State Corporation: Ministry of “Intermediate Product” or Means to Save Added Value?

             The uncontainable growth of the number and power of assets consolidated within the state corporations cannot but astonish the expert community. The total offensive of the state can be analogous only to the attack of the Red Army back in 1944-1945. The super monster Rostechnology intends to establish 33 powerful holdings out of its more than 300 companies. The very quantity of holdings bears a significant number, reminding the 33 knights of Pushkin’s fairy tale. You can nearly see them coming out the ruins of the country’s industrial and technological fundament. Actually Rostechnology is becoming a super ministry of intermediate product, which is called to reinforce the state control over the manufacture and export of machine building and defense products.   



             All of us, the intellectuals and economists of middle age, have a clear a memory of how the “pop” economists of 1980-ies and 1990-ies brilliantly and with much reason lashed the “self-eating” economy of the USSR (the term coined by V. Selyunin), where exactly the sector of intermediate product was disproportionately inflated at the expense of the final product sector, which was working for the consumers’ benefit. That was where they saw the key structural deficiency of the soviet economy, and the reason for the empty shop counters of the early 1990-s. 


             The cure prescription was astonishingly simple: to privatize the entire sector of the intermediate product (alongside the final, certainly), “throw it into the market”, cancel the state order, and let those clumsy soviet-style “behemoths” learn to work in the conditions of the real competition for the sake of the real consumer, rather than the abstract “state”, which is forgiving for the engineer’s miscalculations, drinking bouts of the workers, and other unthinkable “inefficiencies”. If for the cure of the soviet ills of the “intermediate plants” a structural reorganization is needed, then, instead of one monstrous “Uralmash”, which is consuming natural resources for the sake of production of no one knows what, dozens and hundreds of small firms should appear. They should possess flexible modern management, targeted at the current market demands. That would be the life of abundance! Then will we forget the debasing queues for fridges and pressing irons! 



             In fact, it’s hard to explain to the young people of today, who are living among the bursting counters of home appliances, what it was like 18 or 20 years ago: to buy a pressing iron even without the electronic devices you had to be registered in the waiting list according to your working place as well as compete for this commodity with your friends and colleagues. Though, 20 years ago you had to queue for domestic irons, while you can only see imported irons on today’s counters.  


What, after all, happened to the intermediate plants? 


             They all had different fates. Most of them quietly finished their technological lives. We had numerous examples of “brutal reorganization”, when a plant producing spooling for electric engines to be used in domestic washing machines, finally became a storage facility for imported washers. A little better was the situation when the plant, instead of a series of technological operations, kept one or two of them, mostly technologically elementary, mostly dealing with raw materials. It was not that too bad if it was possible to start up production of end consumer goods, however low their technological level against the intermediate product. All the same, due to a shortening of technological chain, reducing the number of technological processing, production of added value went drastically down. Accordingly, it led to a lower level of employment, wages and technological potential. Predictably enough, technological and social degradation soared. The debased civil engineer, who had to “re-qualify” into a porter or storage guard, finds a bottle of vodka more convenient as a form of cultural pastime, because his engineering and technical potentials do not require a moral support of classical music, museums and theaters. In such a way, the spiritual added value of the population also went radically down. 


             Contrary to that, as a result of structural reshaping of the economy, raw materials production and retail services got much more advantageous positions. Consequently, we witness the so called “Dutch disease” of the Russian economy where the producers are being displaced by import substitution products. Gradually, this disease grows up like a cancerous tumor all over the technological chain, also capturing those who stand closer to the end user (for example, passenger car seats producers) and those who stand closer to raw materials (producers of compressors for pumping oil and gas).  The degradation gradually covers the entire sector of intermediate product, where the decisive share of added value is created, and where the entire technological potential of the USSR was: the best professionals and the best resources, research institutes, construction bureaus, with their countless developments. 


