## _wp1089 - 1.6 percent and decline in industrial output was the most significant contributor to output

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### I. Introduction — framing and competing views
- The resilience of the Russian economy still depends on what its energy exports earn.
- Falling prices for oil contributed to the timing of the crisis in 1998 and a steep reduction in output in late 2008 and 2009.
- President Medvedev (November 2009) emphasized the need for Russia to modernize away from dependence on oil and gas exports: “Instead of a primitive economy based on raw materials we will create a smart economy.”
- Two broad interpretive views:
  - “Normal” market-economy forces: new institutions allocate resources more efficiently; higher energy export earnings can finance structural reform and social compensation, reducing vulnerability to falling energy prices.
  - “Virtual” economy forces: planners retain a reduced but significant role, sustaining complex enterprises via transfers from the energy sector; high energy prices mask inefficient manufacturing and increase vulnerability when prices fall.
- The paper presents new evidence on sources of Russian growth, outlines areas of agreement, and identifies unresolved questions.

### II. Output collapse and recovery, 1970–2004 — key empirical facts
- Transition context and policy package:
  - Transition followed disintegration of the Soviet Union; Soviet system relied on a nonmonetary inter-enterprise transaction (NMT) system, price controls, state orders, and publicly owned production structures.
  - Transition policy package: freed most prices, liberalized trade, introduced a tax system, closed the budget deficit, tightened monetary policy, rapid and massive privatization, and liberalized foreign exchange.
- Aggregate outcomes (average growth rates by period):
  - 1970–1989: Output grew on average 2.1 percent annually.
  - 1989–1998: Russian output contracted by 6.3 percent annually.
  - 1998–2004: After the 1998 devaluation the economy grew at an annual rate of 6.8 percent through 2004.
- Structural and utilization dynamics:
  - Disorganization caused underutilization of production factors and sectoral compositional changes.
  - Industrial capital utilization rates:
    - Early transition (1989–98): decline accelerated dramatically.
    - Late transition (1998–2004): fast recovery in capital utilization rates, averaging 5 percent growth in cited Table 1 context.
  - Industrial sector’s share in output declined as shares of other sectors increased consistently.

### III. Growth accounting — method and data
- Method:
  - Cobb-Douglas production function adjusted for utilization rates of capital and labor (uK, uL) following Dolinskaya (2002) and Oomes et al. (2005).
  - Key notation: U_y^ is growth in output per worker adjusted for utilization, U_k^ is growth of capital per worker adjusted for utilization, and  is growth in total factor productivity (TFP) residual.
  - Sectoral decomposition separates reallocation effects from sectoral composition effects on aggregate labor productivity.
- Data sources and parameter choices:
  - Output: Goskomstat real output 1992–2004; De Broeck and Koen (2000) for 1970–91.
  - Employment: De Broeck and Koen (2000) for 1970–97, updated with Goskomstat for 1998–2004.
  - Physical capital: updated De Broeck capital stock extrapolated for 1998–2004 using Goskomstat capital stock growth rates via K_t = (1 + growth)*K_{t-1}.
  - Factor shares: Labor share = 0.65; Capital share = 0.35.
  - Utilization rates: Soviet-period capital utilization from Malle (1987); transition-period capital and labor utilization from REB, CEA, and IET. Industrial utilization rates used as proxy for all sectors.
- Notes and caveats:
  - Choice of utilization data affects levels of factor inputs but not trends and main growth-accounting conclusions.
  - Lack of sector-specific utilization surveys may bias results if non-industrial sectors had different utilization patterns.

### IV. Growth-accounting findings (adjusted for utilization)
- Main qualitative result:
  - Pre-transition growth driven mainly by capital accumulation; early transition dominated by TFP decline; late transition dominated by TFP recovery.
- Quantitative contributions to average growth rates, adjusted for utilization (Table 3 values):
  - 1970-1989: Output 2.1; Employment 0.2; Capital 4.5; Output per Worker 1.9; Capital per Worker 1.6; Factor Productivity 0.4.
  - 1989-1998: Output -6.3; Employment -2.5; Capital -3.5; Output per Worker -3.8; Capital per Worker -0.4; Factor Productivity -3.4.
  - 1998-2004: Output 6.8; Employment 3.4; Capital 5.3; Output per Worker 3.4; Capital per Worker 0.7; Factor Productivity 2.7.
- Effects of adjusting for utilization (selected comparisons with “Not Adjusted”):
  - Recovery differences (Table 4, adjusted vs not adjusted):
    - Adjusted: Output 13.1; Employment 5.9; Capital 8.8; Output per Worker 7.1; Capital per Worker 1.1; Factor Productivity 6.1.
    - Not Adjusted: Output 13.1; Employment 2.6; Capital 0.1; Output per Worker 10.4; Capital per Worker -0.9; Factor Productivity 11.4.
  - Adjusting for utilization reverses/changes sign and magnitude of capital per worker and TFP contributions during recovery:
    - Capital per worker recovered on average by 1.1 percent (adjusted); without adjustment there was an almost 1 percent decline.
    - Utilization-adjusted TFP averaged almost 6 percent growth during recovery, about half the TFP recovery when not adjusted for utilization.
- Robustness:
  - Using REB, IET, and CEA utilization series yields similar qualitative conclusions (Tables A5–A7 presented).

