Gerschenkron's New Russia
Abstract: In his catch-up theory, Gerschenkron argued that it is possible for a relative backward economy to engineer industrial growth through government intervention. In the case of late 19th century Russia, active state intervention took the form of channelling investments to favoured industries. This included the state’s pivotal role of raising inflows of foreign investment capital. We revisit Gerschenkron’s theory, which assumes that a backward economy such as Russia can successfully imitate more advanced market economies. We argue that the Putin regime was designed to offset inefficiencies generated by a weak property rights system, which otherwise led to severe hold-up costs from the desire of oligarchs to divert wealth through asset-stripping. The state also re-asserted control over Russia’s natural resources, in order to channel economic rents to subsidise other corporate sectors. Moreover, the state became pivotal in commanding the flow of funds through its direct or indirect control over the banking sector. We test the significance of the above policies on the performance of Russia’s corporate sector. Our findings suggest that the new state-private co-partnership system is positively related to firms’ improved performance. We find evidence that energy sector rents are channelled to favoured economic projects, while private investors earn a risk-adjusted competitive return. Furthermore, we find that such rents are channelled through Russia’s developing banking sector.