             The creation of a free market could not but lead to a “mental debilitation” of the technological structure of the economy, since instead of long-term consistent work on the organization of vertically integrated competitive productions in the shape of multi-sectoral concerns, a structural disorganization of sectoral and inter-sectoral economy management bodies was conducted. This could not be otherwise. A primitive objective: “to give the people their sausage” required accordingly primitive methods: privatization and reduction of state order to science intensive productions. Finally, “the mines of technological wealth” of the Soviet empire remained, mildly speaking, out of demand for the production of added value inside the country, though were quite successful as intellectual raw material for transnational corporations. It’s not only about the brains drain, possessing interior as well as exterior character, because many Russian researcher work on western grants in Russian universities and research institutes of the Russian Academy of Sciences. A huge channel for pumping the technological potential are the so called foreign direct investment of foreign companies in hi-tech sector, when the cheaply bought Russian companies and institutes, fallen out of the former vertical technological chain for the production of high added value, become a trophy to the winners of technological and organizational war. To our great regret, market reform in Russia, was a cask of powder, which burst the gates of the USSR technological fortress, holding out against the western “wolves”. 


             Yes, the defending castle was ineffective in its technological business in most of the industries. The “army management” was also bad. Yes, the morale of the defendants was undermined. But instead of taking up some more astute defending methods: peacemaking with part of the attackers, inviting them into the castle, learning their skills, making frequent sallies outside, organizing sabotage beyond the enemy lines, manufacturing new canons and strengthening the walls: they decided to give up to the victors in the hope of their mercy, in the hope also that after a small tribute they will teach them the right management of things. But it didn’t work out that way. The winners came, devastated the castle, and reinforced the management disorganization of the remaining technological units.   


             Finally, the regal power was regained in the castle, the authorities came to, looked about themselves over the destroyed and smoking forges, where instead of new swords and guns, the drunk masters cooked shashliks of imported meat, and decided to stop the general ruin, because they understood, that not only their future, but also the present depended on the capacity of these forges to manufacture strategic product. And the decision was: without much thinking to collect the remains of the technological power under its eye, to prevent the ultimate robbery of the last goods. 


             Certainly, it’s not enough: to make a heap of technological potentials and put vigilant guards over it. This entire mound can as well decay under the most vigilant supervision. What is needed is a set of real viable programs of development, based on large-scale investment programs in locomotive industries. Another necessity is the responsibility and the new development ethic for the officials working in ministries and state corporations. The absence of subjects and a culture of development in today’s Russia are a shame of the state authorities and the society itself before the young generation. At this moment, apart from the lively rhetoric of the construction of a “new Russia”, audible among the “enchanting Seliger nights”, the authorities cannot offer the young people a participation in the really comprehensive programs of economic development.   


             Obviously, the new large-scale development programs will require a transfer of management of part of technological assets of the state corporations into private hands.  We do not know in advance, what all the possible applications of the future technological growth will be. If, for example, the Federal Target Program for Development of Nano-technology will achieve commercial results in the market of mass consumer demand for the new products, the appropriate group of bureaucrats will easily find a means of privatization, by treating public opinion with stories of the inefficiency of the state machine. Such was the case of the mass market of cell communications, which was developed out of a couple of state research institutes in early 1990-s. 



             Currently, though, due to the absence of a well-targeted development strategy, the state corporations should function for the preservation of the remains of technology, professional resources, organizational culture, and at the very least: to give people hope of resumption of technological development.  Simultaneously, together with some modest amount of state orders, the culture of creating product with high added value will be preserved, which is the basic index distinguishing an industrial economy from the underdeveloped ones. The stoppage of Russia’s deindustrialization is important for many reasons. One of them is the global financial crisis, provoked by the deindustrialization of the US. Whatever the praises of the “new economy” from the academic periodicals and cathedras, it’s getting more and more clear that the US has lost its position of the world’s factory and it’s directly related to the fundamental problems of the world finance.   


             There’s no occasion for examining the most pessimistic scenarios for the development of the world finance crisis. But we cannot exclude the possibility of temporary dismantling of the world food trade, as well as that of machines and tools of the intermediate character, upon which the functioning of industrial infrastructures are built, from the city canalization to airports and space launching sites. Domestic consumers of these products have long been used to accessible and quality imported goods. A possible default in the US, the dollar’s loss (alongside with Euro and Yen, which are related to it) of the status of the world’s reserve currency and the world’s payment means will temporarily confuse the established trade flows. Quick replacement of machine tool import will be much on the agenda. So it’s here where the mobilizing capacities of the administrative system of the state corporations will prove their advantages over the powers of the “unseen hand”. Certainly, it’s a step backwards, to the “damned past” of the Soviet-style command economy, but the task of elementary survival of technical systems and the related social systems should be solved at any cost. 


