Growth & Backwardness in Late Tsarist Economy

Any discussion of the Tsarist economy must begin with a choice of standards of comparison. Virtually any measure of Russian economic activity circa 1914, held up against statistics from contemporary economies in Europe, portrays Russia as a deeply backward economy. From one perspective, that's the end of the story: even after a half-century of industrialization, often producing tremendous hardship for the ordinary people of Russia, the country was still far behind any Western standard. From another point of view, though, an internal comparison against Russia's own history makes late Tsarist economic performance look more impressive. One historian has characterised the Tsarist experience as an example of 'rapid industrialization in a "follower" country under conditions of great economic backwardness in relation to the aspirations of the political authorities' (Grossman 1973: 486).

There's no doubt about the transformative nature, though plenty of debate about the root causes, of the industrial burst that took place in Russia during the 1890s, under the influence of Finance Minister Sergei Witte's modernisation efforts. Annual growth rates for national output during these years were among the highest ever recorded in Europe to that time, averaging more than 7 per cent through most of the 1890s. A depression in 1900, followed by the war and revolution of 1904-5, slowed the economic progress. When the economy began to recover in 1907, the nature of its industrialization process became distinctly different from what it had been in the prior decade. Railroad construction by the government played less of a role in the economy, and increased military spending did not make up the difference. 'The conclusion is inescapable that, in the last period of industrialization under a pre-Revolutionary government, the significance of the state was very greatly reduced,' writes Alexander Gerschenkron. And this was good news, for a change in Russia: 'The retrenchment of government activities led not to stagnation but to a continuation of industrial growth' (Gerschenkron 1962: 21-22).

What direction might that industrialization have taken, had war and revolution not interrupted its progress? 'A French economist forecast in 1912 that if Russia maintained until 1950 the pace of economic growth that she had had since 1900 by the middle of the twentieth century she would dominate Europe politically, economically and financially' (Pipes 1990: 191). The subsequent economic-cycle theories of Nikolai Kondratiev and Joseph Schumpeter suggest maintaining such a pace would have been most unlikely, but the prediction gives some sense of how observers viewed Russia's economic performance at the time. A more sober assessment nonetheless suggests optimism: 'The Russia of 1914 possessed economic characteristics which suggest that industrial take-off of an autonomous and not unconventional type, though clearly not achieved, might at least have been imminent.' (Trebilcock 1981: 275).

What went right

Both structural and sectoral factors were involved in this brief era of modern economic success in Russia. Among them:

Structural soundness. Coming out of the trough period of 1900-05, Russia could draw on a macroeconomic structure conducive to recovery. The Witte 'system' had bequeathed the country an economy of sufficiently dynamic capital concentrations to make it subject to the positive as well as negative forces of the business cycle - and '[t]he recuperative power of a capital-intensive economy is greatly superior to that of its historical predecessors' (Gerschenkron 1962: 133).

Rapid rises in industrial activity, of a magnitude and duration suggesting they reflected genuine economic growth rather than any state-induced anomaly. National output numbers tailed off from the impressive gains of the 1890s but remained at a robust 6 per cent annual average. Micro-economic measures tell a more dramatic story -- the large increase in railway traffic from 1905 through 1913 for numerous commodities, including more than a doubling in coal and iron ore shipments as well as a 167 per cent increase in building material traffic (Trebilcock 1981: 263); the rise of 29 per cent between 1908 and 1913 in employment in large-scale industries (Gatrell 1994: 174).

Agricultural improvements. For decades, Russia failed to devote any of the manifold energies of state sponsorship to the largest sector of the economy. Following the 1905 Revolution, Premier Stolypin's reforms promised an invigoration of the agricultural market. In the event, the government and the gentry obstructed much of the possible progress. Still, 'the period 1907-14 can present real claims as one of the very few phases of successful agricultural advance recorded in Russia before the 1950s' (Trebilcock 1981: 259).