### V. Sectoral reallocation findings
- Sectoral dynamics (Table 5 and Table A7 highlights):
  - Industrial sector (IET reported averages):
    - 1970-1989: Output 2.6; Employment -0.1; Capital 5.0; Output per Worker 2.8; Capital per Worker 1.9; Factor Productivity 0.9.
    - 1989-1998: Output -8.4; Employment -6.0; Capital -2.7; Output per Worker -2.4; Capital per Worker 1.2; Factor Productivity -3.6.
    - 1998-2004: Output 3.1; Employment 3.4; Capital 5.4; Output per Worker -0.3; Capital per Worker 0.8; Factor Productivity -1.1.
  - All other sectors (IET reported averages):
    - 1970-1989: Output 1.2; Employment 0.3; Capital 4.3; Output per Worker 0.8; Capital per Worker 1.4; Factor Productivity -0.6.
    - 1989-1998: Output -3.0; Employment -1.3; Capital -4.0; Output per Worker -1.7; Capital per Worker -1.0; Factor Productivity -0.7.
    - 1998-2004: Output 10.6; Employment 3.4; Capital 5.2; Output per Worker 7.2; Capital per Worker 0.7; Factor Productivity 6.5.
- Output per worker levels (selected Table 6 values, in 2000 prices, millions of roubles as presented):
  - 1970: Industry 24; All Other Sectors 7; Total 13.
  - 1990: Industry 67; All Other Sectors 13; Total 33.
  - 1999: Industry 61; All Other Sectors 23; Total 36.
  - 2004: Industry 43; All Other Sectors 16; Total 15 (values reproduced as presented—with table formatting ambiguity noted in source).
- Interpretation:
  - Pre-transition: industry grew faster than all other sectors, driven by capital investment.
  - Early transition: industrial TFP declined substantially (about 3 percent more than in other sectors), industry contracted sharply in employment and output share.
  - Late transition: industrial output per worker continued to decline but more slowly; all other sectors averaged 7 percent annual growth in output per worker, with 6.5 percent contributed by TFP.
  - Absolute productivity gaps: labor productivity was three times higher in industry than in other sectors in 1970 and five times higher in 1990; by 1999 industry remained five times higher; by 2004 industry was about three times higher.
- Reallocation effects:
  - Early transition: negative factor reallocation effects because industry (most productive) shrank and released factors to lower-productivity sectors.
  - Late transition: reallocation effects became positive as all other sectors expanded productivity and shares and absorbed factors with higher returns.

### VI. Explanations of collapse and recovery — theoretical mechanisms
- Disorganization model (Blanchard and Kremer (1997) framework):
  - Planner enforcement disappears → decentralized bargaining for intermediate inputs.
  - Collapse of complex industrial production networks drives a steep fall in industrial labor productivity and output.
- Privatization and institutional weaknesses:
  - Mass privatization occurred without full development of property-rights protection, contract enforcement, banking adequacy, bankruptcy procedures.
  - Short-term privatization effects largely negative; ownership structure matters (worker sales/diffuse ownership vs foreign investor involvement).
- NMTs and liquidity constraints:
  - NMTs could both sustain production when banks were nonfunctional and, if overused, worsen enterprise balance sheets.
  - Empirical threshold effects (from Ukraine analysis applied here):
    - More than 70 percent reliance on NMTs undermined enterprise growth.
    - Less than 30 percent reliance promoted growth.
  - Access to credit positively affects output; high-performing firms combined NMTs and credit effectively.
- Virtual economy hypothesis:
  - Government channels quasi-fiscal transfers via the energy sector to strategic enterprises (price discrimination in energy: hard-currency exports at world prices; domestic cash sales; domestic sales at virtual/NMT prices).
  - High world energy prices increase transfers that can sustain pre-transition production structures without restructuring; falls in world prices reduce transfers and undermine such enterprises.
  - Virtual-economy mechanisms may create disincentives for restructuring among strategic firms.

### VII. Interpretive scenarios and implications
- Normal-economy path:
  - Disorganization is temporary; market mechanisms and institutional development lead to private-sector-driven growth.
  - Energy-export wealth used to finance restructuring and social cushions.
- Virtual-economy path:
  - Planner-like mechanisms persist via quasi-fiscal transfers and NMTs channeled through the energy sector.
  - High world energy prices sustain growth but raise vulnerability to price declines.
- Hybrid outcome:
  - Russia could combine virtual and normal elements; future path depends on which forces dominate.

### VIII. Policy-relevant observations and research priorities
- Policy sequencing:
  - Institutional development sequence matters: macroeconomic stabilization should precede domestic financial-sector reforms and external financial opening to ensure banking-sector adequacy and productive resource allocation.
- Exchange-rate episode:
  - The 1998 devaluation likely improved trade competitiveness for export and import-competing firms and may have aided recovery.
- Future research priorities (as identified in source):
  - Obtain output and factor input data for public vs. private sectors to test whether negative state contributions were replaced by positive private-sector contributions (test of normal-economy hypothesis).
  - Conduct comparative growth-accounting for energy and manufacturing subsectors and analyze reallocation effects between them to quantify the virtual-economy hypothesis.
  - Undertake detailed study of energy-sector quasi-fiscal deficits and NMT flows between energy and manufacturing to confirm or refute the virtual aspect of the economy.