             You may ask, what is the occasion for such pessimism? I can ask in turn: why was the new Russian president so active in including the G-8 summit agenda in Japan the issues of the world fiancé crisis and was so insistent in defending the ruble as the regional reserve currency? 


             In that respect the creation of state corporations should not be looked upon as “violence against the market” or “sinecure for bureaucrats”, but rather as an element of crisis management and a means to ensure elementary technological security of economy. It’s a kind of final checking of the troops before the battle. It’s necessary to whet the swords, oil the guns, clean the cannons, and locate the vehicles at the most dangerous points of the enemy’s attack. He may not attack at all, but then we will go back to the barracks, but the checking will never do harm.   


               But all the same, the strategic reason for the formation of the state corporations is the task to preserve the technological potential of creation of products with high added value. However strange it may seem to the reader, educated on liberal economic myths of universal efficiency of the competition, we believe that the combination of administrative levers with maintaining relative independence of privatized companies which are part of state corporations, is a more useful medicine against the everlasting insensitivity to the innovations of domestic companies. Modern theoreticians of competition and strategic management have established that co-evolution and co-operation of companies are not less important for the continuous development than competitive emulation. As early as in the times of Adam Smith, the driving force of progress and the source of innovations was believed to be not only the desire to do something better than your competitor but also the possibility to study and acquire his technological and organizational novelties. The dissemination of innovations goes better in the ambience where the competitive pressing to introduce novelties is well completed by favorable possibilities to study the competitor’s actions and to exchange experience. It was too bad to deride and forget the “theory of the socialist competition”. The western economy developed on similar tracks, under the programs of industrial policy, state-private partnership, simply issuing state orders according to the system of multi-level relationships between “primary contractor – subcontractor”. The main idea of all these organizational technologies: alongside with awarding the winner to maintain and support the losers, to prevent degradation of the general technological base, and the reduction of variety.  

             The demanding reader will ask: what prevents us from constructing a similar system without the remedy of the bulky state sector? Why all this excessive administration and the return to totalitarian past? We fought for some other things in 1991?

             The response my lie in that famous “national and cultural individuality and identity”, which is like a splinter and prevents the adepts of western institutes from implanting them immediately in the Russian sick organism. What shall we do if the technologies of raiders are not used for the creation of a chain of technologically advanced productions, but rather for the transformation of research institutes into a complex of trading places and store houses? Therefore, the existing institutes, born out of free market forces, want to destroy the potential of added value. Therefore, they should be opposed by other institutes, more organized and ethically motivated. As Bolsheviks in October of 1917 opposed to the institutes of drunken sailors, who were spoiling the defenseless Winter Palace, thus discrediting the October Revolution, more organized and ideologically biased institutes of revolutionary “special taskforce” which believed in the “glorious future” of their country.

             Meanwhile, the modern state administrative (not judicial) power is Russia’s most powerful and respected institute. No doubt, it would be fine to build our life according to the model of Anglo-Saxon law and the principles of power division. Then the judicial system could produce such institutes as could have an undisputable authority over the participants of the economic development, while the state’s administrative machine itself could deal with “indirect” methods of state regulation, contributing to the competitiveness of the private sector. But today there are no such institutes, while there still are remains of industrial economy. So, what shall we do?

             Either implant the institutes of competition and civil society and not do the “dirty” work of administrative action upon the complex of added value sectors, and wait for the advent of “institutional stabilization”, as we did in 1992, waiting for Gaidar’s promised “macroeconomic stabilization” to arrive within 3 months. Or make the main accent on the building of organizational mechanisms for the manufacture of industrial products with high added value here in Russia and get abstracted for some time from the study of highly developed institutes of non-state economy of the modern West. I’m sure that the Korean or Japanese readers will find the question itself funny. They understand very well that the real institutes survive only in the process of successful collective project work on the national level.

Tolkachev Sergey ,
13.08.2008. Views: 1121

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