People Are Better Than Institutions: Who Will Launch Modernization in Russia

  |   Econs
Dialogue Chain. Episode 3. Natalya Zubarevich, Professor, Faculty of Geography, Lomonosov Moscow State University, interviews Aleksander Auzan, Professor, Dean, Faculty of Economics, Lomonosov Moscow State University

Dialogue Chain. Episode 3. Natalya Zubarevich, Professor, Faculty of Geography, Lomonosov Moscow State University, interviews Aleksander Auzan, Professor, Dean, Faculty of Economics, Lomonosov Moscow State University

Zubarevich: Alexander, I have the honor of interviewing you today.

Auzan: Thank you, Natalia. It’s a great honor for me too.

Zubarevich: I will start in a bit of a sneaky way. I’ll start with the details and then move on to the bigger picture, as it were.

Auzan: Let’s try.

Zubarevich: Let’s try. My first detail-oriented question. We are currently seeing immense growth in Russia’s household debt. The total amount of loans issued exceeds the consolidated budget of all Russia’s regions, and it will soon exceed the federal budget. At the same time, household income has been decreasing for five years. Looking at this dangerous trend, can we blame it on a lack of rationality? Might it not be better to tighten our belts to avoid falling into the debt trap? Why do people walk straight into it? Or is it some peculiar type of Russian rationality: take what you can, while you still can?

Auzan: I believe that the root of the household debt issue lies in the massive improvement in consumer well-being during the 2000s. The way I see it, the development that started in 1991 boils down not to building a market economy and democracy, but rather to creating a consumer society,. And the consumer loan was both a tool to build this social structure, and a part of it.. I would like to point out that excessive household debt didn’t emerge when living standards fell, but when the economy started recovering after the 2008-2009 crisis, when the government tried to use the old model to move forward, to exploit consumer demand that was already insufficient.

Zubarevich: You mean by boosting demand.

Auzan: Yeah, boosting consumer demand. Now let us come back to the question of human behavior. Firstly, each person has a more or less conventional background of borrowing, re-financing, trying to take a new loan to pay back the old one, and so on. This creates a certain sentiment. But I think they also hope that the government will help them out and, in the worst-case scenario, write off their debts. Meaning that in the worst-case scenario, you don’t have to pay.

Zubarevich: Would it be right to call this a ‘do what you can and hope for the best’ mentality?

Auzan: I would say that it is the paternalistic mentality, meaning that people rely on the government to help them out, like a father, when things go horribly wrong, and to either pay their debts or else to say, ‘There were no debts at all. Away with you, peasants.’

Zubarevich: Nice. Alright then. We see that something here isn’t right. There is a huge lack of rationality.

Auzan: Natalia, I do not think that it is a lack of rationality. I believe that it is the reliance on paternalism, which is not foolishness but actually quite rational behavior in a country where the government has and does intervene on a regular basis.

Zubarevich: Agreed.

Auzan: That which we consider a cultural stereotype is actually no more than the remnants of former institutions. It is the second life of institutions that existed for centuries. By the way, Veblen said that consumer behavior is just the reflection of a long-extinguished light, of old economic rules that are no longer in place. That is why this behavior is rational.

Zubarevich: Then, if you please, I will go to the astral plane and ask you general value questions. They are short. You can answer however you like. My first question is this: The value-shaping institutions need reforming. Where do we start? Where will we first start to see people moving in this direction?

Auzan: For me, this is a question of serious concern. Of course, I would love to say that we should start with schools. But I’m starting to have doubts about that , because our four-year-long longitudinal study of Russian universities, in which we studied values shifts during university years, and which was supported by the National Project Institute, showed paradoxical results, which we later explained, as theorists should do. The level of confidence decreases during university studies, i.e., social capital goes down. The well-known cheating behavior test (on students’ opinion about a cheating situation) shows: the one who let his mate copy the answers, according to the students, did the right thing. However, by their senior year, students stop judging the one who cheats: he is one of them. It is the social capital of bonding. Thus, we see a drop in the general level of confidence, while the bonding… the notion that it’s right to dodge fares, that it’s OK to evade taxes, gains ground. When we were discussing this issue with our colleagues from other universities, they said, “What did you expect? We are responsible for socializing them, meaning that we teach people how to live in a real country, not on a cloud. And that’s what life in a real country looks like”. So it turned out that the existing education system cements what we have now…

Zubarevich: The old value matrix.

