harnessed alongside appropriate public sector management and private<sup>sector</sup> development policies.

- Ignoring the S&T sector as a unique factor of production -- on a par with land, labor and capital -- is tantamount to ignoring the one resource which<sup>is the key</sup> to development and prosperity in the 21st century "knowledge economy."

- Emerging evidence from a recent OECD international survey shows<sup>that</sup> inherited inefficiencies and contracting budgets are combining not<sup>only to affect</sup> education access and quality but are beginning to have an adverse<sup>effecton</sup> student outcomes which in turn will affect the availability of a well<sup>educated</sup> supply of human capital, familiar with new technology and<sup>capableof</sup> economic creativity. If Russia does not act soon to reverse these trends, it could lose the one factor of production that is critical to success<sup>in the</sup> Knowledge Economy -- a well educated labor force that is capable of both consuming and producing world class knowledge.

How can Russia cultivate productive linkages between its S&T<sup>resourcesandits</sup> enterprises, especially given the preponderance in Russia of large<sup>industrialenterprises</sup> and isolated S&T institutions? The crucial lesson from Finland<sup>and Israel,amongothers</sup> seems to be that a successful S&T strategy should be integrated into<sup>anoverallprivate</sup> sector development and enterprise development/restructuring strategy.

This integration is currently lacking in Russia. The S&T sector does not have<sup>a history of</sup> communicating with the enterprise sector and responding<sup>toitsneeds.Butuntil</sup> investment in the enterprise sector gathers momentum, enterprises<sup>willnotgeneratean</sup> effective demand for Russian S&T. Thus, in many respects, "solving the Russian<sup>S&T</sup> problem" is inextricably linked to resolving the enterprise restructuring<sup>problem,with all</sup> that implies for improving the investment climate, improving public<sup>and corporate</sup> governance, reducing administrative barriers to entry and exit,<sup>improvingfinancial</sup> intermediation, improving creditor rights in bankruptcy,<sup>etc.Atthesame time, given</sup> Russia's historical legacy of institutional compartmentalization,<sup>specialattentionshould</sup> also be paid to developing linkages between the S&T<sup>sectorand enterprises.</sup> The objective should not only be to ensure that the process of restructuring<sup>theS&Tsector</sup> proceeds in pace with the process of restructuring the enterprise sector but<sup>to ensurethat</sup> the restructuring of the enterprise sector drives the restructuring of<sup>theS&T sector.</sup> This paper will examine the current status of the Russian S&T<sup>systemandthe</sup> government's proposals for reform. **Part I** will discuss the origins of the current problem. It will suggest that the Soviet Union bequeathed Russia with an ambiguous legacy in terms of S&T - a legacy of world class leadership<sup>inmanyfieldsof basic</sup> science and a laggard in almost all fields of industrial innovation.<sup>It will alsosuggestthat</sup> this legacy was not an accident, but an inevitable consequence of the<sup>Sovietsystem.This</sup> section will also discuss the evolution of the Russia S&T system in the<sup>ten yearssincethe</sup> break-up of the Soviet Union. Despite the profound changes that<sup>havetakenplaceto</sup> date, the paper will suggest that this has been primarily a process of<sup>changewithout</sup> transition and reform. Thus, despite the many policy initiatives<sup>thatwereinaugurated</sup> _-5-_