This Is Going to Hurt

16 November 2006
Corporations are welcoming the green light for Russia’s accession to the Wolrd Trade Organisation, but the general population is not so positive, and for good reason, writes Kagarlitsky.

The last time Russia was knocking on the door of the World Trade Organization was at the very beginning of the decade. Most people then had only a hazy idea about what the WTO was, so there was no public alarm. Major corporations, however, were strongly opposed, which might be why the accession process has taken so long.

Last week we heard that Moscow and Washington had reached a deal, and that the path to the WTO was open. But attitudes toward membership have changed. Looking to attract capital and gain global access, corporations are now sanguine about the WTO. It's the general population that is nervous -- and not without reason.

Liberal economists are once again acting as psychotherapists and trying to calm us. Russia is already acting as if it were already a WTO member, they say, so it can't get any worse. There will also be a transition period, lasting until about 2012, so there will be time to adapt.

At the beginning of the decade, protectionist measures generated rapid growth in automobile and home-appliance production by Western companies in Russia. Without these protectionist tariffs, Moscow's Fords and Hyundais wouldn't come from St. Petersburg and Taganrog in the Rostov region, but from Turkey or China.

Import substitution was sparked by the ruble's tumble in 1998. The years since have also witnessed growth in middle-class incomes and consumption. But to maintain increased production after the transition period, productivity would also have to rise. This means reducing wages.

World oil prices historically follow a 10-year to 12-year cycle. This means that the inevitable fall in the flow of petrodollars will arrive at the same time that WTO requirements are coming into full effect. There will be no soft landing.

Ford labor union leader Alexei Etmanov told me that wages account for about 2.5 percent of production costs for the company, which is low even by Latin American standards. But people will work for even less in Africa or parts of Asia.

What if the workers at Ford manage to drive the wage portion of costs up to the astronomical level of 3 percent? You would think that management would remember Henry Ford's dictum that its workers should be its main customers.

But the WTO's principle aim is to break these connections. The growing demand from the middle class will be met through the exploitation of what amounts to slave labor in poor countries. The gains for our workers will be stripped away under the threat of closing down production. Today, if Ford, Hyundai or BMW want to sell in Russia, they have to produce in Russia. But once the WTO rules come into effect, this will change.

Earlier Russian liberals like Sergei Witte and Pyotr Stolypin followed protectionist policies because they understood that their abandonment meant death for Russian industry. Protecting domestic markets was also an integral part of industrial growth in Japan and, later, South Korea.

Industrial development has generally been accompanied by a rise, not a fall, in living standards, and higher wages usually accrue from a stronger labor movement. The main principle of the WTO, conversely, is to reduce wages and benefits in the name of competitiveness.

What's good for elites is often not good for society as a whole. Natural resource monopolies lead to the development of the bourgeoisie, whose ties with officialdom form the foundation of an oligarchic system of government. But this ruling class has little interest in national culture or even industry. The national culture will be replaced by expensive restorations to the Bolshoi Theater, and the industry will be given to foreigners. If conditions change and those foreigners then close their factories and transfer production to China, then fine. Let them go.

This article was originally published by The Moscow Times (Copyright 2006)