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Lean Russia: Sustaining economic growth through improved productivity

Russia’s economy has been growing rapidly over the past decade, with per capita GDP doubling over this period. Labor productivity remains low, but improvements have been promising. In five sectors—steel, retail, retail banking, electric power, and residential construction—productivity stands now on average at 26 percent of US levels in 2007.

A joint research effort by MGI and’s Moscow office finds that key historic sources of growth of the Russian economy—favorable global market conditions for Russian exports, positive demographic trends, and available capacity—are no longer available, and in this new environment productivity and new investment become critical drivers for the economy’s future growth. The current global economic crisis has made the need to address the productivity challenge even more urgent.

The study suggests that Russia can meet this challenge by optimizing business processes and investment and by removing administrative barriers in key sectors.

The research examines the progress Russia has made since MGI’s initial productivity study in 1999, analyzing labor productivity in five sectors that are crucial to Russia’s development. It also identifies productivity gaps and proposes opportunities for improvement.

  • Steel. Labor productivity in the steel sector has doubled in the past ten years and now stands at 33 percent of US levels. The gap can be further reduced by retiring open hearth furnace technology and improving efficiency by cutting excess management layers and increasing automation and work efficiency in production and maintenance.
  • Retail. Russia’s retail sector has been growing faster than those of China, India, and Brazil over the past seven years. At the same time productivity more than doubled from 15 to 31 percent in the past decade, making it the fastest growing in terms of productivity out of all five sectors analyzed. The long-term growth potential in Russian retail is significant, and opportunities to make productivity gains can be captured by accelerating the expansion of modern format stores and improving their in-store processes.
  • Retail banking. Productivity in this sector stands at 23 percent of US levels, and its long-term growth potential is very strong. To improve productivity in retail banking, branch processes need to be simplified and the share of electronic payments increased – steps that will require joint action by government and banks.
  • Residential construction. This sector will be an important engine for growth. In the past ten years, labor productivity in the sector grew by only 3 percent, against a national average of 6 percent; the slow productivity growth has left the sector at 21 percent of US levels today, versus 15 percent in 1999. To achieve productivity improvements in residential construction, licensing procedures must be simplified and more efficient construction techniques and materials must be introduced.
  • Electric power. Productivity in this sector stands at only 25 percent of the US level. Total factor productivity, however, is relatively high at 80 percent of US levels. Boosting labor productivity in the sector will require centralizing administrative processes, introducing broader functional roles, and adjusting regulated norms in Russian power plants. Also, as the sector embarks on a major capital investment program, it will be important to lower dramatically the cost of new plant construction by increasing transparency and the quality of project management.

The analysis identifies key shortcomings common to all sectors and finds that inefficient business processes account for 30 to 80 percent of the productivity gap with the United States, depending on the sector. Obsolete capacity and production methods account for 20 to 60 percent of the productivity gap, while structural differences are a less significant factor in the Russian economy, accounting for 5 to 15 percent of the gap.

Acting together, Russia’s government and industry can tackle the drivers of low productivity by implementing the following initiatives: increasing competitive intensity, dramatically improving business processes, enhancing professional education and training, launching labor mobility and social protection programs, implementing an integrated approach to urban and regional planning, and further developing the financial system.

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