Innovation Locomotive or Brake?

Maksim Blant

Newsru.com economics commentator Maksim Blant wrote on an interesting subject this week:  is spending on the OPK an engine or drag for Russia’s innovation economy?

Blant has two primary arguments against military Keynesianism in Russia’s context.  First, more money for the OPK will further tighten an already taut market for certain labor.  Second, OPK spending’s multiplier effect will benefit raw materials producers more than consumers.

His article appears against a backdrop of questions about Russia’s ability to meet increasing pension obligations over the next 2-3 years without raising taxes, and former Finance Minister Kudrin’s contention that it could, but for the 20 trillion rubles going to the military’s rearmament program.

The problem, Blant concludes, is not that President Medvedev intends to rearm by depriving pensioners of their last bread crusts.  No, Medvedev defends rearmament as a means of stimulating growth in manufacturing, and turning the defense sector into an innovation development “locomotive.”

Blant allows that a majority of experts are inclined to agree that increased military spending can stimulate economic growth, and large defense industry orders can have a multiplier effect causing expansion in other sectors.  The argument is familiar.  State orders lead to job creation and greater consumer demand.  Defense enterprise orders to suppliers spur the process in other sectors.  The jolt causes the economy to turn around.

Blant says there are cases where military spending has brought an economy out of crisis, but asks will it work in Russia? 

He doubts creating jobs in the defense sector will increase consumer demand.  Even discounting how much procurement money will be stolen in the military or OPK, he says relatively little of the trillions will go for wages.  It would be easier to increase consumer demand by raising pensions.

Blant says this job creation effort will occur in the midst of a demographic crisis — not an excess, but rather a relative shortage of labor.  With state orders in hand, defense enterprises will compete against private businesses for engineers and skilled workers.  Faced with this, civilian producers can either raise wages and lose competitiveness, or “escape” to countries where the labor market isn’t so tight.  This, concludes Blant, makes the OPK not a “locomotive” of innovation development but rather its gravedigger.

Blant turns to the multiplier effect in adjacent sectors.  Yes, OPK money supports them, but raw materials suppliers and processors most of all.  Together the two sectors form a “closed loop,” only weakly connected to other industries.  In the end, he foresees a repeat of the 1980s, where the USSR’s defense sector, heavy machinebuilding, and raw materials producers sucked up the lion’s share of labor and other resources, leaving nothing for the consumer sector.

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One response to “Innovation Locomotive or Brake?

  1. Rather exaggerated. The spending will not be a huge GDP burden compared to the 1980s. In fact, Russia will continue to spend less than 3.5% of its GDP on defense, around 3% actually. Meanwhile, the orders via the united shipbuilding and aviation corporations will help capitalization which will aid civilian projects – An-124, MS-21, ships, etc. Moreover, new models need to be procured and deployed and used so that they can be more marketable as exports and compete in tenders. This way domestic spending will also aid success on foreign markets which bring in about $9-$10 billion a year..
    Russia far away from overspending on the military a la USSR.

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