### IX. Appendices — data construction and utilization-rate evidence (selected points)
- Primary output sources: Goskomstat (1992–2004) and De Broeck and Koen (2000) for 1970–1997.
- Limitations of De Broeck and Koen (2000): not updated since 2000; growth-rate-based level construction induces rounding error accumulation; using growth rates with one decimal precision on base-year levels can generate imprecision.
- Sectoral output construction method: update De Broeck sectoral levels for 1998–2004 using Goskomstat sectoral growth rates; apply sectoral shares to total output levels.
- Utilization rates dataset construction:
  - Capital utilization: Malle (1987) for Soviet years; REB, IET, CEA surveys for transition years; linear interpolation used where needed.
  - Baseline assumption for 1970–1983: capital utilization equals labor utilization (data on labor utilization for Soviet period not available).
- Tabulated utilization rates (selected values from Table A2, in percent as presented):
  - 1970: Labor 0.90; Capital, REB 0.90; Capital, IET 0.90; Capital, CEA 0.90
  - 1975: Labor 0.92; Capital, REB 0.92; Capital, IET 0.92; Capital, CEA 0.92
  - 1980: Labor 0.87; Capital, REB 0.87; Capital, IET 0.87; Capital, CEA 0.87
  - 1985: Labor 0.83; Capital, REB 0.83; Capital, IET 0.82; Capital, CEA 0.81
  - 1994: Labor 0.75; Capital, REB 0.61; Capital, IET 0.50; Capital, CEA 0.50
  - 1998: Labor 0.75; Capital, REB 0.55; Capital, IET 0.44; Capital, CEA 0.40
  - 2000: Labor 0.83; Capital, REB 0.62; Capital, IET 0.50; Capital, CEA 0.44
  - 2004: Labor 0.88; Capital, REB 0.74; Capital, IET 0.66; Capital, CEA 0.58
- Survey differences and implication:
  - REB reports higher capital utilization levels than IET and CEA; patterns are similar across surveys.
  - Capital utilization fell nearly by half in the mid-1990s and rose to 74 percent in 2004 (REB); labor utilization improved from 75 percent in the mid-1990s and flattened around 86 percent since 2000.
- Growth accounts using different surveys (selected REB/IET/CEA averages from Appendix C):
  - REB (1970-1989): Output 2.1; Employment 0.2; Capital 4.5; Output per Worker 1.9; Capital per Worker 1.6; Factor Productivity 0.4.
  - REB (1989-1998): Output -6.3; Employment -2.5; Capital -3.5; Output per Worker -3.8; Capital per Worker -0.4; Factor Productivity -3.4.
  - REB (1998-2004): Output 6.8; Employment 3.4; Capital 5.3; Output per Worker 3.4; Capital per Worker 0.7; Factor Productivity 2.7.

*Source: _wp1089 - 1.6 percent and decline in industrial output was the most significant contributor to output (PDF chapter/section).*

### References .............................................................................................................

### _wp1089 - References .............................................................................................................

### I. INTRODUCTION
- The resilience of the Russian economy still depends on what its energy exports earn.
- Falling prices for oil contributed to the timing of the crisis in 1998 and a steep reduction in output in late 2008 and 2009.
- President Medvedev (November 2009) emphasized the need for Russia to modernize away from dependence on oil and gas exports: “Instead of a primitive economy based on raw materials we will create a smart economy.”
- Two broad views of the post-Soviet Russian economy:
  - “Normal” market-economy forces: new institutions allocate resources more efficiently; higher energy export earnings can finance structural reform and social compensation, reducing vulnerability to falling energy prices.
  - “Virtual” economy forces: planners retain a reduced but significant role, sustaining complex enterprises via transfers from the energy sector; high energy prices mask inefficient manufacturing and increase vulnerability when prices fall.
- The paper presents new evidence on sources of Russian growth, outlines areas of agreement, and identifies unresolved questions.

### II. OUTPUT COLLAPSE AND RECOVERY IN RUSSIA, 1970–2004
- Context and structural change:
  - Transition from a planned to a market economy followed disintegration of the Soviet Union.
  - The Soviet system relied on a nonmonetary inter-enterprise transaction (NMT) system, price controls, state orders, and publicly owned production structures.
  - Transition policy package: freed most prices, liberalized trade, introduced a tax system, closed the budget deficit, tightened monetary policy, rapid and massive privatization, and liberalized foreign exchange.
- Aggregate outcomes:
  - 1989–98: Russian output contracted by 6.3 percent annually.
  - After the 1998 devaluation: the economy grew at an annual rate of 6.8 percent through 2004.
  - Pre-transition (1970–89): output grew on average 2.1 percent annually.
- Structural and utilization dynamics:
  - Disorganization of planned production caused underutilization of production factors and sectoral compositional changes.
  - Industrial capital utilization rates:
    - Early transition (1989–98): decline accelerated dramatically, reaching -4 percent (industrial capital utilization rate change referenced).
    - Late transition (1998–2004): fast recovery in capital utilization rates, to an average of 5 percent growth (Table 1 referenced).
  - Industrial sector’s share in output declined as shares of other sectors increased consistently (Table 2 referenced).

### III. GROWTH ACCOUNTING
- Purpose and method:
  - Growth accounting exercises compare pre-transition (1970–89), early transition (1989–98), and late transition (1998–2004) sources of growth, and study effects of sectoral reallocation.
  - The analysis adjusts a Cobb-Douglas production function for utilization rates of capital and labor (uK, uL) following Dolinskaya (2002) and Oomes et al. (2005).
  - Production function: Y = A*(K^a)*(L^(1-a)) modified for utilization: aL^(1-a)K and utilization-adjusted growth rates U_y^, U_k^, and Â.
- Key formulae and definitions:
  - Adjusted production function notation presented: (LK uu, ) and U_y^ is growth in output per worker adjusted for utilization, U_k^ is growth of capital per worker adjusted for both capital and labor utilization, and  is growth in total factor productivity (TFP) residual.
  - Sectoral decomposition is applied to separate reallocation effects from sectoral composition effects on aggregate labor productivity.

