Hello! Welcome to your weekly guide to the Russian economy — written by Alexandra Prokopenko, Alexander Kolyandr and Denis Kasyanchuk and brought to you by The Bell. To mark the second anniversary of Russia’s full-scale invasion of Ukraine, we take an in depth look at how Russia’s economy has
What he’s likely suggesting is that the guns vs butter model will at some point come to play.
Basically it assumes that any increase in defense spending will have to be diverted from social programs. This typically creates imbalances in the domestic economy, as wealth is more effectively distributed back into the economy from social programs when compared to defense spending. This is typically why most governments spend less than 4% on defense spending.
Military spending can be considered a liability unless it’s currently being utilized to leverage territory or wealth from an opponent. The returns can lift a country out of an economic slump, but once the war stops and government spending slows, the economic gains tend to collapse.
Now this theory is predicated on a bunch of assumptions, the main one being that an economic model created after WW1 may not be applicable to modern economics…and if that was what the authors intended, they should have led with it. But that’s the only legitimate argument I can think of based on the article.
I mean we also have the US where military spending has been propping up the economy for decades. There are whole states now where military industry is the main source of jobs. So, it’s a pretty tenuous to suggest that military spending can’t prop up an economy indefinitely.
Yes, and we have witnessed the general decline of social services and social safety nets in equal proportion. And while US spending is significant, it’s still only 3%of GDP.
It can, but it usually requires an indefinite war. It’s one of the reasons America is constantly at war. Why spend so much on obtaining an army if it isn’t going to be utilized? Especially when a little war can turn a 3 trillion dollar liability into a potential 3 trillion dollar investment?
And again, we are talking about macro economic theory from nearly a century ago. It very well could be a dead theory, we just haven’t really had a lot of data opportunities to rebuttal it with.
The decline in social services and social safety net is not the result of US military spending though.
Typically it does, and it’s easy to see how Russia could either end up in an indefinite war with the west or just become arms manufacturing hub for the BRICS and start arming countries in Africa, Middle East, and Asia, which is already starting to happen incidentally. Alternatively, the same industry that’s being used for weapons manufacturing could be turned to civilian use, which would be a much better scenario. Both the US and USSR ended up doing that to an extend after WW2 ended.
The key point is that there’s little evidence to suggest that high military spending will lead to an unstable economy down the road.
True, but I tend to give it a little extra weight due to my partiality towards historic materialism. Examined in those terms we could perceive the other causes as a byproduct or consequence of the industrial war complex.
You should read up the history of the guns vs butter model, it’s origin is surprisingly based for the 1920s.
Both are possibilities, but their both kinda hard things to plan an actual functioning economy around. Especially under their current preferred economic model. Both would be much easier to achieve under a fully centralized system.
It depends on your perspective. If you’re counting on future behavior to mimic your past data set, then you would probably utilize past behavior as “evidence”. But then again, if that always worked the rise of the Soviet Union would have been impossible to comprehend as a possibility prior to ww1.
Again, I’m not claiming that the guns vs butter model an undeniable fact. It’s just my best guess on how the authors in the article came to their conclusion. But again, they are probably operating on a limited framework that conceptually precludes new ideas or thought.
For the record, I very much agree that military industry isn’t the best way to develop the economy. Ultimately, any effort that goes towards producing weapons is effort that could be directed towards improving the lives of the people in the country. It’s just that you can get away producing a lot of useless stuff before there’s a serious drag on the economy. Incidentally, military industry is just one example of this. I generally agree with Graeber’s bullshit jobs thesis stating that a lot of work is basically just make work with no useful social purpose to it.
Russia is actually fairly centralized at this point. They pretty much had to move back to a planned economy after the war started.
A 2023 World Bank study gives a pretty good overview. In particular, it distinguishes between businesses of the state (BOS), that are at least 10% government owned by some government, and state owned enterprises (SOE), which are majority owned or more, and controlled, by the government.
Top line result is shown in the following chart:
And here’s another chart showing SOE in Russia compared with China https://cepr.org/voxeu/columns/state-owned-enterprises-global-economy-reason-concern
Russia’s high levels of SOEs is not far behind China by many measures.
Central bank plays a big role in Russia as well, and has large influence over the funding of the private enterprise. FT even moaned about state directed economy standing up to sanctions back in 2022.
And I agree with your assessment that the authors most likely did use the guns vs butter model as the basis for their argument. It’s not without merit, but I the devil’s always in the details. With the world changing as rapidly as it is, I think it’s pretty hard to make any predictions regarding what’s going to happen a year or two down the road. We’re kind of in terra incognita here.
I agree, but I feel the real danger of tooling your economy towards military production lies within its inherent inflexibility. Oftentimes it’s easier to convince people to turn ploughs into swords than swords back into ploughs.
Yes, but they’re still tackling the ghost of Yeltsin. A lot of the centralization is still being organized under the control of the people who rose to power during the implementation of shock therapy. I think they probably should have cooked those particular geese before the war.
Yeap, we’ve definitely been cursed to live in interesting times. Thanks for the discourse. It’s not very often you can air out some conflicting ideas without someone throwing a hissy fit. Cheers.
I very much agree, once you create the structures necessary to feed the war machine, there’s a lot if incentive to keep them in place. Although, it is worth noting that the problem is worse in the private sector where there is constant need for profit. State owned infrastructure can be repurposed or mothballed much easier. In fact, this article from the guardian mentions that one of the reasons Russia was able to ramp up military production was because they had mothballed factories around for this exact eventuality
https://www.theguardian.com/world/2024/feb/15/rate-of-russian-military-production-worries-european-war-planners
Also agree that Russia is still dealing with all the problems that resulted from mass privatization. In my view, that’s the biggest challenge for Russia going forward. Amusingly the west effectively ended up doing capital controls for Russia via sanctions. It would’ve been an unpopular measure with the oligarchs if it came from the government, but since it was imposed externally, they had little choice but to get with the program.
And I enjoyed the discussion as well. I find when there is good faith disagreement, that typically means that people are looking at things from a different perspective or they rely on different information to form their view. Having a discussion to figure out the reasons for disagreement tends to enlighten both parties, and the end result is we both get a more nuanced understanding of the subject. So pleasure was all mine. :)