Consequent improvements in the petty economy, shown by a healthy growth in the kustar sector by 1914, providing 'a much-needed broadening of the Russian economic base' (Trebilcock 1981: 263). Perhaps this counteracted the potential for Luddite opposition to further industrialization, given the competitive pressures on traditional industry. 'The northern peasant … had traditionally earned a large portion of his supplementary income from household industries. This source of income began to dry up with the development of modern mechanical industries. The crude cloth, shoes, utensils or hardware produced in cottages during the long winter months could not compete either in quality or price with machine-made products. Thus at the time when the peasant stood in greatest need of supplementary income he was deprived of it by industrial competition' (Pipes 1974: 168).

The kustar growth suggested the opening, at long last, of a meaningful market for manufactured consumer goods; in 1890, this demand was estimated at a tiny 17 rubles per capita (Carson 1959: 117), and Gerschenkron concedes that right up until the war, 'limitations upon the peasants' purchasing power for industrial products were a serious obstacle to the industrialization of the country.' However, he says the argument made in a number of 'populist' histories that 'industrial development in Russia… if started, was bound to founder in the shallowness of the 'internal market'' - turned out not to be correct because the government had substituted for consumer demand under Witte's policies (Gerschenkron 1962: 123).

New engines of growth. Railroad and armament expenditures did not keep up with announced plans, but 'the pattern of substitutions was changing rapidly. To some extent banks stepped into the vacuum left by the state.' (Gerschenkron 1962: 133)* [*Peter Gatrell appears to differ with Gerschenkron's interpretation of the role of armament expenditures. He argues that 'industrial recovery was a by-product of rearmament,' but concurs that Tsarist industrial policy aims had nothing to do with the recovery: 'So far as the old regime was concerned, the revival of industry occurred in a fit of absence of mind' (Gatrell 1994: 163)]. Foreign equity capital also filled the void, rising to more than 40 per cent of total common stock capital in the country by the eve of the war (McKay 1970: 25).

Russia made a 'smooth assimilation of modern banking methods' as investment banking became a major factor in Russian business (Trebilcock 1981: 271). Meanwhile, private commercial banking thrived; the total of deposits, capital and current accounts in private banks tripled between 1905 and 1912 (Trebilcock 1981: 274). 'The paralysing atmosphere of distrust began to vanish, and the foundation was laid for a different kind of bank. Gradually, the Moscow deposit banks were overshadowed by the development of the St. Petersburg banks that were conducted upon principles that were characteristic not of English but of German banking.' (Gerschenkron 1962: 21-22).

Improvements in human capital. There are suggestions that a higher-calibre workforce was becoming available to Russian industry. In 1895 less than 40 per cent of Russia's military recruits were literate. By 1913, that figure had reached 68 per cent. At the upper level, a boom in technical and business study abroad by young Russians, along with a well-established learning process at the feet of Western experts involved in Russian industry (Trebilcock 1981: 268).

Brakes on optimism

There are countervailing elements, as well as alternative ways of viewing some of the positive factors in late Tsarist growth, which cumulatively call into question just how bright an industrial future Russia might have enjoyed if war and Bolshevik rule had not come to pass. 'Autonomous preconditions' indicating a takeover of the state's former substitution role in the economy 'do not fully emerge' from the performance data, according to Clive Trebilcock: 'they are uncompleted, or they are counterfeited by what is in fact a revised form of institutional "substitution", or they are mimicked by foreign participation.' (Trebilcock 1981: 280). To the extent the government did purchase industrial goods, its interventions 'were distributed very unevenly' and 'were not based primarily upon cost or quality considerations. Everyone understood this' (McKay 1970: 269). Further, taxation was regressive, and it was rising. Including profits from the alcohol monopoly, per capita taxation rose 77 per cent from 1900 to 1913 (Kahan 1967: 462). Half the ordinary revenue of the state came from the liquor monopoly and railroad operations. Although Russia had just begun to reduce sovereign debt levels, its national debt stood second in the world in absolute terms (Carson 1959:130-131). By 1913, the level of domestic consumption of industrial products remained very low. Agriculture remained dominant in this supposedly industrializing economy. Until 1911, grain continued to account annually for roughly half of all exports (Carson 1959: 121). And concentration of modern resources was a problem: there was 'a great degree of concentration of industry and banking in very large corporations in the main cities, but very little spreading of financial and industrial activity to smaller towns and to rural areas' (Blackwell 1974: 37).

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