Dublin-based Russian economist specialising in macroeconomics reflects on Moscow
Konstantin Gurdgiev is a professor of finance at Trinity College Dublin. He is also consultant to a number of international clients focussing on macroeconomics and geopolitical risks in Western, Central and Eastern Europe, as well as on capital and investment markets.
This November Konstantin delivered a lecture for Strelka students naming lack of adequate support for human capital among some of the prime concerns for Russia. In his Strelka Magazine interview Gurdgiev discusses how development of urbanism reflects on Russia’s overall standing globally and what’s missing in Moscow in terms of culture of entrepreneurship.
— In our country urbanism is perceived as primarily characterised by the bottom-up approach and small scale initiatives: a new bench, new tiles, a better-looking lamp post. How would you, as a macroeconomist, define urbanism?
— I sympathise with the approach devised at the University of Chicago. Macrosystems of economics rely on micro-foundations. And from this point of view, urbanism and small entrepreneurship form the basis of economic activity and innovation in any country. They create a certain microclimate that either stimulates or prevents the growth of economy. Urbanism interests me as long as it is seen as a part of culture and environment of economics.
Economic growth today is defined (and will remain to be in the future) by investment not into physical or technical capital, but into human capital. Undoubtedly, human capital is also linked to natural, environmental or ecological capital, but it is definitely the best indicator of urban development and of the range of possibilities for self-realisation offered to people by city systems and city design.
To me human capital is something that is extremely difficult to measure: not the industry, but the entrepreneurs themselves as a certain type of people who are ready to handle risks and find possibilities for business development in spite of them”
I call it a ‘care system’ — an economy comprised of four incentives: create, attract, retain and enable. By positioning urbanism at the centre, we would get an urban system in which design, architecture, aesthetic and ecological elements, services, transport, education, healthcare, social services, social and entrepreneurial insurance together constitute an ecological structure that allows human capital to develop. Urbanism, to my mind, is the ground zero of economics.
— Is there any statistical evidence of correlation between urbanism and human capital?
— There exist several indexes employed to measure the role of human capital in economics, its presence in various cities and countries. This subject is always discussed at the World Economic Forum in Davos: each year a new report on the Human Capital Index is delivered as well as on the Global Talent Index. As for numerous works written by Richard Florida, they don’t need an introduction.
What we have here is an attempt to evaluate the presence, quality and development rate of human capital using a digital data base as our foundation. Unfortunately, these indicators have their limitations. Unless we come up with a clear definition of human capital, we wouldn’t know how to measure it properly. Most economists assess human capital using simple criteria: either by looking at skill sets that can be quantified, or at the growth of industry in the country. I see this approach as highly limited. To me human capital is something that is extremely difficult to measure: not the industry, but the entrepreneurs themselves as a certain type of people who are ready to handle the risks and find possibilities for business development in spite of them.
Unless we provide substantial top-down support, there would be no development of this resource, and therefore no positive example for potential investors in human capital
Any serious inquiry into human capital normally involves cutting away all the measurables. For example, we have calculated the added value of physical capital, we have the approximate added value of technical capital and then the rest is assigned to a combination of human capital and technology — total factor productivity. But unfortunately this is not a direct way of assessing the role of human capital.
— What difficulties is Russia facing in terms of human capital?
— In spite of everything, Russian economy still has an impressive human capital base, and it is of high quality too. The main concern here is preservation and provision of opportunities to realise its productivity. The Index of Human Capital rating that measures the level of education, quality of healthcare, employment, infrastructure and legal protection, provides sound evidence for that. If we consider various age groups, we can see that in the ‘15 years old and younger’ category Russia is ranked 13th out of 124. This is a very high position that indicates a high quality of educational and healthcare system for children and teenagers. But if we look at the ‘25 years old and above’ category, we can see that Russia has travelled all the way down to the 29th place. It soon becomes clear that locally-grown talent is not supported and as a result these people cannot realise their full potential. Which consequently leads to a major ‘talent leak’.
I’d like to point out that Russia’s case is not unique. In Italy, for example, 15-20% of the best university graduates leave the country each year and never come back. But the reasons for this in Russia are not the same. The Italians have a chance to get their people back by using design solutions and business strategies that create added value and, consequently, value for citizens, whereas in Russia the loss of even an insignificant number of people seriously affects the average level of the remaining labour.
— These problems can be solved using either the top-down or the bottom-up approach. Which one is more effective in Russia’s case?
— I think that right now the biggest problem is absence of any support for the initiatives at the top. The talent is there but it requires help developing. Unless we provide substantial top-down support, there would be no development of this talent, and therefore no positive example for potential investors in human capital.
Anything is possible in Russia. But more often than not these possibilities turn into pure utopia. Great ideas emerge, but quoting the unforgettable Victor Chernomyrdin, we always end up with the ‘we wanted the best, but it turned out as always’ situation
Nevertheless, anything is possible in Russia. But more often than not these possibilities turn into pure utopia. Great ideas emerge, but quoting the unforgettable words of Victor Chernomyrdin, we always end with ‘we wanted the best, but it turned out as always’ situation. For example, the Russia-2020 Strategy (a concept of long-term socio-economic development of Russia until 2020, commissioned by the Russian government in 2010 — Ed.) — an interesting plan for the development of industry and technological investment that, despite sounding quite sensible on paper, was never implemented.
