Tigran Sarkisyan 

Chairman of the Board of the Eurasian Economic Commission, Candidate of Economic Sciences, Prime Minister of Armenia (2008-2014), Chairman of the Central Bank of Armenia (1998-2008) 

DIGITALIZATION: A GAME CHANGER

The rapid advance of information and communication technologies in all spheres of people’s lives causes significant changes in the nature of production, and hence in trade and economic relations between countries and in integration.

In particular, we are witnessing the formation and successful operation of digital industrial platforms (DIPs) which ensure automatic coordination and optimization of interconnected activities of a large number of market players by eliminating unnecessary intermediaries. This leads to a sharp reduction in transaction costs and an increase in the speed of operations.

Thus, the DIP is a special, modern form of organizing the division of labor. The peculiarity of this form is also important given that it exists in the new economic reality, one of the main characteristics of which is as follows: the maximum added value is being created today in brand- new industries as well as industries that have been digitized, which leads to a sharp increase in labor productivity by linking industry-specific data with DIPs.

A good example of determination in developing a digital platform is the Chinese Alibaba Group (established in 1999, capitalization US$ 266 billion). The group consists of 14 digital platforms, including trading platforms oriented to the external and internal markets, as well as financial, logistics, customs and other platforms. Fostering economic growth, Alibaba Group plays an important role in promoting China’s economic interests worldwide, including the territory of the former USSR.

Using government support, transnational corporations similar to Alibaba Group from the United States, Europe and China have accumulated huge amounts of data and information, and a colossal scientific potential. According to the World Bank the global digital platforms are already abusing their dominant position.

DIGITAL ECONOMIC TRENDS

Assets in any traditional industries that have not been digitized are undergoing dramatic depreciation as the value of new digital assets is rising. Leading experts agree that within the next 15-20 years the world will see the widespread application of the platform-oriented business model and, in fact, the reformatting of the customary organizational structures of industry and trade.

Speaking of the ways in which the main trends in the digitalization of the world economy and trade have influenced the Eurasian Economic Union, one can say that our integrated marketplace has been losing consumers which migrate to the digital markets of other countries. For example, Aliexpress sends as much as 90% of parcels ordered as part of electronic cross-border trade by citizens of our countries, and generates about 50% of the cash flow. In addition, large Russian investors are investing in subsidiaries of similar corporations. Thus, we are already participating in this new digitalized world trading system and the main task facing us today is to occupy a proper place in it.

All the above trends have introduced a new logic not only into the systems of world trade and economy, but also into integration systems. The old models have lost their relative advantages, while new ones are in the process of being formed. No other way is possible since the existing models of integration were formed in the economic conditions, whose most important elements were the establishment of tariffs, the facilitation of customs procedures, the development of general rules of trade, etc. The current technological and digital leap has created its own integration logic based on technological platforms and solutions, digitalization and digital standards.

It should be noted that the development of the digital economy has led to the emergence of major new trends in the development of world trade and economic activity, in the division of labor, and in the industrial system. The key trends are as follows:

The world economy implements the so-called “smart management systems”, which, thanks to the automation and digitalization of production processes, manage those production processes, significantly reduce transaction costs, increase energy efficiency and identify marketing and trading advantages.

Thanks to digitalization, tens and hundreds of new specializations have appeared while some of the old ones have disappeared. This process runs so quickly that educational systems cannot keep up with the changes and the new sectors themselves often turn into education centers. A graphic example is the educational centers set up by the world’s largest IT corporations, whose graduates are valued on the market no less than graduates of top universities.

And, most importantly, brand-new industries have been created based on digital technologies. Some of the old industries are dying out, but some are being transformed through digital logic. The «digital share» in the cost of modern cars, for example, is steadily growing, and the cars themselves are turning into «smartphones on wheels,» as they were called in the article which appeared in The Economist.

It should be noted that the developed countries and some integrated unions have already formulated their digital agendas in order to accelerate the transformation of traditional industries and the transition to a digital form of interaction. The European Union has institutionalized the digital agenda as a separate direction of integration and approved the creation of the «EU Digital Single Market». The United States, Great Britain, South Korea, Singapore, Israel and others have announced their digital economy strategies and have been actively promoting them through international treaties and bilateral agreements. Many countries have identified their role in the division of labor in the digital economy.