#### A. Data Sources (summary of data choices)
- Output:
  - Goskomstat raw data on real output for 1992–2004.
  - De Broeck and Koen (2000) for 1970–91 (historical data not available in Goskomstat publications or WEO database).
- Employment:
  - De Broeck and Koen (2000) aggregate and sectoral employment data for 1970–97, updated using Goskomstat Statistical Yearbooks for 1998–2004.
- Physical capital:
  - Updated De Broeck capital stock by extrapolating capital stock levels for 1998–2004 using growth rates for capital stock reported by Goskomstat via the formula: K_t = (1 + growth)*K_{t-1}.
  - Perpetual inventory method noted: K_t = (1 - d)K_{t-1} + I_t, but not used due to varying depreciation and underutilization issues.
- Factor shares:
  - Labor share = 0.65 and capital share = 0.35 (consistent with De Broeck and Koen (2000), Dolinskaya (2002), and Oomes et al. (2005)).
- Utilization rates:
  - Capital utilization rates for the Soviet period from Malle (1987).
  - Transition period capital and labor utilization rates from Russian Economic Barometer (REB), Center for Economic Analysis (CEA), and Institute for the Economy in Transition (IET).
  - Trend of industrial factor utilization rates used as a proxy for other sectors; industrial utilization rates applied to all sectors (same approach as Oomes et al. (2005) and Dolinskaya (2002)).
- Notes and caveats:
  - Choice of utilization data affects levels of factor inputs but not trends and main growth-accounting conclusions.
  - Lack of sector-specific utilization surveys; assumption may bias results if non-industrial sectors had different utilization patterns.

#### B. Growth Accounts Adjusted for Utilization — Findings
- Main qualitative findings:
  - Pre-transition growth driven mainly by capital accumulation.
  - Transition period: early transition dominated by TFP decline; late transition dominated by TFP recovery.
- Quantitative results (Table 3: Contribution of factors to average growth rates, adjusted for utilization, 1970–2004):
  - 1970-1989: Output 2.1; Employment 0.2; Capital 4.5; Output per Worker 1.9; Capital per Worker 1.6; Factor Productivity 0.4.
  - 1989-1998: Output -6.3; Employment -2.5; Capital -3.5; Output per Worker -3.8; Capital per Worker -0.4; Factor Productivity -3.4.
  - 1998-2004: Output 6.8; Employment 3.4; Capital 5.3; Output per Worker 3.4; Capital per Worker 0.7; Factor Productivity 2.7.
- Adjusting for utilization changes the interpretation of recovery:
  - Without adjustment, TFP during recovery is significantly overestimated.
  - With utilization adjustment:
    - Capital per worker recovered on average by 1.1 percent; without adjustment there was an almost 1 percent decline.
    - Utilization-adjusted TFP averaged almost 6 percent growth during recovery, about half the TFP recovery when not adjusted for utilization.
  - Table 4: Drop and Recovery differences (average growth rate differences between periods):
    - Drop (difference between 1970-1989 and 1989-1998):
      - Adjusted for Utilization: Output -8.4; Employment -2.7; Capital -8.1; Output per Worker -5.7; Capital per Worker -1.9; Factor Productivity -3.8.
      - Not Adjusted: Output -8.4; Employment -2.8; Capital -5.3; Output per Worker -5.6; Capital per Worker -0.9; Factor Productivity -4.7.
    - Recovery (difference between 1989-1998 and 1998-2004):
      - Adjusted for Utilization: Output 13.1; Employment 5.9; Capital 8.8; Output per Worker 7.1; Capital per Worker 1.1; Factor Productivity 6.1.
      - Not Adjusted: Output 13.1; Employment 2.6; Capital 0.1; Output per Worker 10.4; Capital per Worker -0.9; Factor Productivity 11.4.
- Robustness:
  - Using capital utilization rates from different surveys yields similar conclusions (REB results presented in text; other surveys in Appendix C, Tables A5-A7).