There are a couple of world class entrepreneurs in Russia. I’m not talking about giants like Gazprom, I mean people like Mr Kaspersky. He managed to bring his brand to the global market and receive worldwide recognition not just as a Russian businessman, but as a businessman of international calibre. But this is a rare example for Russia. Worse, many businessmen are forced to leave Russia because local market doesn’t allow for its players to have growth opportunities abroad.
If you want to export, your business model has to be entirely different compared to the one that works within Russia. The size of investment makes no difference here. Russian businessmen should be able to trade in the international market without dependence on government contracts and standing on their own two feet. This is what culture of entrepreneurship is. It also implies support for ownership rights, fiscal rights, protection against arbitrary implementation of regulations and laws against certain people as a method of shock therapy and even restriction of competition. We have been discussing it for years, but unfortunately, it is clear that no change of the structure at the top is happening.
The business of the future will not be about pumping oil, gas and timber out of Russia, but about smart use of these resources and creation of added value: linking soft processes together, creativity, design, user design and industrial design, with a better understanding of the demand and supply system on the global market.
— How will this reflect on the everyday lives of citizens?
— A society based on human skills, on human capital, gives citizens the right and power to decide where and how they live. It does not necessarily mean that we should adopt the Swiss type of democracy (every dispute can only be resolved with a referendum — Ed.), but we can learn a lot from it. For example, the practice of referendums that allow local authorities to have more control over their budget and taxation. The federal structure of Russia, as well as the structure of Moscow — a gigantic metropolis — has reached a point when vertical management is no longer technically possible, when huge amounts of information are lost and cumbersome and non-transparent structures are created.
This new residential block doesn’t just land on me coming out of nowhere, whether I like it or not — on the contrary, I play an active role in the decision-making process
By giving citizens more power we could gradually develop the culture of local referendums, even if just on the municipal level, which will in turn result in the emergence of an ecosystem that would allow each person to use their talents and knowledge for city management and, at the same time, to become a shareholder of their own city.
— But don’t you think that in order to achieve this Moscow would have to go through drastic change?
— I don’t think there’s a need for cardinal change. In the beginning of the 1990s Russia tried to bring about drastic change. But this never worked out. If there’s no culture of change, no experience of productive dialogue between those in power and the electorate, the citizens — this system would never work.
We need to create precedents on a smaller scale. For example, if you are devising development concept for a residential area, you could either create a project just to meet the formal criteria, exhibit it in a cellar and invite the local community to come and take a look at it, knowing well that no one would come and no one would see it. Or you could use social media, involve businesses, enterprises, shops with a public relations focus and create a channel for communication with the citizens living in the local area. And even if there’s no cardinal alteration to the overall plan, smaller change would definitely happen and citizens would feel that they had a chance to express their views and that their voices were actually heard. This new residential block doesn’t just land on me coming out of nowhere, whether I like it or not — I play an active role in the decision-making process. Radical change should be replaced with gradual transformation. This transformation would start only if citizens receive a real opportunity to take part in the process of creation of the city system or city services.
Future is not made by realists — it is made by dreamers. Realists only help realise it
Is it possible in Moscow? At the moment, probably not. Moscow is out of control — it’s too big. When the biggest and most important part of the city — its centre — is a federal zone and all city management is vertical, these changes are impossible simply because too many interests are already tied to this structure, and stakeholders are not willing to abandon their positions just for the sake of democracy.
Is there any hope that Moscow would be able to build an effective system of governance? No. But there is a real necessity for it. The development of such cities as Moscow, Saint Petersburg, Kazan, Samara that have both a local market and an access to the global market would be impossible without it. Managerial approach would be too high a price to pay for the development of the Russian economy.
Moscow needs not a plan, but a strategy. We must establish today how in 20 years’ time we would satisfy the interests of better educated and more demanding citizens who will have businesses both in Moscow, in Russia and abroad. These citizens will expect their relationship with the government to be completely different. But at the moment no one is paying enough attention to this issue.
— This year Strelka students are reflecting on the possible re-interpretations of this relationship with the help of digital technology. What is your message to them?
— I always mean what I say and I don’t have and I don’t use any ready-made arguments — after all, I have nothing to sell. Some time ago I worked for IBM on their Smarter Cities programme which involved working in Moscow during the launch of the ‘City’ project. I’m a Muscovite myself, I was born and grew up here, and although I don’t live in Moscow any more, my family is still here, I still own an apartment and a country house here. And I want to see a city standing on the global market with its head held high. And not just a city with a great past, but a very problematic present.
I personally want to take an active part in it, but that’s not why I’m here today. I’m always eager to discuss economics not just with economists, but with students who still possess some of the romantic naivety and a will to change the world.
— But isn’t this romanticism an obstacle for those dealing with economic issues?
— No, never. Future is not made by realists — it is made by dreamers. Realists only help realise it. Every student is a dreamer. The transformation into a realist should happen without the loss of ideals, of the need to think about things bigger than just structural architecture or city transport management. As an economist I’m constantly thinking about these issues and I really enjoy discussing them with students.