Pyotr Schedrovitsky: “The mechanism of SEZ died, it had nothing to interest world companies in”

“No royal decision”

Mr Schedrovitsky, in the early 2000s, when you were the adviser to the plenipotentiary ambassador to Volga Federal Okrug, a concept of cluster development of the okrug was developed together with you. You’ve recently said that this idea was distorted and multiplied in the wrong way. How did it look at first? What was it based on? What do we see now?

First of all, we must answer the question: “What is a cluster as a mechanism of more detailed division of labour?” Let’s imagine that several enterprises running one type of activity are located on one territory. If this is true, they can gather and agree that the infrastructure each of them needs separately will be created considering the interests and prospects of business development of all cluster residents. Then it will turn out cheaper for everyone. Here you have the first simple effect of clusterisation on the surface.

The second effect: let’s imagine that there is a process in a production line that’s characteristic of this type of activity without which it’s impossible to create the product. But this process in every specific enterprise can’t be a hundred per cent loaded, for instance, due to seasonality or other reasons. In other words, a product can’t be made without this job, it takes a day in a week or a month in a year to do this job. Then it seems only right to agree with each other, give this technological process to a specific company that will service all the members and at the same time be constantly loaded.

This is why clusters have been a key mechanism to boost workforce productivity and strengthen cooperation in the last several thousands of years.

The Soviet Union tried to move in this direction. But, as you understand, everything depends on critical mass, how many enterprises from this number we managed to gather on the territory, what stage of a product and technology’s life cycle this enterprise is in and how many resources they have for such joint work.

We almost don’t have such labour division system incubators. There has been made some progress in the last 5-6 years in this area, but it hasn’t been possible to do what we wanted to do in the 2000s

Silicon Valley is a simple example. There are tens of thousands of IT companies on a small territory. The density and effects of this activity are very high. Effects of reduction in prime cost by means of cluster interaction are extremely important to every member. Moreover, this cluster is simultaneously an incubator of new relations in production, we can say it incubates the system of division of labour itself and its participants. Up to 5,000 new technological start-ups appear in Silicon Valley a year. Just imagine the density of critical mass concentrated on this territory.

Neither the Soviet territorial policy of industry localisation nor the modern Russian one has managed to achieve similar effects. We almost don’t have such labour division system incubators. There has been made some progress in the last five or six years in this area, but it hasn’t been possible to do what we wanted to do in the 2000s.

Are you putting the example of Silicon Valley as a positive one? In the last years, we’ve heard about a brain drain, this “cluster” seems to have exhausted itself, it has been unprofitable to rent a flat, take children to kindergarten…

I’ve put the example of Silicon Valley as an example of how thousands of people and tens of thousands of companies do the same activity on one territory. It means they can constantly cooperate and make new products and do it more efficiently and cheaper by using different members’ skills. Yes, Silicon Valley has performed its role. In the last five years, the centre of gravity of creation of the new industrial revolution’s technological platform has left IT, now it’s backwoods of the world technological development.

I am not talking about technologies of application of digital solutions to rebuild the real industry but just IT solutions and software. Everything has a life cycle. We were born, grew up, matured, gave birth to children, got old and then we will die. You point a finger at a territorial cluster’s life cycle and say: “Look, it can barely walk, it’s shuffling.” Fine, yes, it’s shuffling, that’s it, the peak of maturity is over, it was at the height in the 70-80s. There is no royal decision that can be upped and applied everywhere after getting a certainly good result immediately.

If we start doing something now, we must be sitting again and thinking about what institutional matrix to invent to attract entrepreneurial factor or business to the territory. There is no such thing as eternal solutions

Economic growth transmission belts

Now we see a big number of special economic zones to be created, everyone continues to talk about the creation of new ones…

No, actually. The Priority Development Area (Priority Social and Economic Development Area) — yes, but SEZ is a mechanism that ran well in the 50-60s. What did it look like? You cut off a piece of the territory, introduce some specialised legal, tax regime on this territory, thus pulling the energy of transnational companies to this territory, not to a metropolis where they usual locate the headquarters. They located some of their technological processes in the SEZ oriented to the local market, an R&D if there are other research centres nearby, logistic subdivisions.

Jurong Island in Singapore is the simplest example of SEZ, it’s an artificial island founded once by Lee Kuan Yew to enable all big oil and gas and petrochemical companies that wished to work in the Pacific Rim to locate some elements of their business. They located common infrastructure, common warehouse for oil products, an R&D and so on the artificial island of 32 square kilometres. These several square kilometres had been generating S$45 billion a year 5-6 years ago.

The mechanism of SEZ began to die in the late 20^th century: it had nothing to interest world companies in, you couldn’t make up any special privileges. As for priority development areas, the main game in the Far East is that the state provides these sites with infrastructure, almost free for residents that instead locate production models directed at the Asian-Pacific marker with small tax benefits.

By the moment of creation of development programmes in the Far East, in the 2011-2012s, the mechanism of PDAs, which was included in this programme as one of the transmission belts of economic growth, was in the top 5 most effective regimes in the world. Now it’s 2019, new solutions have appeared, and this regime will gradually lose its positions in the top 5 institutional schemes designed to attract entrepreneurs.

