A decade ago, the demise of the Soviet Union astounded the world. The collapse of Russia’s economy since then has been, in its own way, equally astounding. State-owned businesses have been privatized, prices are deregulated, and competition abounds. Yet unlike Poland, whose per capita gross domestic product has shot up by 20 percent since 1989, Russia has seen its per capita GDP—now at a paltry 15 percent of US levels—fall by more than 30 percent in the same period (Exhibit 1). Meanwhile, the country’s stagnating productivity stands at less than 20 percent of the US level (Exhibit 2).
How could such a collapse occur? To paraphrase Tolstoy, healthy economies are all basically alike; each unhealthy economy is unhealthy in its own way. The McKinsey Global Institute’s recently completed year-long study of the Russian economy explored the performance of many of its most important industries: cement, confectionery, dairy, food retailing, general merchandising, hotels, petroleum, residential construction, software, and steel.1 Our findings confirm the severity of Russia’s predicament. These ten industries average only 19 percent of US productivity levels, with software leading the group at 38 percent and cement in last place at 7 percent (Exhibit 3).
The old and the...