Russia has one overlooked option to boost its economic productivity – encourage widespread migration of laborers and small business owners from surrounding nations. But is it really possible to import demography on such a grand scale?
The current Russian approach towards the human capital resources in Central Asia presumes that they will be infinitely available upon the first call. Photo: TASS
Any high-profile discussion about the future growth of the Russian economy is going to agree on one key fact: the need to boost the country’s productivity. That’s because productivity is imperative for Russia’s economic competitiveness in modern industrial and post-industrial products and services. The more productive a country is, the wealthier and more competitive it becomes.
The strategic goal for Russia is still focused on approximately doubling its GDP within 15-20 years, which would mean entering the club of “advanced” – rich and competitive – economies. As productivity is the key contributor to GDP growth, the goal means that Russia needs to post an average increase in productivity of 4-5 percent a year.
However, an important question remains largely unanswered: How can this be realistically done?
The keys to improving Russian economic productivity
There are three ways of boosting economic productivity: investing into productive assets like machines; putting more hands to work; and improving the skills of the workforce (referred to as total productivity). Ideally, all three should work together.
However, this is a very unlikely scenario for Russia. Even during periods of ebullient investor confidence, the country had a relatively low rate of investment into capital assets compared to other emerging markets. Currently, Russia has a gross capital formation ratio of about 20 percent. [Gross capital formation ratio is a macroeconomic indicator that measures how quickly a nation is growing its fixed asset base as a percentage of GDP – Editor’s note.] This is mediocre on the global scale and hardly allows for a breakthrough in the nation’s asset base (in comparison, India’s rate is 32 percent and China’s 46 percent).
The accumulation of skills is also problematic; unfortunately, Russia is losing some members of its internationally competitive workforce through emigration. The emigration figures don’t look overly dramatic (the Organization for Economic Cooperation and Development estimated the emigration rate of highly educated Russians at 1 percent in 2010-2011); however, they don’t give grounds for optimism either.
Thus, the only realistic way of quickly boosting Russian productivity is expanding the workforce. This type of growth is often looked down upon nowadays, yet it was an intrinsic part of the economic miracles of the 1950s and 1960s in nations like Germany, Japan and Austria.
So is there any hope for Russia here?
The country is known for its stagnating population and seems firmly trapped here. In short, Russia appears to be an emerging economy in terms of wealth with the demographics of an advanced nation. Some improvement will come in 10-15 years when people born during the baby boom of the 2000s will turn into members of the fully productive labor force. Until then, the working human capital of the country is likely to further deteriorate through emigration and aging.
According to a popular saying, “Demography is destiny.” Yet, in the 21st century, the demography of a nation is constantly being traded – either willingly and strategically or in an uncontrolled way. Actually, importing demography is not a problem for any country that has an income level a few times higher than that of its neighbors.
Russia happens to be one of those countries – it has substantial pools of human capital available across its borders, first of all, in Central Asia, and is also capable of attracting them. Yet the idea of relying on the import of this workforce is currently a very uncomfortable topic for public discussion. As a result, these human capital resources are indeed used – but in a very non-strategic manner.
There are two ways of importing a workforce: either bringing in “gastarbeiters” (those who work and go on a transient basis as migrant laborers) as Germany did in the 1970s and 1980s, or encouraging permanent migration, in the form of those who intend to settle.
Popular opinion tends to view the latter variant as more threatening in the case of cultural or religious differences, being concerned with the dilution of “national identity.” Upon second thought, however, the migrant laborer variant does not make any more sense. It creates all the same cultural tensions, but brings no strategic gains. Moreover, there is not even a theoretical chance for resolution of the tensions, as the migrants are constantly rotating with little accumulated learning.
Sure, there are a lot of challenges in implementing such a strategy, but none of them are unknown in the course of global history. The U.S. is an excellent example of a sustained strategy of importing its workforce from the most diverse sources: from rural Poland or Greece and China or Japan in the early 20th century to Mexico, India or Philippines nowadays. The important feature of the strategy was that it never made unrealistic assumptions about the quality of the inbound flows, relying instead on the internal institutions to build this quality over time (though at times the process resulted in gems such as inventors, entrepreneurs and scientists).
The aim here was the successful integration of the second generation, and this was generally accomplished. As a result in the second part of the 20th century, the U.S. grew in population by over 60 percent in the period from 1950 to 1990. At the same time, European countries like Germany or the UK, which were rather restrictive towards migration, started to lag behind in rates of economic growth around the 1970s, when the gap in demography became too big to be filled by either capital investment or gains in skills.
