineer – 93%; 2. Doctor – 91%; Scientist – 91%; ... 10. Lawyer – 69%

19. Entrepreneurship (SMEs)
• SME share of full-time employment in total employment
• Russia: 23.5%
• 28 EU countries: 25% - 52% (average = 39%)
• SME contribution to GDP
• EU-28: 28%
• Russia: 20.5% of turnover (implying a much smaller share in GDP)
Perhaps Russia’s entrepreneurs operate in the shadow economy or choose
careers in government

20. Concluding Remarks
• There is a debate in the economics profession whether institutions or human
capital are more important for economic growth
• Of course, both are important; the question is which of the two is “primary” in
the sense that it would eventually cause the other
• The developments in Russia so far do not support the view that high human
capital leads to better institutions, although the jury is still out on this
• What is relatively clear, however, is that Russia’s comparative advantage in the
educational aspect of human capital has not resulted in high growth in the
absence of increasing oil prices
• I have argued that this is mainly because too many educated Russians tend to
engage in redistributive rather than wealth-creating activities
• Russia needs to improve its institutions before it can take full advantage of its
human capital