#### C. Reallocation Effects — Findings
- Sectoral dynamics and productivity:
  - Transition expected to shift factors from low-demand sectors to higher-demand sectors.
  - The growth accounting exercise separates sectoral reallocation effects from composition effects; it does not capture within-sector (firm-level) reallocations due to lack of subsectoral data.
- Sectoral contributions (Table 5: Sectoral sources of growth, adjusted for utilization, 1970–2004 — average growth rates, contributions):
  - Industrial Sector:
    - 1970-1989: Output 2.6; Employment -0.1; Capital 5.0; Output per Worker 2.8; Capital per Worker 1.9; Factor Productivity 0.9.
    - 1989-1998: Output -8.4; Employment -6.0; Capital -2.7; Output per Worker -2.4; Capital per Worker 1.2; Factor Productivity -3.6.
    - 1998-2004: Output 3.1; Employment 3.4; Capital 5.4; Output per Worker -0.3; Capital per Worker 0.8; Factor Productivity -1.1.
  - All Other Sectors:
    - 1970-1989: Output 1.2; Employment 0.3; Capital 4.3; Output per Worker 0.8; Capital per Worker 1.4; Factor Productivity -0.6.
    - 1989-1998: Output -3.0; Employment -1.3; Capital -4.0; Output per Worker -1.7; Capital per Worker -1.0; Factor Productivity -0.7.
    - 1998-2004: Output 10.6; Employment 3.4; Capital 5.2; Output per Worker 7.2; Capital per Worker 0.7; Factor Productivity 6.5.
- Output per worker levels (Table 6: Output per Worker, Adjusted for Utilization, in 2000 prices, millions of roubles):
  - Industry vs All Other Sectors (selected years):
    - 1970: Industry 24; All Other Sectors 7; Total 13 (presumed per Table formatting).
    - 1990: Industry 67; All Other Sectors 13; Total 33.
    - 1999: Industry 61; All Other Sectors 23; Total 36.
    - 2004: Industry 43; All Other Sectors 16; Total 15? (table formatting ambiguous in source; values preserved as presented in Table 6 lines).
- Interpretation:
  - Transition brought a contraction in industrial sector output per worker growth and a boom in other sectors.
  - Pre-transition: industrial sector grew more than twice as fast as all other sectors, mainly via capital investment.
  - Early transition: industrial TFP declined annually on average 3 percent more than in other sectors.
  - Late transition: industrial output per worker continued to decline but more slowly; all other sectors averaged 7 percent annual growth in output per worker, with 6.5 percent contributed by TFP.
  - Absolute productivity gaps:
    - Labor productivity was three times higher in industry than in other sectors in 1970 and five times higher in 1990.
    - From 1990 to 1999 labor productivity decreased in every sector; industry remained five times higher than elsewhere in 1999.
    - By 2004 industry labor productivity was again about three times higher than in other sectors.
- Reallocation effect during early transition:
  - Negative factor reallocation effects because both productivity growth and the relative share of industry plunged.
  - As industry shrank but remained the most productive sector, released factors were absorbed by lower-productivity sectors, yielding negative contribution from factor reallocation effects.

*Source: _wp1089 - References (excerpted content provided).*

### 1.6 percent and decline in industrial output was the most significant contributor to output

### _wp1089 - 1.6 percent and decline in industrial output was the most significant contributor to output

### Key empirical findings and growth-accounting results
- Capital accumulation drove output growth in the Soviet period; during the transition TFP was the main contributor to output decline and recovery. Utilization rates of capital and labor declined early in the transition and recovered later.  
- The capital-intensive industrial sector had been the engine of Russian growth before the transition; during the transition the industrial sector started shrinking fast and its share in output fell.  
- The industrial sector was the most significant contributor to growth in output per worker into the early transition period; in the late transition the contributions of all other sectors became dominant and overcompensated for the negative contribution of the industrial sector.  
- Productivity dynamics: industrial sector productivity continued to sink throughout the transition period; productivity in all other sectors averaged 7 percent growth annually in the late transition period.  
- Factor reallocation effects:
  - Early transition: reallocation effects were negative as the industrial sector’s share and productivity fell and released factors went to sectors with low and declining productivity.
  - Late transition: reallocation effects became positive as productivity and shares of all other sectors began to grow; factors released from the shrinking industrial sector were reallocated to sectors with faster productivity growth and increasing relative share in the economy.
- Specific table figures (Table 7. Russia: Growth in Output per worker, Adjusted for Utilization, 1970–2004 (Average Growth Rate)) as presented in the source:
  - 1970-1989 2.8  0.8 1.9 1.7 0.3 -0.1
  - 1989-1998 -2.4 -1.7 -3.8 -1.6 -0.5 -1.6
  - 1998-2004 -0.3 7.2 3.4 -0.2 2.8 0.8
- All other sectors doubled their output per worker from 1999 to 2004 (phrase preserved exactly as in source).

### Explanations of collapse and recovery: theoretical interpretations
- Disorganization model (Blanchard and Kremer (1997) framework):
  - Central planner enforcement disappears → decentralized bargaining among suppliers and buyers of intermediate goods emerges.
  - Two disorganization forces: (1) planner no longer enforces the production system; (2) alternative market opportunities make participation in old production chains unattractive.
  - Result: collapse of complex industrial production networks; industrial labor productivity declined more than in other sectors, driving overall output collapse.
- Slow private-sector organization and privatization issues:
  - Mass privatization occurred early without necessary market institutions: property-rights protection, contract enforcement, banking adequacy, bankruptcy procedures were largely absent.
  - Short-term effects of privatization were mostly negative; many privatized firms collapsed.
  - Ownership structure matters: sales to workers and diffuse ownership prevalent in former Soviet countries may explain poorer post-privatization performance; where foreign investors had larger shares, short-term privatization effects were positive.
- Non-monetary transactions (NMTs) and liquidity constraints:
  - One view: reliance on NMTs caused shortages of cash, reduced creditworthiness, and reduced output (Calvo and Corricelli findings for Eastern Europe).
  - Alternative view: NMTs temporarily sustained production when banking sector was nonfunctional (Marin & Schnitzel). NMTs could both stave off collapse and, if overused, worsen balance sheets.
  - Empirical threshold effects (from Ukraine-based analysis applied in source):
    - More than 70 percent reliance on NMTs undermined enterprise growth.
    - Less than 30 percent reliance promoted growth.
    - Access to credit has a positive effect on output; high-performing firms used a combination of NMTs and credit effectively.
- Virtual economy hypothesis:
  - The government preserves the production structure by extracting and directing value transfers (via the energy sector) to strategic enterprises that avoid restructuring.
  - Energy monopoly practices price discrimination: hard-currency exports at world prices, domestic cash sales, and domestic sales at virtual/NMT prices to strategic firms.
  - High world energy export prices increase value transfers to strategic enterprises and can sustain output without restructuring; a decline in world prices would reduce transfers and undermine performance.
  - The virtual economy mechanism may make strategic enterprises reluctant to restructure, as they receive virtual below-market pricing for inputs (e.g., energy).

