Finding evidence that businesses are created in times of economic expansion is important because much of the policy debate about diversification is based on the assertion that few emerge. As the argument goes, Russia does not seem to produce much beyond what it has produced in the recent past. This claim is used to support direct intervention to help new economic activities emerge. But one of this study’s hypotheses is that emergence may not be the problem, rather that sustainability is what is lacking in the Russian economy. Therefore, addressing sustainability may be the central economic issue for diversification: it means making sure that efficient firms that emerge in booms survive downturns. Thus, reducing volatility in economic output is a good way to improve their chances of survival.

# LITERATURE

Interest in growth and volatility largely began with macroeconomic studies on booms and busts and the divergence of long-term economic growth between low- and high-income countries. These studies showed that the “peaks-and-valleys” unsustained growth and volatility, characterize lowperforming, poorer countries. Poorer economies tend to have high variances in growth rates across time. In comparison, better economic performers are less volatile and are characterized by “peaks and plateaus”—no valleys (Pritchett, 2000).<sup>3</sup> The current study extends this look at booms and busts, or surges and slumps as they are referred to here, to understand the effects of these on industry and firm-level dynamics.

This study is also closely related to the emerging literature on the links between volatility and economic structure. This new literature points to a reverse causality between a relative lack of diversification and economic volatility. Koren and Tenreyro (2007)<sup>4</sup> decompose volatility into three components: sector-specific shocks, country shocks and covariance between the two to show that less developed countries experience greater growth volatility due to increased concentration in volatile sectors. Moore and Walkes (2010),<sup>5</sup> show that less diversified economies have higher rates of output, investment and consumption growth volatility.

This study explores volatility to question the sustainability of Russian economic growth and whether this type of growth can generate economic diversification. While volatility may hinder economic diversification, at the same time, a lack of diversification characterized by increasing concentration of economic output into a few sectors and/or a few firms may increase the chances of more volatility of this economic output. Breaking this cycle may require concerted effort, maybe from policymakers, but it first needs to be identified, confirmed and then better understood. This study makes progress on identification and understanding.

> 3 Pritchett, Lant (2000) “Understanding patterns of economic growth: Searching for hills among plateaus, mountains, and plains”, _World Bank Economic Review,_ 221–50.

> 4 Koren, Miklós, and Silvana Tenreyro. "Volatility and development*." _Quarterly Journal of Economics_ 122.1 (2007): 24387. Print.

> 5 Moore, Winston, and Carlon Walkes. "Does industrial concentration impact on the relationship between policies and volatility?" _International Review of Applied Economics_ 24.2 (2010): 179-202. Print.

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