Auzan: Right. And I believe it is path dependence. They contribute to perpetuating this path dependence. But I began to think we had forgotten about certain other crucial value factors. I think it was back in 2012 that we studied the ‘artificial’ capitals effects in connection with the Big Moscow project. They send a message. They are texts. I mean the ‘artificial’ capitals. Or new districts in the capital. It turned out that even the architecture and the planning matter. Moreover, some texts contain mistakes. For example, the Founding Fathers wanted Washington to be a message from Ancient Greece, but the way it was built made it a message from Ancient Imperial Rome. The text was different.

Zubarevich: Right, right.

Auzan: On the other hand, St. Petersburg turned out to be a very effective message, because, there is the Summer Garden, for example, where the ruler and the members of educated society could stroll together and no one had to kneel. Later, city gardens appeared in all provincial and district centers and were places for local leaders to communicate with people. St. Petersburg’s shipyards represent one of the key symbolic structures of the city, conveying a different attitude toward industrial activity and so on. This is what matters. That is why I sometimes think that these real changes happening in the country will make the values shift. And the education system will certainly change, too. However, I believe that our education system is in a dire state, because the model of the early 1990s, in my point of view, delivered unsatisfactory results. Moreover, the new generation Z is coming, and we need to work with them in a totally different way. Thirdly, it would also be nice to help our country off its path dependency, and to achieve the results we have always dreamed of.

Zubarevich: So, you expect a demand for institutions, for institutional modernization from the population. When will it arise? And why will it arise? In what form? For what exactly? If this demand does arise, how would you describe, at least in general terms, a national Russian formula for modernization?

Auzan: Let’s start from the difficult question about the demand for institutions because the studies I have mentioned, I mean the ones we conducted with the help of the Russian Venture Company, these have shown (just as the Eurobarometer did) that our demand for institutions is quite strange. Because no more than 30% of the population expresses a demand for any kind of institutions. Why? Because if we have closed bonding social capital, people do not need institutions, as they get all the necessary social connections from the people around them.

Zubarevich: They resolve everything within their circle.

Auzan: And if they have, let’s say, extensive notebooks with many connections outside of the inner circle, they start playing with the rules instead of playing by the rules. They find ways to sidestep this or that, to secure a loan without any collateral and to help their children avoid compulsory military service, and so on. That is why, in many cases, both types of social capital are used against the institutions. Nevertheless, I believe that we do have a foothold. Let us also note that if we live in a time when the authorities’ popularity is clearly going down, this means that there is a demand for change. Because if we can’t rely solely on the president’s will, we will have to rely on something else. Another factor is the state of Russian business both within and beyond the country. Russian business has suffered a lot, because it has no refuge now.

Zubarevich: They are penned in.

Auzan: Exactly. They are penned in. This means that some business groups will have to make a choice. What kind of choice? If money is flowing back into the country, then it would be nice to have at least some kind of conditions for that. Because I mean, where else can it go? To the UAE, where everything will depend on the Sheikh’s mood swings? Or to the People’s Republic of China, where it will turn out that the Political Bureau of the CPC Central Committee has made a hidden ruling on that? That’s why the impetus and the demand ought to arise here as well. Let’s turn to the third source of demand. In my opinion, it’s what’s happening among the elites. I think this is the most important point. The well-known North-Wallis-Weingast doorstep conditions explain the phenomenon of ‘forks in the road’ where limited access orders are replaced by open ones. Where does natural economic development (that’s what I would call development that leads to positive economic dynamics) start? Let me remind you that we are saying that the elites should write the laws for themselves and then apply to the rest, rather than making themselves exempt. Organizations should be depersonalized; they should not depend on a single person, no matter what type of organization it is; political, commercial, or non-commercial. Also, tools of violence should be controlled collectively. I shall start with this last point. I believe that we are in a critical situation. The tools of violence can be controlled in two ways: either they are divided among the members of the group, or…

Zubarevich: Everyone gets something.