### Interpretive scenarios and implications
- Normal-economy path:
  - Disorganization is temporary; market mechanisms replace planner-enforced networks.
  - Private sector increases its positive contribution to growth once institutions develop.
  - Energy-export wealth could finance restructuring of enterprises using energy profits as a social cushion.
- Virtual-economy path:
  - Planner-like mechanisms persist via quasi-fiscal value transfers (not direct subsidies) channeled through the energy sector and NMTs.
  - High world energy prices can sustain a production system without restructuring, producing continued high growth but high vulnerability to a drop in world energy prices.
- Hybrid outcome:
  - Present Russian economy could combine both virtual and normal elements; future evolution depends on which path dominates.

### Policy-relevant observations and research priorities
- Institutional development sequence matters: macroeconomic stabilization should precede domestic financial-sector reforms and external financial opening to ensure banking sector adequacy and resource allocation to productive activities.  
- The 1998 devaluation likely improved trade competitiveness for export and import-competing firms and may have aided recovery.  
- Future research needs (as identified in source):
  - Data on output and factor inputs in public vs. private sectors to evaluate whether negative contributions of the state were replaced by positive private-sector contributions, testing the normal-economy hypothesis.
  - Comparative growth-accounting for energy and manufacturing subsectors and analysis of reallocation effects between them to quantify the virtual-economy hypothesis.
  - Detailed study of energy-sector quasi-fiscal deficits and NMT flows between energy and manufacturing to confirm or refute the virtual aspect of the economy.

*Italic: Source: _wp1089 - 1.6 percent and decline in industrial output was the most significant contributor to output (PDF chapter/section).*

### Appendix A. Data Sources

### Appendix A. Data Sources

### Primary output series and dataset comparisons
- Primary source of Russian real output series: State Statistical Agency of Russia (Goskomstat).
- IMF World Economic Outlook (WEO), De Broeck and Koen (2000), Dolinskaya (2002), and Oomes et al. (2005) use output data reported by Goskomstat.
- WEO dataset: series on Russian real output for 1992–2004; described as the most complete.
- Oomes et al. (2005): series on real output levels for 1995–2004 in 2000 prices; comparison shows Oomes et al. dataset is an extraction from the WEO database, which has a longer time series.
- De Broeck and Koen (2000) dataset:
  - Observations for 1970–1997, measured in 1973 prices, for five sectors: industry, agriculture, construction, transportation, and other sectors.
  - Constructed using the real growth rates published by Goskomstat.
  - Two noted weaknesses:
    - (1) Dataset has not been updated since 2000; its real output growth rates for 1993, 1994, and 1995 were different from those currently reported by Goskomstat.
    - (2) Instead of using underlying raw data on output, De Broeck and Koen used real GDP growth rates reported by Goskomstat to extrapolate levels of output via the formula: )1(* 1 growthYY tt   (as presented in the source).

### Limitations of growth-rate-based level construction
- Using growth rates reported with one decimal point precision on base year output denominated in billions of rubles generates variation and potential rounding error accumulation over subsequent years.
- Observed average effect: database that relies more on De Broeck and Koen (2000) (column 2, Table A1) suggests a 0.2 percent higher recovery in the late transition period and a 0.2 percent lower decline in the early transition period.
- Goskomstat does not report sectoral levels of real output; De Broeck and Koen contains sectoral real outputs for 1970–1997.
- Sectoral output construction procedure used:
  - Update De Broeck and Koen (2000) levels for 1998–2004 using real sectoral output growth rates reported by Goskomstat.
  - Derive sectoral output shares for each year.
  - Apply these shares to total output levels derived using Goskomstat data for 1992–2004 and De Broeck and Koen data for 1970–1991 (column 1, Table A1).
- Sectoral output calculations are subject to imprecision due to rounding errors in sectoral real growth rates.

### Standard national accounts practice and deflators
- Standard calculation: use official nominal output data and apply an output deflator.
- Technical annex to the national accounts chapter of the Goskomstat Statistical Yearbook (2006) explains sectoral real output growth series are constructed by using the sectoral output deflators.
- Technical annex recognizes imprecision in derivations of sectoral output deflators for:
  - the Soviet period with controlled prices,
  - the early transition period with price liberalization and three-digit inflation,
  - the late transition period.
- Reference: Statistical Yearbook (2006), p. 331.