NO ALTERNATIVE

The Eurasian Economic Union has yet to finalize and implement its digital agenda but we need to understand that no other way is possible. To be more exact, the only alternative is the establishment of full control over the Eurasian Economic Union’s digital marketplace on the part of the global players. And it is unacceptable for both the integrated union and the EAEU member states.

If the scenario outlined above is implemented we will run the risks of losing the digital sovereignty or the motivation for integration by reason of:

a) our trade and the free movement of goods being diluted by global markets;

b) our digitized domestic enterprises being connected to other countries’ DIPs;

c) our businesses and individuals using new digital solutions for financial services, including the bitcoin, created by foreign companies;

d) our highly skilled workforce being used for the development of new IT solutions for foreign DIPs which will retain most of the created added value.

Thus, the main risk boils down to the Eurasian Economic Union’s losing its competitive edge as global markets transform. The most effective way to limit the integration processes to the EAEU boundaries is the formation of the Union’s own DIPs in order to keep pace with the new digital revolution and maintain economic and technological independence.

OUR ADVANTAGES

The availability of huge amounts of data collected from the majority of the organizations within the government-controlled information system can be relatively advantageous for the swift implementation of this approach in our countries. It can become a springboard for building our own ecosystem for the EAEU’s digital platforms. Thus, in Russia alone there are 390 government-controlled information systems that annually collect several thousand different reporting forms from businesses. A side effect of building such an ecosystem will be turning the existing regulatory activities into algorithmic regulation which is transparent and does not require a huge administrative apparatus for its implementation.

The second advantage may be the existence of private initiatives in our countries, which have already been used to create our own markets and media platforms that may be involved in the process of building global DIPs on the basis of government- controlled private partnerships. This will enable us to attract domestic investors for the implementation of megaprojects, and to award contracts to our IT specialists including those working for foreign companies. The first echelon of such DIP megaprojects may include trading, logistics and financial platforms, while a possibility of organizing government procurement on the basis of such platforms can dramatically increase the attractiveness of integration and the market value of such projects.

Today the Eurasian Economic Commission is building an integrated information system for the interaction and coordination of state information resources and information systems (Article 23.3 of the Union Treaty). However, in order to adequately respond to the challenges and risks facing our young association we need a coordinated approach to our Union’s broad digital agenda. The EAEU statement on the digital agenda adopted by the heads of state on December 26, 2016 in the city of Saint Petersburg is an example of such approach.

Saint Petersburg’s Ways of New Industrial Development 

Interview of the president of the FES of Russia, Director of the Institute for New Industrial Development and ex-Chairman of the Committee for Economic Development of St. Petersburg Sergey Bodrunov, REGNUM News Agency. 

KNOWLEDGE ECONOMY

A person can work during the day at a factory, and give culinary advice online in the evenings. One person can occupy three jobs today, or sometimes vice versa. We still talk about creating «jobs». Even the presidential decrees stated the need to create 25 million jobs. This means, given the load, that we need to find 37-40 million people somewhere who will work in those jobs. Where can we find them? Who put this task in the decrees? Illiterate people. It is necessary to create competences, not abstract jobs. A job is a place where accessories and skills are concentrated while a competence is the person’s ability to «adjust» himself to a certain type of activity. A person, for example, can have the competence of a cook, and not just work as a cook at a particular nano hot food unit, be it «high- performance» or «high-tech»

Sergey Dmitrievich, what do you think should be the main outlines of the economic model for St. Petersburg? What are the main tasks to be set? 

— In today’s world, in order to understand what the economy of such a metropolis as ours needs, it is necessary to understand how the world economy is structured. It is necessary to have a dynamic picture to understand what market trends will exist in 10 years, what we should produce to be able to ride these trends and how to sell those products afterwards.

