Here’s a question. If country X grows its economy 1% faster than country Y over ten years, what’s the difference in outcomes?

I previously looked at Serbia and Zimbabwe in this sense, trying to calculate the True Costs of Stupidity:

Thus the Cost of Milosevic(ism) can be accurately measured. It is the space between the two lines of a simple graph of total GDP measured over time:

  • one line shows Serbia’s actual awful performance
  • the other line shows what Serbia would have achieved by growing at an average of 3% a year over the past seventeen years. (Note: a conservative estimate – of course it could have done a lot better than that with common sense leadership and policies.)

To calculate that gap, a mathematician uses the Trapezium rule. In Serbia’s case the ‘opportunity cost’ of Milosevic and Milosevicism now runs towards hundreds of billions of dollars.

It is no exaggeration to say that Milosevicism in all its forms delivered a set-back to Serbia from which it will never recover. There is no conceivable chance of Serbia growing faster than Slovenia for the decades required for Serbia to ‘catch up’ the ground lost in the past seventeen years.

The political costs of this madness also have compounded up. Montenegro and Kosovo have broken away – had Serbia developed to its natural potential they could be clamouring to stay with Serbia and share its success.

That’s right. Within only a few years the ‘opportunity cost’ of frittering away growth opportunities for reasons of political vanity mounts up to staggering levels, even in a small and relatively poor economy. I recall Serbia’s finance minister making this point to me: thanks to Milosevic and NATO and sanctions and the whole mess, Serbia had experienced far greater losses in proportional terms than Germany in WW2. Western assistance programmes after Milosevic fell might look large, but they were a drop in the ocean compared to what Serbia had lost.

If the opportunity cost of stupidity runs into hundreds of billions of dollars for small Serbia, what about the cost to Russia of its reckless policies in Ukraine? How would one start to calculate the numbers?

Poland’s Radek Sikorski (now Marshall of the Polish Sejm) tackled that very question in a recent speech at Harvard University. He started by looking at how well Russia has done by joining the ‘world of rules’ after the Soviet Union collapsed:

Freed from decades of self-inflicted communism, Russia has joined the global economy as a normal country. And it has seen the benefits. Russia’s GDP was a feeble $570 billion in 1990. By 2013 Russia’s GDP has grown to $2.1 trillion.

So, in the years following the end of the Cold War, did NATO and EU governments show unwavering hostility towards Russia? Did we cynically ‘take advantage of Russia’s weakness’? Have we been ‘humiliating’ Russia? I answer those three questions in three words. No. No. And no.

The record since the Berlin Wall came down shows NATO and the European Union and their individual member states all working hard, and in good faith, to build normal, purposeful relations with Russia. And it shows that Russia itself benefiting hugely from this support.

He then looked at what happens if Russia’s economy takes a sustained hit from sanctions:

The international response to Russia’s policies has been restrained. It has been designed to raise the cost to Russia of undermining Western institutions. The policy is working, up to a point.

Russia’s president has just admitted that the price his country is paying is high. Let’s run the numbers again.

In the decade from 2002-2012, Russia’s economy grew on average by 5% per year. Russia, like Poland, was integrating with the global economy, and seeing very positive results. If Russia were to grow at the same rate from now until 2025, its GDP would be in 2025 $3.7 trillion– up from today’s $2.1 trillion.

If instead Russia grows at only 1% over the next decade, which seems to be the case this year, because of sanctions and because of global mistrust of its intentions, its GDP in 2025 will be far less – $2.3 trillion.

Therefore, cumulatively over the decade, Russia will have lost the staggering sum of over $8 trillion! Its leaders have decided to gamble with their own citizens’ lives and hopes, by looking to the past, not the future. Some of Russia’s citizens are wondering whether this enormous price is worth paying – and what Russia is getting for it?

These figures of course represent a bleak scenario. But even if Russia manages (say) 3% growth per annum over the next decade after a bit of a slump in the next couple of years, the wealth lost by not maintaining its early successful growth path will run into trillions of dollars. It’s a big economy, and a big economy underperforming means a LOT of lost opportunity.

In practice that will mean that Russia’s awful health and social services carry on being awful for far longer than necessary. Many tens of thousands of Russians will die unnecessarily through poor procedures, grotty medical treatment, dangerous roads and insane accidents. President Putin’s latest long speech did not honestly address these strategic problems caused by his own policies.

The iron laws of compound interest also apply to us. Debt levels in far too many areas are soaring out of control as welfare state policies become steadily more unaffordable on both sides of the Atlantic:

As Robert Lucas showed, “a government that is credible—that is, a government that makes itself understood and believed—can quickly end a major inflation without a big increase in unemployment.government credibility will cause people to quickly adjust their expectations”.

But the corollary of that is that wild and sustained government stupidity as we are seeing in so many places and policy areas can lead to people adjusting their expectations – and behaviour – in wild and persisting stupid directions:

The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else…

True. But at least Radek Sikorski has done the Russian people a favour by attempting to explain just how much Putinism could cost Russia in the next ten years. If smart Russian economists disagree, maybe they might explain why he’s wrong?