To sum up, do you mean that SEZ as well as PDA are irrelevant, should we be looking for new solutions?

Yes, if you want to back up projects 10-20 years in advance, new solutions are needed. If we start doing something now, we must be sitting again and thinking about what institutional matrix to invent to attract entrepreneurial factor or business to the territory. There is no such thing as eternal solutions. Of course, what we created 10 years ago seemed to us very good, and now we are looking at it critically and understand that we missed something, left something undone, there have been contradictions between the local and general legal regimes.

Whatever concessions you make, if they change in a year, nobody will fall prey to them. The more you declare the rise in benefits, as a stakeholder, I start to feel more confident that you will change the game rules in the short run

One doesn’t have to overstate the meaning of benefits to the stakeholder, they are concerned about the stability of game rules and the long-term use of these rules, which can be foundation for a long-term project. Whatever concessions you make, if they change in a year, nobody will fall prey to them. The more you declare a rise in benefits, as a stakeholder I start to feel more confident that you will change the game rules in the short run. Game rules must exist forever from a perspective of a project’s scale, if the project is designed for 50 years, the game rules must last for 100-200 years. And if you introduce legislative initiatives every 3 months, people won’t react to it, they will sit and wait for you to stop having these reformist convulsions.

“World history has a tiny number of bloodless transitions from socialism to capitalism”

You often say that what a person understands never coincides with what the speaker wants to say. This is why I think it is necessary to ask about the lecture. The gist is that we should push entrepreneurs to reconsider their business mechanisms at the dawn of the fourth industrial revolution so that our country won’t carry out “the chasing industrialisation» by an administrative method”, is the formulation correct?

Firstly, I don’t want to persuade anybody because I know that it’s hardly likely. Every person does what he or she understands. It’s very hard to influence it, expand it and, moreover, to transform it. This is particularly true for experienced people. Moreover, the more effective they were, the less likely it was to persuade them into something unusual. For this reason, I certainly don’t hope to be able to persuade somebody into something, but I am obliged to inform about those events, results of my analytics and research that these people probably just don’t see.

Secondly, I can only claim and express my personal position as much as possible. The second part of your question was the expression of my personal opinion that has formed for quite a long period and whose subject is the ratio of administrative and entrepreneurial development mechanisms, particularly the so-called chasing industrialisation.

Yes, now I have quite a strict position and think if we try to carry out new chasing industrialisation, which is third for Russian, with administrative methods, it is highly likely we won’t achieve any results at all.

It is a big and serious question if we will be able to switch or, so to speak, go back to the entrepreneurial model. If you ask me about the probability of an entrepreneurial manoeuvre, I will say that I thought it was highly likely 25 years ago, while now it seems to me that it is less likely that in the early 90s.

What can a functionary do? Three things: he can hold a meeting, write a letter and make a phone call. And that’s all it can do in a situation

This is explained by the fact that over 25% of the country’s economy during the “second bourgeois revolution in Russia”, in 1987-1997, were almost based on entrepreneurship from scratch. There were no restaurant businesses, no hotels 30 years ago, the mass media were completely different, 10-15 sectors were in fact recreated and constructed by small groups of entrepreneurs for a short period by historical standards. And pay attention to that it was relatively bloodless. Yes, there were expenses, of course, and quite considerably. But world history has a tiny number of bloodless transitions from socialism to capitalism.

Now, this per cent of entrepreneurship is reducing nationwide. And functionaries can do nothing any more. What can a functionary do? Three things: he can hold a meeting, write a letter and make a phone call. And that’s all it can do in a situation.

It is very easy to have 10% of annual growth when you catch up with someone with a low bar. But it is a risk, an experiment to have 1,5% of growth at the cutting edge when it’s unknown where to go

Complete knockout for the world economy

During the lecture, you said you doubted that China was the leader of the fourth industrial revolution. Why? And what countries do you think have a better prospect?

I can’t spell my intuition out. Yes, China, of course, has quite an active community process of small family entrepreneurship. But, unfortunately, it is more and more driven out by the activity of big corporations with a big share of domestic bureaucracy, which are very closely affiliated with the same administrative system, which we talked about.

What’s the key problem of such systems? If you see well where you should go, if somebody has already paved the way and already shown an example, the administrative model is very good to get to the point the one who is ahead at. Because the one who was the first to move by trial and error, while you don’t have to, you already know what you need. At the moment when the goals in the form of samples of activities are set, such resource mobilisation by means of the administrative apparatus is effective.

Now imagine that you came to the fore, you have nobody to copy, you have to show an example and do something new, while your entire system isn’t based on it.

It is very easy to have 10% of annual growth when you catch up with someone with a low bar. But it is a risk, an experiment to have 1,5% of growth at the cutting edge when it’s unknown where to go. This is why I think as soon as the Chinese choose a resource to copy, they will simply stud down in many areas. It will be a complete knockout for the world economy.