Besides, we must not forget that we are living during the information revolution. And this, among other things, means that the world is moving on towards a knowledge-intensive economy. Your gadget, which you are using to record our conversation, has less hardware than before, and more knowledge. The main characteristic is “the acceleration of the acceleration» of scientific and technological progress. The level and the importance of knowledge are growing in all aspects of production–from jobs to materials.

Does this mean that education becomes even more important than before? 

— Not only this. The character of work changes. Until quite recently, people could not actively combine different types of activities or jobs while today it is quite normal.

In this new economic situation, the importance of knowledge, mobility, plasticity of the workforce is growing. It is impossible to predict what jobs will be needed in 15 years, but it is possible to predict what competencies will be needed. And here we are faced with another problem: the quality of forecasting is not at the desired level. The economy is developing faster than we are able to comprehend the laws of its development and, even more so, to teach economics students accordingly.

DIGITALIZATION FIRST AND FOREMOST

On what points should the Saint Petersburg economic model focus in these new circumstances? 

— We need a new approach. It is necessary to answer the question: which local pieces of the global marketplace can develop faster than others. First of all, it is digitalization. President Putin spoke about this at the recent economic forum. Honestly, I nearly fell off my chair when I heard him say it. We spoke and wrote about this for 10 years, but everyone rejected this idea, because everyone wanted to operate the usual way: «jobs, machines, equipment.» Now everyone will start turning the other way. It is high time.

You are talking about high tech, but at the same time many experts and officials believe that the future of the city’s economy is not just digitalization but also tourism. 

— From a global perspective, tourism leads to a dead- end in terms of economic development. It is a dead-end for the same reason: digitalization. Let’s say, do you know what a palm tree looks like from above? Now you know it visually, and soon you will know and feel it palpably by means of virtual reality helmets and other similar gadgets. Already there is no need to take a selfie on the roof of a skyscraper, you will be able to see, and not only see–feel! — everything without a selfie. Digitalization will soon allow us to observe all the features of Saint Petersburg from any angle. And at the museum where I want to «go», my «digitized» guide will tell me all I want to know, not what he invented and not what someone dictated to him.

I will not only be able to see things, I will also be able to «talk» with those who were there before me. In the foreseeable 15-20 years we will be able, while at home, with the help of small devices, much smaller than a TV set, to see and feel much more than what we see now on tourist trips. Will it make sense for people to actually visit cities and towns? If not, who will need a powerful urban tourism infrastructure?

Now we receive lots of Chinese tourists who have not seen enough. But in about twenty years there will be almost no tourists anywhere. Just like there will be no drivers, guards, cash, and we will not have to close the doors. Because the importance of the material aspect and the associated social institutions will decline.

WHAT KIND OF CAPITAL WILL SAINT PETERSBURG BE?

Predictions based on the previous models of development of the city’s economy described Saint Petersburg’s role as either a financial or an auto- cluster capital. It did not work out. But what kind of capital should we ultimately become? 

— A Russian digitalization capital is exactly the kind of capital we should become. We have everything for it right here. Digitalization consists of two important components. The first is hardware, the second is intellect, software. This basis rests on several sub-bases: on the one hand, the production of certain materials, the production technologies and culture, and all the necessary infrastructure; on the other hand, brilliant mathematicians and engineers.

Unlike many other cities Saint Petersburg has everything to solve this problem. We have the country’s — or even the world’s — most prominent software experts. They are able to solve problems quickly and efficiently, and these solutions are then bought by businessmen from, say, the US, a country which is considered advanced in terms of the relevant industries. Now we experience a constant «brain drain» because of the absence of a proper level of demand. Demand implies the availability of money, benefits, support, and serious challenges. If these conditions are met, then all our «brains» will remain here, moreover–others will arrive.

As for hardware, we also have important technological achievements. Suffice it to mention the Technological Institute, Zhores Alferov’s projects, the Institute of Information Technology, Mechanics and Optics. We have «applied specialists» who know how to use this hardware–in the field of aviation, transport, energy. We have good universities that can train specialists in the necessary fields of expertise. In Soviet times there were examples of such task-setting, let us recall Akademgorodok. If we set this task now, if we create a special economic zone here, then this line of activity will pull the rest of the city’s economy after it.