The U.S.S.R. overall kept up in demography with the U.S., yet started to see a loss of productivity growth around the mid-1960s. Interestingly, it was the time when Russia (then known as the RSFSR) started to diverge in the population growth trend. The U.S.S.R. never had a strong immigration flow, but tried to a certain extent to redistribute internally the “demographic dividend” gained in highly fertile Central Asian republics to the places where the economy demanded workers. Yet, as the stagnation in productivity since the 1970s showed, the strategy lacked effectiveness in the strategic build-up of human capital.
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Does Russia need more immigration?
Unfortunately, there is a common misinterpretation of Russia’s migration statistics. It’s common to see in the media an impressive official figure of 12 million accumulated migrants (which puts Russia in second place in the world, trailing only the U.S.). However, almost all of this growth was created in the 1990s, when migration stood in the high hundreds of thousands a year.
This was mostly repatriation. After the breakdown of the U.S.S.R., those who felt more affiliated with Russia returned from other former Soviet republics. In those times, Russia could count on the strong influx of skilled Russian-speaking ethnically Slavic workforce who happened for some reason to hold foreign passports. Since then the influx of migrants has dropped considerably. The official figures of the past ten years fluctuate in the range of 250,000–300,000 immigrants a year, representing approximately 0.2 percent of the population.
At the same time there are reasons to doubt the official emigration statistics. For example, these statistics puts the number of those who left Russia for the U.S. in 2014 at less than 2,000. The U.S. version of the 2014 figure for Russian legal immigrants is over 9,000, some 4.5 times higher.
Many of those who leave – even to settle – these days don’t bother to cancel the official registration in their Russian place of residence, keep their citizenship, but do not register with the Russian embassy abroad. If the multiplier of 4.5 is applied to the official Russian outbound statistics to the non-Commonwealth of Independent States (CIS) countries, the number of annual emigrants soars to over 200,000, which means that actual net immigration has a very modest surplus of about 50,000, about 0.03 percent of the population.
Returning back to the productivity growth target of 4-5 percent a year, and very optimistically estimate the input of capital assets and skill accumulation at half of this, there’s still the necessity of boosting the workforce by 2-2.5 percent a year. As can be seen, the actual influx produced by “organic” migration is smaller by two orders of magnitude.
Russia’s integration challenges
Still, Russia today is highly skeptical and restrictive towards permanent immigration – quite in the manner of the European countries during the 1970s and 1980s. The way Russians reflect on the present day “migrant crisis” in the EU leads to more skepticism, if not outright phobia about migrants.
The popular opinion tends to overlook that Russia was a multi-ethnic, multi-religious society for centuries. In a sense, it was the union made – rather uneasily - between “Slavs” and “Tartars” around the 15th century that allowed the Russian state to safely expand to east of the Volga being reasonably sure that the belt of Islamic population on the crucial communication lines would not be a threat. Accommodating and integrating people from different cultures are an essential part of the DNA of the modern Russian state.
Unfortunately, this fact is rarely reflected upon or even explicitly mentioned in public. Much of the popular thinking still evolves around the idea of Russia being a “Slavic” ethnic state. The peculiar interpretation of the word “nation” in the modern Russian language – which makes it synonymous with ethnicity - does not help at all. “Integrating into the Russian nation” sounds like an absolute oxymoron. The barriers to integration that are often cited are religion, culture and language. Yet, those concerns come from the wrong historic perspective and strategic future outlook.
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Changing the paradigm
If Russia is strategically ready to become an advanced economy, the question is not whether or not to allow massive immigration, but how to integrate it. Russian society needs to accommodate itself to the fact of the necessity of migration – and learn to deal with the issue, leveraging the historical legacy of integration. The expectations of a massive influx of a “highly skilled” and “culturally compatible” workforce should be put aside.
These expectations are hardly realistic: bringing in tens of thousands from Europe or even Latin America is out of the question, provided the current level of Russian economic development. The paradigm of Russia as a quickly growing emerging market requires first of all medium-skilled industrial workers, and there is little available supply of them on the country’s borders. Ukraine was the only important source, but it has largely re-oriented its migration flows towards the EU, which is more attractive in many ways.
This means that a long-term and bold immigration strategy is required, dealing with the issues of attracting, retaining and developing the workforce for the Russian economy, much in the way a growing corporation would approach its human resources needs.