### Data Sources (as provided in the source)
- Output:
  - 1992–2004: Data on real output levels downloadable from the IMF WEO database.
  - 1970–1997: De Broeck (2000) database downloadable from http://ddcn.prowebis.com/.
  - 1998–2004: Data on output growth rates downloadable directly from Goskomstat web-page http://www.gks.ru. Complete datasets are published in Statistical Yearbooks (Российский статистический ежегодник) of Goskomstat.
- Capital:
  - 1970–1997: De Broeck (2000) database downloadable from http://ddcn.prowebis.com/.
  - 1998–2004: Data on capital growth rates, aggregate and sectoral, published in the Goskomstat Statistical Yearbooks (Российский статистический ежегодник) of Goskomstat, pp. 320–330 (depending on the year of publication). These data are not directly downloadable from the Goskomstat web page.
- Labor:
  - 1970–1997: De Broeck (2000) database downloadable from http://ddcn.prowebis.com/.
  - 1998–2004: Data on employment, including sectoral shares, downloadable directly from Goskomstat, http://www.gks.ru. Complete datasets on employment are published in the Statistical Yearbooks (Российский статистический ежегодник).
- Utilization Rates:
  - Capital utilization rates for 1970–1983: available from Silvana Malle, 1987, “Capital Utilization and the Shift Coefficient of the Soviet Planning,” Economics of Planning, Vol. 21, p. 81, Table 7.
  - Capital utilization rates for 1992–2006: Russian Economic Barometer, Vol. XVI, No. 1, 2007, p. 30, downloadable from http://site.securities.com.
  - Labor utilization rates for 1994–2006: Russian Economic Barometer, Vol. XVI, No. 1, 2007, p. 31, downloadable from http://site.securities.com.

### Appendix B: Capital and Labor Utilization Rates — construction and assumptions
- Dataset on factor utilization rates for 1970–2004 constructed using capital utilization rates from Malle (1987), Russian Economic Barometer (REB), Center for Economic Analysis (CEA), and Institute for the Economy in Transition (IET).
- REB, IET, and CEA surveys started in the early transition period; no information on Soviet-period rates except from Malle (1987), which reports official Soviet statistics on capital utilization for 1970, 1975, 1978, 1980, 1982, and 1983.
- For years with no raw data, a simple linear interpolation method was used to connect the closest observation points.
- Data on labor utilization rates for the Soviet period are not available because enterprises kept no records on effective numbers of workers.
- Baseline assumption: capital utilization equals labor utilization for 1970–1983 (acknowledging that during the transition period rates were not equal and data limitations prevent a better proxy for labor utilization during the Soviet period than Malle (1987) capital utilization rates).
- Raw data as reported by Malle (1987), REB, CEA, and IET are indicated as shaded in Table A2 in the source.

### Tabulated utilization rates (selected values from Table A2)
- 1970: Labor 0.90; Capital, REB 0.90; Capital, IET 0.90; Capital, CEA 0.90
- 1975: Labor 0.92; Capital, REB 0.92; Capital, IET 0.92; Capital, CEA 0.92
- 1980: Labor 0.87; Capital, REB 0.87; Capital, IET 0.87; Capital, CEA 0.87
- 1985: Labor 0.83; Capital, REB 0.83; Capital, IET 0.82; Capital, CEA 0.81
- 1994: Labor 0.75; Capital, REB 0.61; Capital, IET 0.50; Capital, CEA 0.50
- 1998: Labor 0.75; Capital, REB 0.55; Capital, IET 0.44; Capital, CEA 0.40
- 2000: Labor 0.83; Capital, REB 0.62; Capital, IET 0.50; Capital, CEA 0.44
- 2004: Labor 0.88; Capital, REB 0.74; Capital, IET 0.66; Capital, CEA 0.58
- Source noted in table: REB, IET, CEA and Malle (1987); Table A2 titled "Russia. Utilization Rates of Capital and Labor for the Industrial Sector (in Percent)".

### Survey differences, patterns, and sample distributions
- Surveys show different levels of capital utilization but similar patterns.
- REB reports higher levels of capital utilization than IET and CEA.
- Decline in capital utilization was much deeper and recovery faster than decline in labor utilization.
- After collapsing by nearly half in the mid-1990s, capital utilization rates quickly rose to 74 percent in 2004.
- Labor utilization improved from 75 percent in the mid-1990s and since 2000 has flattened at about 86 percent; this may be the natural rate of labor utilization for the Russian economy (see Oomes et al., 2005).
- One explanation for survey differences: different sample distribution across small, medium, and large enterprises.
  - REB: most small and medium-size enterprises.
  - IET: relies more on larger enterprises.
  - CEA: on older enterprises.
- Table A3: Sample Size Distribution of Russian Industrial Enterprises, 2003 (in percent; Source: Oomes et al (2005), 1/ Total set of registered industrial enterprises, Goskomstat):
  - Small (< 500 employees): IET 38; REB 58; CEA 33
  - Medium (500-1000 employees): IET 18; REB 17; CEA 20
  - Large (> 1000 employees): IET 44; REB 24; CEA 44
  - Total: 100 100 100 100

### Table A4: Sources, samples, and data on capital and labor utilization rates (summarized)
- Institute for the Economy in Transition (IET):
  - Sample: 1,200 industrial enterprises: 9 percent small enterprises and 74 percent large. Sample updated monthly to replace up to 50 closed and nonresponding enterprises. Response rate 65–70 percent.
  - Disadvantage: Large enterprises may be over-represented.
  - Data: Quarterly capital utilization rates for the industrial sector since 1992.
- Russian Economic Barometer (REB):
  - Sample: 1,000 enterprises randomly selected from list of registered enterprises (30,000–40,000); 58 percent small enterprises and 22 percent large. Response rate 50 percent.
  - Disadvantage: Small enterprises may be over-represented.
  - Data: Quarterly capital utilization rates for the industrial sector since 1991 and labor utilization rates since 1994.
- Center for Economic Analysis (CEA):
  - Sample: 1,400 industrial enterprises, 33 percent small enterprises and 44 percent large. Sample not updated systematically. Response rate 85 percent.
  - Disadvantage: Old enterprises may be over-represented due to insufficient updating.
  - Data: Monthly capital utilization rates for the industrial sector since 1993.

