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Perm and Duluth — A Double Portrait

Is Russia simply ignoring market economy rules — and what makes it so difficult to gauge economic reforms?

December 7, 2003

Is Russia simply ignoring market economy rules — and what makes it so difficult to gauge economic reforms?

In the early 1900s, Duluth, Minnesota, was one of the fastest growing cities in the United States. Between 1900 and 1910, its population jumped from 119,000 to 211,000.

Located near one the world's most productive iron mines and at the west end of Lake Superior, Duluth seemed poised to become one of America's leading metallurgical centers.

The city's economic future appeared even brighter in 1915, after the United States Steel Corporation decided to construct a $20 million plant there.

Predictions that Duluth would surpass Pittsburgh, Chicago and Detroit as America's iron and steel capital were commonplace.

However, contrary to expectations, Duluth never became a metallurgical giant — for reasons of simple market economics.

Duluth's distance from major iron and steel markets — and an extremely cold climate — eventually made it less competitive in the U.S. and global marketplace than other similar cities in the United States.

Within a few years, its dwindling markets and declining production showed that, far from becoming America's next great industrial center, Duluth was serving as a textbook example of what was to be called "locational maladjustment."

In their now classic 1937 case study of Duluth, two economic geographers — Langdon White and George Primmer — highlighted the hidden costs associated with the city's location.

First, cold winters increased steel production costs. The long-term mean January temperature in Duluth is -13.9°C (7°F). But on average there is a 1-in-10 chance that January days will fall to -22°C (-8°F) or below.

In a climate with such extremes, equipment has to be specially modified to prevent water supply lines from freezing and to ensure that machinery continues to function.

Second, Duluth had higher labor costs — again a result of the cold climate, which necessitated a cost-of-living adjustment.

Finally, Duluth was at a competitive disadvantage relative to other American steel centers owing to its distance to markets and the higher transportation costs this entailed:

"The successful location of iron and steel plants is largely a matter of transportation costs, but not, as is so commonly assumed, of freight charges on raw materials only.

Transportation charges on finished steel to the point of consumption are equally, if not even more, significant. It is here that Duluth's weakness and Detroit's strength become apparent: Duluth, situated in a region where farming is the chief occupation, obviously requires little steel.

Detroit, capital of the automotive industry, is the largest consumer of high-finished steel in the world" (From White and Primmer 1937 study).

From the very beginning of its existence as an industrial center, Duluth was never in a position to become a leading producer of iron and steel. It was simply too cold and too far from the principal markets. The market clearly communicated this fundamental fact to both producers and consumers.

As a direct result, Duluth's economic and population base shifted after the 1930s, and it stopped growing. Today fewer than 250,000 people live in metropolitan Duluth (the Duluth-Superior MSA), not many more than in 1910.

Like Duluth, Perm in Russia began the twentieth century in relative obscurity. In 1923, with a population of 67,000, it was Russia's 31st largest city. But in the next ten years, it tripled in size.

By 1939 it was the 13th largest city in the country. Its rapid growth was the result of the development of the Soviet defense industry.

A dozen huge defense enterprises (with up to 30,000-40,000 employees each) were located in Perm in three distinct phases between the 1930s and the l960s.

Perm is an even colder place than Duluth. Its mean January temperature is a degree or so lower, and it experiences even more extreme low-temperature days. (In eight out of forty-two years Perm's average January temperature was below -18° C. Duluth had only one year that cold over the same period.)

Perm also shares Duluth's remoteness. Its location in the Ural Mountains places it far from customers elsewhere in Russia, as well as from those abroad.

In contrast to Duluth, however, the market was never allowed to send signals that Perm's cold climate and remote location were a disadvantage for either industrial production

Transportation, climate, and labor costs were never factored in as Soviet central planners and defense-industry specialists built and expanded the arms plants in the city. Consequently, whereas Duluth's population topped out at well under 300,000 before the 1930s, Perm's was just taking off at that point.

It eventually reached more than one million people. By 1970 the Soviets had ended their final defense buildup phase in Perm.

From then on, its growth slowed considerably, and in the l990s it finally stopped altogether as the new post-Soviet government radically demilitarized its economy. But by then Perm was already four times as big as Duluth had ever been.

Perm now stands as one of Russia's frozen dinosaurs, the world's fifth coldest city with a population of over a million people, bereft of the rationale that built it to such proportions in the first place.

Adapted from "The Siberian Curse: How Communist Planners Left Russia Out In The Cold" by Fiona Hill and Clifford Gaddy. Copyright © 2003 by The Brookings Institution. Used by permission of The Brookings Institution.