Attraction. The current Russian approach towards the human capital resources in Central Asia presumes that they will be infinitely available upon the first call. This view misses that strong regional competition is emerging for this resource pool. For example, the Gulf countries increasingly need working hands and are ready to pay for them. Turkey has strong economic growth. Iran is likely to boom (and is already an important migration destination for Afghanistan’s workers). Finally, China is becoming increasingly affluent – and deficient in the cheap labor that is essential for its economic model. At the same time, Russia has massively devalued the ruble, which makes its wages less competitive even on a regional scale.
Once again, the competitive opportunity for Russia is only in encouraging migration for permanent settlement, as all of its regional competitors can go to the labor market to shop for transient laborers. Russia can also offer a somewhat higher level of institutional and political development vs. countries like China or the Gulf monarchies. The factor is important for strategic settlers, and largely irrelevant for short-term migration choices (where the issues of immediate cultural comfort, including religious norms, can have higher priority).
Retention. If the full integration of the second generation is the strategic goal – as it should be – institutions should be created that will give comfort to the migrating families, especially children. This means more places in schools for children, education and socialization for non-working housekeepers, an infrastructure for intense learning of language – all accompanied by media discourse that will make the mindset of the “native” population more accommodating.
The issues of religious comfort are particularly strong. They are also the most politically challenging, especially in the present-day world, as “religious” in the migration case almost inevitably means “Muslim.” Once again, Russia could do much better reacquainting itself with its historical legacy of integrating Islam.
Development. Importing demography for growth means the readiness to deal with the initially challenging level of human capital, as was and is the case with the U.S. Two economic institutions were essential in the American case: industrial mass production and entrepreneurship. American industrialist Henry Ford’s conveyer belt was not only a great cost reduction factor in manufacturing, it happened to become a great social integrator and skill builder. People of all languages and origins could be put to work with modest initial instruction with no urgent need to interact in the process beyond their abilities – and learn and progress in the process.
At the same time the ease of starting a shop, a cafe or any other imaginable small business was a way to not only earn a living, but also to start building a social network, which gradually included “natives.” All across the world, one can often see people who remain in a generally xenophobic mood to have a fellow “other” as a salesman in a corner shop. Getting to know real people is probably the best possible way to start the uneasy process of accommodating migrants. This is a small step for a person, a huge leap for society.
The challenge for Russia is that both institutions are dormant. There is not as much prosperous industry across the country as needed. In fact, the layoffs of the “native” workforce are an imminent threat at many manufacturing giants. This, of course, does not contribute to the pro-migration sentiments. At the same time, the local authorities seem united in having the small kiosk with an owner from Central Asia selling homemade kebabs as the icon of the “bad” small business.
Once again, the issues can be treated only through the change of paradigm. The industrial enterprises should be identified that can effectively employ strategic migrants not just for the short-term benefits of cheap labor, but with the view of building up the skills. Those enterprises should be encouraged morally and financially to pursue responsible immigration strategy, especially to develop facilities for language learning and cultural integration. At the same time, the migrant-run business should be presumed to be a social and economic opportunity, not a sanitation threat. A program of settlement for business investment of moderate size should be part of the overall strategy.
It may really seem like a bad idea to bring in masses of low- and medium-skilled migrants with different cultural and religious backgrounds and limited command of the Russian language in the middle of a recession, let them “steal” either jobs or customers, and then let them settle permanently.
However, the inconvenient truth is that this is probably the only way to build the foundation for the long-term build-up of productivity that will translate into the growth of wealth that Russia needs to ensure its place among the advanced economies. The longer Russia delays the decision, the weaker its competitive position on the regional labor market will be.
It is not unlikely that, 5 or 7 years from now, the labor pool of Central Asia will be mostly committed to countries like China, the Gulf monarchies or even Iran. Then Russia will have to bring in resources that do not have any common history with Russia – unless the country would be willing to settle for a state of permanent economic stagnation.
On the bright side, in the case of permanent migration, you import not only the workforce, but also the customers, who will be increasingly willing and able to buy. This gives an additional push to the economy, creating a sort of multiplier effect. Steady economic growth is a proven cure for all type of social concerns.
Finally, there is the potential for a uniquely Russian integration mechanism. The mighty state propaganda machine can be put to good work at resolving the social tensions on both sides, forming the accommodation mindset of the “natives” and speeding up the integration of the “new nationals.”
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.