You can add another important area–medicine and pharmaceuticals. The city is already engaged in this area of research and is doing it right. People, human capital, is an important component. To a great extent this capital depends not only on education (as I have already said) but also on the people’s health. Technologies for making people healthier, extending human lifespan and improving the quality of life will play an important role in the nearest future.

The framework of the city’s future economy can rest on these two elephants: digitalization and pharmaceutics. We must, of course, continue to support those enterprises (for example, energy companies) which will retain their importance for the city and for other industries in the next 10-15 years.

Digitalization of the marketplace is very important. Knowledge is the main economic resource of the future. And all the knowledge that we possess turns into information when we begin to work with it. The information must have a form that will allow it to penetrate everywhere. Digitalization allows you to put this on a technological basis. We immediately begin to move forward, because a technology is emerging: how to build a new life in which the knowledge capacity will be implemented through digitalization. Next, we need to understand in what directions should digitalization proceed. We need to find out which of the city’s enterprises are capable of solving these problems. We cannot just remove a particular enterprise from the federal program but we can set new tasks for it upon agreement with its management. So we will encourage the taking of advanced positions in these areas. Sooner or later we will accomplish these tasks one way or another, but if we do not start today, we will be late, and the market will be occupied. This is the most reasonable approach to planning the future economic life of the city.

What is to be done to not end up as we always do. 

The train of technological development is moving so fast that it is impossible to keep up with it and try to jump into the last car. Digitalization, understood as the universal implementation of digital information technologies, as going completely digital — is what the Russian authorities proclaim as a way to recover lost economic positions. If we think we can achieve some kind of acceleration through digitalization, it is, of course, true, but what exactly will we accelerate? What kind of economy? So, after the initial analysis of the proposed “digital” initiatives Russian economists made a number of important remarks on what may “not work” in the idea itself and, even more so, in the way it is supposed to be implemented. 

PROBLEMS OF  THE ECONOMY PROGRAM

Sergey Bodrunov, President of the Free economic society of Russia, Director of the S.Yu. Witte Institute of New Industrial Development 

The ministries are debating on a new draft government decree — who will manage the “digital economy” and how. The question is important: huge money in the future, great powers, etc. Ministry of Communications has prepared a draft government decree on the management system for the implementation of the Digital Economy program. For this, it has proposed to form an ecosystem with a center — an autonomous non-profit organization that will be responsible for the implementation of the program. As regards the participants of the program, they are the basic state corporations including Rostekh, Rosatom, etc. Unquestionably, they are competent firms possessing necessary knowledge, but the those responsible for the implementation are the same. Thus, program managers, those responsible for the implementation, and supervisors are all rolled into one. In my opinion, this leads to a conflict of interests.

There is also a draft government decree prepared by the Ministry of Economic Development concerning the ministry’s scope of authority. They have their own view. It is proposed to transfer all control to the Ministry of Economic Development, together with legal regulation. This is an important point, because a huge number of amendments has been made in regulatory acts, and someone should coordinate and supervise this process. That is, someone should control and coordinate the MED. And it is proposed that the Ministry of Communications be left in charge of strategic functions, research competencies, technologies, digitalization infrastructure, etc. It seems to me that this project is more rational.

I would not give preference to any specific directions of technological development in the digital/information sphere. And I would not approve of dwelling on only those things that are owned by our esteemed giant concerns. I myself am a trained IT specialist, and I can say that many things in this area seem to appear “out of nowhere”; today it is impossible to keep scientific process in rigid frames, it is impossible to develop technologies, especially digital ones, by simply pointing in various directions.

Having read the program, I believe that it keeps the risk that was reflected in the opinion of the Government’s expert council concerning its draft. There was this phrase: “… the proposed description of the program allows us to conclude that the goal of the project is not the fast-track development of the Russian Federation, but the desire to raise the level of digitalization of the country’s economy to the current level of a number of developed countries by 2025 … Such a position will lead to a situation in which by 2025 Russia will need to develop another program for the development of digital economy, since one of the fundamental characteristics of information technology is the rapid introduction of new technologies that cannot be foreseen today. “

Thus, for myself, I have isolated two big problems. One problem is the proposed approaches to the program, the second is program management. The success of the program and, given its importance and role for the country, Russia’s ability to join the team of 21st century economic leaders depend on how these two problems will be solved.

