RESHAPING RUSSIAS ECONOMIC GEOGRAPHY

A modern, diversified, and competitive Russia

Uwe Deichmann Europe and Central Asia Region The World Bank June 9, 2011

Russias peers have been changing

Yalta, 1945. With the US, one of the worlds two undisputed superpowers. Moscow, 1991. With Canada and Australia, one of the three most endowed with natural resources. Yekaterinburg, 2009. With Brazil, China, and India, at the first conference of leaders of the four biggest emerging economies.
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Russias ambitions

Modernization Diversification Competitiveness

A generous size
On March 28, 2010, Russia cut two of its 11 time zones in a bid to revive commerce between the countrys regions.

A fortunate location
The country is located between Western Europe, the richest region, and East Asia, the fastest growing region

But an unfortunate legacy

For more than half a century, central planners tried to spread out people and production

What is wrong?
Low Mobility: Russians move just 1.3 times in their lifetimes Americans are ten times as mobile, moving 13 times. Little Concentration: Share of the three largest cities in the population is just 12.5 percent
Canada and Australiaat 75 percent--more concentrated.

Limited Specialization: Russias economy is dominated by the extraction of oil and gas
Brazil, China and India are now competitive in a range of primary, secondary and tertiary exports.
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From Yalta to Yekatarinburg

A film by Bill Cran produced for this report

Big debates
Monotowns. 700 monotowns have 25 million people, a quarter of urban Russia
Question: Which towns are viable in a market economy?

Moscow. Russias capital has 13 million people, and is the priciest metropolis in the world
Question: Is Moscow too big?

Special Economic Zones. Russias experiment with SEZs faltered, but is being rethought
Question: How should SEZs be used to promote international integration?
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What should Russia do?

Increase mobility. Address the longest legacy of distorted economic decision-makingfreeing people to be mobile across regions and between cities. Facilitate concentration. Nurture the places where innovation and diversification will take placeits bigger cities. Encourage specialization. Take advantage of its fortunate location through tradespecialize and strengthen production networks to the west and the east.
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Mobility in Russia and in the US

The two biggest destinations of international migrants have had very different approaches to internal migration

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Russians are lessand lessmobile regionally

Russians are among the most immobile.
Americans move between 12 and 14 times during their lifetimes; Australians between 13 and 15 times Russians only between 1 and 2 times.

In the US, in 2008, 35 million Americans moved

14 percent of all Americans move during a year; in Australia, this ratio is about 18 percent. In Russia, the ratio is closer to 1 percent

Russian mobility has been falling

3 percent in the 1990s, just 1.5 percent during the 2000s Mobility of 15-24 year olds fell by 43% during 1996-2004.
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Aiding mobility and modernization

Reduce administrative barriers. Simplify registration for housing and healthcare at place of permanent residence. Simplify rural land transactions. Address widespread misunderstanding of system for registering land transactions.
Rural population unchanged while agricultural employment fell 30% between 1994-2007

Eliminate labor market distortions. Wage arrears, and in-kind payments still make workers unwilling or unable to move.
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Monotowns and mobility

Market-based mechanisms are the best methods to determine a towns future. Experience suggests that smaller towns are harder to revive.
467 cities and 332 towns with 900 firms produce 30% of industrial output

A fuller devolution of responsibility of social services to municipalities will increase mobility.

Oil and construction boom between 2000 and 2008 slowed down the transfer of responsibilities.

The government can help both those who move and those who stay. Housing market and availability of social services
Mortgage markets and stronger safety nets.
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Concentration in Russia and Australia and Canada

The three large sparsely populated countries have had different approaches to concentration

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Russia is the least concentrated

If Russia were like Canada, the concentration coefficient would have been 16.8, not 2.8
If East Siberia and the Russian Far East were like Alaska, they would have 1 million people instead of current 15 million.

If Russia were like the Canada or Australia, Moscow and St. Petersburg would be 13 million and 7 million, instead of 11 and 5 million
Nizhny Novgorod and Yekaterinburg would each be double their current size of 1.5 million.

And Moscow and next 114 largest cities would have more than 40 percent of the 142m Russians
Just Tokyo and Osaka have 42 percent of 128m Japanese.
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Agglomerated Australia
Three out of four Australians live in Sydney, Melbourne and Brisbane

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Concentrated Canada
Two out of three Canadians live in Toronto, Montreal and Vancouver

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Deconcentrated Russia
Only one out of every eight Russians lives in Moscow, St. Petersburg, and Nizhniy Novgorod

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Congestion without concentration

Moscow and St. Petersburg do not compare well with the worlds top metropolises
Agglomeration Rank by total GDP of the agglomeration Income per person Per capita GDP (PPP) (end 2005, thousand USD) Economic density (million USD per square km)

Tokyo New York Paris London Moscow St. Petersburg

1 2 5 6

33.8 60.6 46.8 53.2

87.7 78.6 38.2 39.6

29 63

19.5 11.5

19.9 2.60

Source: Background note by Mikhail Dmitriev of Moscows Center of Strategic Research (CSR).