Auzan: Exactly. You take the air force, I will take the navy, and someone else will have the secret police. This leaves us with a situation where the divided special services can be, and are, used as a means of competition, which, in my view, leads to unpredictable negative consequences. In this case, one cannot rely on the government to fulfill its obligations. It’s not about whether the prime minister supervises the ministries or not. It’s not about that. It’s not about the fact that the economy and the power structures are different. It’s not about that. The thing is that when security forces are barely being controlled, and they start competing with one another, there can be no positive outcome either for the economy or in politics. That’s why I believe that, now, the elites should feel an extremely urgent need for collective control over the tools of violence. For example, a new format for the Security Council. I’m talking about laying a foundation for institutions. Institutions do not emerge from an idea for a brighter future for the country, but when one tries to resolve a pressing issue that has an institutional solution. I would like to remind you that the Magna Carta was not created because illiterate and violent barons, along with an insane king, were planning for a brighter future for England. It wasn’t like that. The barons just didn’t want to be killed and robbed, so they wrote down a great principle (I mean, of course, it was written by Archbishop of Canterbury, who was literate): any person shall be tried only by the court of peers. It marked the beginning of tremendous progress in England and the whole world. Create good out of evil. There’s nothing else to work with. That’s why I believe that, now, the real source of demand for institutions is the state of the elites.

Zubarevich: The elites.

Auzan: The state of the elites. Now, to your last point: a national modernization formula. Yes, indeed. I do believe that to make this leap of modernization, any country needs to find a ‘place to stand’ within itself and unleash its potential. This potential usually lies in the country’s culture. In fact, to eliminate barriers to development, a country should tap into something in its culture, create so-called interim institutions, and then reform them according to its needs. I will explain this using the example of Russia. We had ‘zemstvos’. They were a perfect interim institution.

Zubarevich: Right. Right.

Auzan: A nineteenth-century Englishman would be driven mad trying to grasp how civil society could be combined with an estates system and absolutism. But such an institution was actually created. It proven to be economically effective, as zemstvo schools and hospitals persist. It has proven to be evolutionally effective, because it set the stage for the transition to curial democracy with the First State Duma and the Constitution, which was the first Russian constitution to enter into force, through the October Manifesto of 1905. Right? Thus, in our history, there were examples of such interim institutions rooted in the culture of that time. We should also remember that, during this period, Russia’s economy showed the highest growth rates. It was the period of great reforms. Like all others, Russian modernization focuses on human capital. Japan, Korea, and China did just the same. At the end of the day, all of them used certain national traits to move forward. As I see it, we have a certain digitalization potential. I mean, for example, the ‘pioneers effect’ and mass customization. For many years, we have seen the same situation. Not so long ago, Zhores Alferov passed away. His heterostructures laid the foundation for mobile communication around the world. Just like Zworykin, back in his day, laid the foundation for modern television. They laid the foundation. But who profited from it? That was usually our story: we create something unique, something exceptional, right here, which is then commercialized abroad. In the digital economy, with 3D-printing, additive technologies, which allows for the production of customized goods at almost the same costs as mass-produced ones. And this is our way to the global stage. Our studies demonstrate a shocking institutions-to-human capital ratio in Russia. I know only about five countries with strong human capital but poor institutions. Our people are better than our institutions.

Zubarevich: They certainly are!

Auzan: This allows us to focus on human capital as a source of development, but also as a goal for development. I mean, if your institutions are unable to keep talented people in the country, if their only function is to generate revenue from anything, then it will not work out. That’s why I would say that our national modernization should be based upon our culture and Russia’s accumulated potential, and that it should aim to build a country of intelligent people.

Zubarevich: That’s a very optimistic note to end on. I will ask our standard last question. Whom would you like to speak with the way I have spoken with you?

Auzan: Well, there are many people I would love to talk to, but I have some questions I would like to address to a great Polish economist, Mark Dombrowski, who, of course, knows a great deal about Poland, about Russia, the EU, and the Eurasian Economic Union, and has been participating in joint scientific conferences for many years. I think he would give us useful insights on how we are seen by a person who knows our country and lives in Poland, which is not always on friendly terms with Russia.

Zubarevich: So, an intelligent outsider…

Auzan: An intelligent outsider.

Zubarevich: …looking in at us.

Auzan: Exactly.

Zubarevich: Perfect. Thank you.

Auzan: Thank you. Thank you so much, Natalia. Thank you.