REALIZING THAT THE WORLD IS DIFFERENT

Sergey Kalashnikov, First Deputy Chairman of the Committee on Economic Policy of the Federation Council of the Federal Assembly of Russia, Chairman of the Interim, Commission on Monitoring Economic Development of the Federation Council, Doctor of Economics, Professor 

What is the government form of modernization? It seems to me that the question is purely rhetorical, and the answer is straight: unfortunately, the current government system is unable to provide a strategy for socio-economic development for the nearest future, even for a decade, not to mention until 2030. Such a strategy for socio-economic development should be proposed by December 2017. The current apparat cannot in principle prepare it for one simple reason: there is not even a general understanding of terminology, let alone the essence of those processes that await us in the future. I will give a concrete example concerning the confusion between two concepts. They are digital economy and new technological order. Digitalization is a kind of format of what already exists. And if it doesn’t exist, what is there to format? The ten platforms earmarked for digitization by the government don’t matter. Why? Because the digital format and the exchange of information on the basis of digital platforms imply new types of relationship among different agents. Let’s just digitize those existing old-school paper-based processes, let’s move from the adding machine to the calculator. That’s all.

Unlike digital economy, the new technological order is either not talked about in Russia or — I beg pardon –it is talked about, at every forum, but it’s only talk. In the past three years, all the forums — Yalta, Far East, St. Petersburg — talked about this. Question: “Does anyone hear these experts?” I think that even professional economists do not hear them.

After all, it is necessary to realize a colossal thing, absolutely strategic: for the first time, the economy and labor are shifting from processing materials at the expense of certain energy possibilities and technologies to processing information, that is, previously we used to take material, do something with it, end up with goods, and now we take information, do something with it and end up with information — this is a completely different type of work, different type of production. Many economists do not understand this completely, in my opinion, and this translates into the fact that the most important point, purely economic, is not raised. In the new economy, when it comes to new forms of production, the problem of pricing is quite different.

The problem of value has turned into a completely unresolved problem to date, and it is clear that for any economy the pricing problem is the key, without which economy can neither be managed nor made sense of. I want to say outright, that along with high tech and IT goods come social services, which also have no price. And the sphere of social services which have no pre- determined result and no price that could be determined objectively by any formula, is expanding. That is, in this area the traditional economy simply breaks down, but we, economists, do not talk about it at all.

Of course, the country’s breakthrough is quite possible even in the conditions of our economic backwardness. Do we have a chance? Yes, there is still a chance. For one simple reason — we are not alone in this failure to understand what will happen tomorrow, the failure to understand the fact that we are at a critical pivotal point. The absolute majority of countries, even those that have been actively financing various modern IT endeavors, haven’t comprehended these processes economically, i.e. in terms of economic theory. Here, we are on an equal footing with those countries, and we are no stupider than they, and the question is: when will we really start to care about this problem.

EVERYTHING IS GOOD IN ITS SEASON

Dmitry Sorokin, Academic Supervisor the Financial University under the Government of the Russian Federation, Corresponding Member of the Russian Academy of Sciences, Doctor of Economics, Professor 

It is clear that an economic model should be built on a certain technological component. It is true. But we are not talking about this technological component, we are still prioritizing. Remember how in 2001 we prioritized innovative economy? It was in the memorable Gref program. It said that “in 2007-2010 we will be switching to innovative economy”. Then we made modernization of economy a priority. Now we have prioritized digital economy.

I agree that although everyone understands the transition to digital economy differently, it is possible that this is exactly the shift in the productive forces, speaking in the old way, which, perhaps, will change the system of all socio-economic relations. I can only repeat the question that has already been asked: what economy are we going to digitize? Let me remind you that the term “digital economy” was not invented in Russia, as far as I understand. And in this regard, I remember a report that was read at a scientific session of the Russian Academy of Sciences in 2008. It was concluded that most of the countries with leadership positions in the high tech sector are currently in the fifth technological order with elements of the sixth, while the Russian economy is in the fourth technological order with elements of the fifth. After the 2009 crisis, after the 2010–2013 slowdown, after the 2014 standstill, after the crisis of 2015-2016 it is unlikely that the technological components have changed much.