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Facilitating agglomeration and diversification

Better urban land and housing market institutions. Zoning laws, land tradability, and simpler land development procedures
Industry occupies 30-40 percent of built-up areas in Moscow and St. Petersburg; should be half as much.

Regulation of urban transport. Public transport use high, but increased private traffic poorly managed.
Traffic and parking management to improve flow, and improved regulation of private bus fleets.

Inter-urban infrastructure, especially roads, to promote spatial efficiency and trade.

Road improvements result in higher benefits than other facilitation measures. Railway maintenance other priority.
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Moscow and concentration

Moscow worlds priciest city, but income and density low relative to well-run metropolises. Congestion is attributed to Moscows size.
But poor planning and traffic management a common problem in many Russian cities including St. Petersburg.

Not delivering urbanization economies for high value-added services. These are a small fraction.
Jobs in low-end retailing rose from 12 to 20% in 1991-2005; scientific activities fell from 16 to 7 percent.

Regulations have undermined spatial efficiency. Land not priced, so it is locked into existing use.
Density profile improved in 1992-2002, but unusual relative to Shanghai, Warsaw, Barcelona, Paris, and New York.
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Specialization in Russia and Brazil, China and India

The four biggest emerging market economies have had very different approaches to international integration

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Russia can be globally competitive

Like Brazil, Russia is rich in oil and gas, but also in agriculture and forestry. Brazil exports soya, orange juice, but also offshore drilling services, and automobiles.
Russias farm exports are increasing (e.g., grain), but could be larger.

Like China, Russia has a history of heavy industry. China shows how to access foreign markets through well-placed SEZs and regulatory reform.
Russia needs foreign investment to modernize production and infrastructure to facilitate trade.

Like India, Russia has a capacity in software development.

Some progress, but weak intellectual property rights make Russia an unlikely candidate for fast growth in IT and business services.
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What is right
As a group, BRICs have stable economies, large domestic markets, and efficient labor markets

Source: Global Competitiveness Report 2009-2010.

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Russia is the least competitive

But during the crisis, Russia became less competitive compared with Brazil, China and India

Source: Global Competitiveness Report 2009-2010.

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Encouraging specialization and competitiveness

Join the WTO. A useful step for creating the domestic conditions for trade-enhancing reform.
Trade enhancing effects of WTO accession small relative to benefits of domestic reform.

Clarify purpose of SEZs. Should be used to generate support for economy-wide reforms.
Keep zones WTO-compliant, and maintain them until economywide conditions approximate those in SEZs.

Learn from BRIC peers. Brazil, China and India offer lessons for agriculture, manufacturing, and tradeable services.
Russia can improve competitiveness by attracting FDI in all three 27 sectors.

SEZs and trade

Increase private sector participation. New SEZs in 2005 addressed some location-related drawbacks, but overly restrictive and still run by government.
Foreign investment in SEZs has been small.

Clarify purpose of SEZ program. In the past, less to speed up expansion of trade in dynamic sectors, more to attract new technology to backward areas.
Strengthens case for long-term subsidies, but WTO membership may make some zones illegal and risk litigation.

Use SEZs as Early Reform Zones. To demonstrate the benefits of good governance and infrastructure.
Aim: creating support for overall domestic reform.
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The Reports approach

Compares Russia with USA, Canada, Australia, Brazil, China, and India.
Experiences of the seven largest countries in the world.

Outlines approach to reshape Russias economic geography.

Migration, agglomeration, and trade.

Proposes policies to make Russia more modern, diversified, and competitive.

Addresses debates on monotowns, Moscow, and economic zones. 29

The Reports messages

1. Modernization. People in a modern, advanced Russia will have to be more mobile internally. 2. Diversification. A diversified Russia will be more spatially concentrated. 3. Competitiveness. A more competitive and influential Russia will be more interdependent internationally.
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For more information

Chorching Goh. Report Team Leader. cgoh@worldbank.org Uwe Deichmann. Team member. udeichmann@worldbank.org Indermit Gill. Chief Economist. igill@worldbank.org

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