### Appendix C: Growth accounts using different surveys (selected table highlights)
- Table A5. Russia: Sources of Growth, Adjusted for Utilization, 1970-2004 (Average Growth Rate) — contributions for periods and surveys (REB, IET, CEA):
  - REB:
    - 1970-1989: Output 2.1; Employment 0.2; Capital 4.5; Output per Worker 1.9; Capital per Worker 1.6; Factor Productivity 0.4
    - 1989-1998: Output -6.3; Employment -2.5; Capital -3.5; Output per Worker -3.8; Capital per Worker -0.4; Factor Productivity -3.4
    - 1998-2004: Output 6.8; Employment 3.4; Capital 5.3; Output per Worker 3.4; Capital per Worker 0.7; Factor Productivity 2.7
  - IET:
    - 1970-1989: Output 2.1; Employment 0.2; Capital 4.0; Output per Worker 1.9; Capital per Worker 1.4; Factor Productivity 0.6
    - 1989-1998: Output -6.3; Employment -2.5; Capital -4.9; Output per Worker -3.8; Capital per Worker -0.8; Factor Productivity -2.9
    - 1998-2004: Output 6.8; Employment 3.4; Capital 7.2; Output per Worker 3.4; Capital per Worker 1.4; Factor Productivity 1.9
  - CEA:
    - 1970-1989: Output 2.1; Employment 0.2; Capital 3.7; Output per Worker 1.9; Capital per Worker 1.3; Factor Productivity 0.7
    - 1989-1998: Output -6.3; Employment -2.5; Capital -5.3; Output per Worker -3.8; Capital per Worker -1.0; Factor Productivity -2.8
    - 1998-2004: Output 6.8; Employment 3.4; Capital 6.6; Output per Worker 3.4; Capital per Worker 1.2; Factor Productivity 2.2
  - Source: Goskomstat, De Broeck (2000) and author's estimations.

- Table A6. Russia: Sources of Growth, Adjusted and not Adjusted for Utilization, 1970-2004 (Average Growth Rate) — drops and recovery (selected values):
  - Drop (Adjusted for Utilization):
    - REB: Output -8.4; Employment -2.7; Capital -8.1; Output per Worker -5.7; Capital per Worker -1.9; Factor Productivity -3.8
    - IET: Output -8.4; Employment -2.7; Capital -8.9; Output per Worker -5.7; Capital per Worker -2.2; Factor Productivity -3.5
    - CEA: Output -8.4; Employment -2.7; Capital -8.9; Output per Worker -5.7; Capital per Worker -2.2; Factor Productivity -3.4
    - Not Adjusted: Output -8.4; Employment -2.8; Capital -5.3; Output per Worker -5.6; Capital per Worker -0.9; Factor Productivity -4.7
  - Recovery (Adjusted for Utilization):
    - REB: Output 13.1; Employment 5.9; Capital 8.8; Output per Worker 7.1; Capital per Worker 1.1; Factor Productivity 6.1
    - IET: Output 13.1; Employment 5.9; Capital 12.1; Output per Worker 7.1; Capital per Worker 2.3; Factor Productivity 4.9
    - CEA: Output 13.1; Employment 5.9; Capital 11.8; Output per Worker 7.1; Capital per Worker 2.2; Factor Productivity 5.0
    - Not Adjusted: Output 13.1; Employment 2.6; Capital 0.1; Output per Worker 10.4; Capital per Worker -0.9; Factor Productivity 11.4
  - Notes:
    - 1/ Difference in average growth rates in Soviet period (1970-1989) and the early transition period (1989-1998).
    - 2/ Difference in average growth rates in the early transition (1989-1998) and in the late transition periods (1998-2004).
  - Source: Goskomstat, De Broeck (2000) and author's estimations.

### Table A7: Sectoral sources of growth (selected highlights)
- Industrial Sector (IET, CEA, REB variants reported):
  - 1970-1989: Output 2.6; Employment -0.1; Capital 5.0; Output per Worker 2.8; Capital per Worker 1.9; Factor Productivity 0.9 (IET row)
  - 1989-1998: Output -8.4; Employment -6.0; Capital -2.7; Output per Worker -2.4; Capital per Worker 1.2; Factor Productivity -3.6 (IET row)
  - 1998-2004: Output 3.1; Employment 3.4; Capital 5.4; Output per Worker -0.3; Capital per Worker 0.8; Factor Productivity -1.1 (IET row)
- All Other Sectors (IET row):
  - 1970-1989: Output 1.2; Employment 0.3; Capital 4.3; Output per Worker 0.8; Capital per Worker 1.4; Factor Productivity -0.6
  - 1989-1998: Output -3.0; Employment -1.3; Capital -4.0; Output per Worker -1.7; Capital per Worker -1.0; Factor Productivity -0.7
  - 1998-2004: Output 10.6; Employment 3.4; Capital 5.2; Output per Worker 7.2; Capital per Worker 0.7; Factor Productivity 6.5
- Source: De Broeck (2000), Oomes (2005), Goskomstat and author's estimations.

*Appendix A. Data Sources, _wp1089.*

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