And then I have a question: perhaps everything is good in its season? What technological order engendered the transition to digital economy, if it came from there? From the fifth to the sixth. We face a different task. Russia’s task is to complete the transition to the fifth order.

I’d like to remind you that, according to published statistics, the share of domestic machine tools and production processes in the Soviet Union’s military- industrial complex was 93 percent. What is it now? We have not even regained the peak level during the fat years, as compared to 2008, and we produce half as much compared to 2009, let alone 1991. And this is official statistics. On December 15, 2016 our esteemed Rossiyskaya Gazeta published the statement by the Deputy Minister of Industry and Trade Vasily Osmakov to the effect that the share of machine tool imports in civilian manufacturing industries was 88% during the nine months of 2016.

Why? We constantly change priorities. We ask ourselves: what good are machine tools when everything should be digitized? I do not in any way question the importance of increasing GDP growth rate, and the goal is to keep it on par with the rest of the world. But we should remember at all times what we are going to go on to achieve GDP no lower than the average by 2019-2020.

At one time during the twelfth Soviet five-year period, the last one, a concept was adopted according to which it was necessary to solve two tasks: to increase the rate of economic growth and, at the same time, to effect technological upgrading. The then director of the Institute of Economics of the Russian Academy of Sciences Leonid Ivanovich Abalkin said that from the scientific point of view, these tasks were incompatible.

Russia’s share in world exports of high-tech products is 0.3-0.4%. The share of enterprises that implement technological innovations is 8%.

The General Secretary of the Central Committee declared: “This is economic determinism.” Life has shown who was right. If we want re-industrialization we should set the goals correctly and formulate priorities of the strategy. Otherwise, it will all boil down to general words about the need for social well-being.

NO TECHNOLOGIES WITHOUT COMPETITION

Igor Nikolaev, Director of the Institute of Strategic Analysis, Financial and Accounting Consultants, Professor of the Higher School of Economics, Doctor of Economics 

I understand, it’s fashionable, and the president himself spoke about “digital economy”! But for some reason, I recalled nanotechnologies. If you look at the statistics on nanotechnology, it’s wonderful. Thus, 354 nanotechnologies were introduced domestically in 2010, and as much as 1116 in 2016. The number has increased more than three times. Great.

So it turns out that nanotechnology has grown several times while the technological level has remained the same. And we have the task set! If you look at the National Technological Initiative, the task there — I had to re-read it — is “to ensure global technological leadership of Russian companies by 2030-2035”. In one fell swoop! Global technological leadership in the world! Ambitious, to put it mildly. But when you look at this kind of statistics, when you analyze it, you can’t help wondering whether it is realistic.

The is: why did all this happen? Of course, I do not claim to know the full answer, but I am deeply convinced that the institutional environment in which these technologies are created and introduced, i.e. competition, is of great importance. What compels the

manufacturer to introduce new technologies? Necessity. If he fails to do it, he will go bankrupt. He doesn’t care about some targets imposed on him from higher up, or about the number of technologies, digital or otherwise, he is supposed to implement, he simply has to do it. If he doesn’t go digital, he will be pushed from the market.

We have underperformed in this area, to put it mildly. For many years there was no talk about competition, then we finally started talking about it, and then a draft National Plan for the Development of Competition was prepared. But it has been left in limbo for at least a year — in the government, in the ministries … Before taking the trip here, I looked it up once again: the draft has been getting the runaround since last August, it just cannot get approved. It is clear why: competition is complicated, it affects the interests of many, while reporting figures on the “digital” seems easier.

So that’s what we need to do first, because it’s an institutional environment, which is absolutely necessary. Only then will these digital, “nano” and other technologies develop. And not only develop, but also drive the Russian economy.