The Politics of Inequality in Russia 1107422248, 9781107422247

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The Politics of Inequality in Russia This book investigates the relationship between the character of ­political regimes in Russia’s subnational regions and the structure of earnings and income. Based on extensive data from Russian official sources and ­surveys conducted by the World Bank, the book shows that income inequality is higher in more pluralistic regions. It argues that the relationship between firms and government differs between more democratic and more authoritarian regional regimes. In more democratic regions, business firms and government have more cooperative relations, restraining the power of government over business and encouraging business to invest more, pay more, and report more of their wages. In more ­democratic regions, average wages are higher and poverty is lower, but wage and income inequality is also higher. The book argues that the rising inequality in postcommunist Russia reflects the inability of a weak state to carry out a redistributive social policy. Thomas F. Remington is Goodrich C. White Professor of Political Science at Emory University. He has taught at Emory since 1978. He is the author of numerous books and articles, including The Russian Parliament: Institutional Evolution in a Transitional Regime, 1989–1999, The Politics of Institutional Choice:  Formation of the Russian State Duma (coauthored with Steven S. Smith), Parliaments in Transition, The Truth of Authority: Ideology and Communication in the Soviet Union, Building Socialism in Bolshevik Russia, and a textbook on Russian politics, Politics in Russia. Remington is a former member of the board of directors of the National Council for Eurasian and East European Research and of the board of directors of the American Association for the Advancement of Slavic Studies. He is Advisor for Russia Workshops for the East-West Parliamentary Practice Project, based in Amsterdam, and he has planned and directed a series of workshops for parliamentarians in a number of cities in Russia since 1993. His research focuses on the development of political institutions in postcommunist Russia, including parliamentary ­politics, legislative-executive relations, and labor market and social welfare institutions. In addition to courses dealing with Russian ­political development, he teaches courses in comparative political institutions and comparative political and economic reform.

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“Tom Remington’s fine new book begins with an unexpected finding: At the subnational level in post-transition Russia, more democratic regional regimes tend to have higher income inequality than more authoritarian ones. More democratic regions do perform better in most respects: Earnings and tax receipts are higher, poverty lower, government more consultative with business and less predatory; whereas authoritarian regional regimes have lower wages and tax receipts, higher poverty, and governments that are exclusionary and predatory toward business, but still more equal income distributions. In a deeply researched and methodologically creative study, Remington identifies the political factors contributing to this conundrum, focusing on government-business-labor relations, communist welfare state legacies, and the inability of Russia’s weak state to implement effective redistributive policies, and considers the implications for Russia’s future politics, stability, and place in the international system.” – Linda J. Cook, Brown University

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The Politics of Inequality in Russia

Thomas F. Remington Emory University

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cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Tokyo, Mexico City Cambridge University Press 32 Avenue of the Americas, New York, ny 10013-2473, usa www.cambridge.org Information on this title: www.cambridge.org/9781107422247 © Thomas F. Remington 2011 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2011 Printed in the United States of America A catalog record for this publication is available from the British Library. Library of Congress Cataloging in Publication data Remington, Thomas F., 1948– The politics of inequality in Russia / Thomas F. Remington. p.  cm. Includes bibliographical references and index. isbn 978-1-107-09641-7 (hardback) – isbn 978-1-107-42224-7 (paperback) 1.  Income – Russia (Federation).  2.  Income distribution – Russia (Federation).  3.  Poverty – Russia (Federation).  4.  Wealth – Russia (Federation).  5.  Equality – Russia (Federation).  6.  Democracy – Russia (Federation).  I.  Title. hc340.12.z9i5162  2011 339.2′20947–dc22    2010052775 isbn 978-1-107-09641-7 Hardback isbn 978-1-107-42224-7 Paperback Additional resources for this publication at www.cambridge.org/us/9781107422247 Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate.

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Contents

List of Figures List of Tables Preface 1. The Political Sources of Income Inequality in Russia 1.1.  Inequality and Globalization 1.2.  Income Inequality in the United States and Russia:  Toward Convergence 1.3.  Democracy and Inequality 1.4.  Explaining Inequality in Russia 1.5.  State Capacity and Regional Diversity 1.6.  The Argument 2. Employment, Earnings, and Welfare in the Russian Transition 2.1.  The Soviet Social Contract 2.2.  The 1990s: Informalization and Decentralization of Wages and Welfare 2.3.  Labor and Social Partnership 2.4.  Reform and Recovery, 1998–2008 The Single Social Tax The Labor Code of 2001 Monetization of In-Kind Social Benefits Pension Reform Minimum Wage Economic Crisis, 2008–2009 2.5.  Conclusion 3. Regime Diversity in the Russian Regions 3.1.  Antireform Regimes: Neopatrimonialism and Autarky Primorsk Ulyanovsk Kaliningrad

page vii ix xi 1 2 4 14 22 29 31 35 40 46 53 58 62 63 64 67 69 72 75 77 91 91 94 96 v

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Contents 3.2.  Market-Adaptive Regimes: Pluralism and Coordination Perm’ Yaroslavl’ Samara

97 97 101 103

4. Democracy and Inequality in the Russian Regions 4.1.  Democracy, Income, and Output 4.2.  Wages, Social Spending, and Social Dependency 4.3.  Dynamic Effects 4.4.  Other Sources of Income and Employment 4.5.  Conclusion 4.6.  Variables and Sources 5. Regional Regimes and the Labor Market: Evidence from the NOBUS Survey 5.1.  The NOBUS Survey Categories of Benefits Adjustments for Prices and Household Size 5.2.  Predicting Variation in Individual Income 5.3.  Household Cash Income 5.4.  Household Level of Analysis (Total Adjusted Wage and Social Income) 5.5.  Aggregating to the Regional Level 5.6.  The Distribution of Household Incomes by Region 6. Helping Hands or Grabbing Hands? Government-Business Relations in the Regions 6.1.  Models of Enterprise-Government Relations 6.2.  The BEEPS Data 6.3.  Regional Regimes and the Business Environment 6.4.  Validity Checks 6.5.  Conclusion 7. Accounting for Regime Differences 7.1.  Elite Discretion 7.2.  Uncertain Sources, Uneven Impact 7.3.  Organized Pluralism 8. After the Crash

110 112 118 122 125 128 130

Index

135 136 137 139 139 142 142 146 147 152 153 156 161 168 169 172 175 177 189 201 217

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Figures

1.1. Gini index of income inequality, United States and Russia, 1992–2008 1.2. Income distribution by quintile, Russia and United States, 1998–2008 1.3. Decile ratios, United States and Russia, 1995–2008 1.4. Official reported poverty, United States and Russia, 1992–2008 1.5. Gini index, 1987–2005: Selected postcommunist countries 1.6. Average regional real incomes, 2006 and 1995 2.1. Median regional employment, unemployment, poverty, and output rates, 1990–2008 2.2. Median regional wage, pension, and income as multiples of subsistence minimum 2.3. Median regional poverty and inequality rate 2.4. Median regional nominal wage, pension, and subsistence minimum, 1995–2006 2.5. Ratio of wage to pension income by region 4.1. Predicted income and inequality levels by democracy score 4.2. Predicted real wage by democracy score 4.3. Predicted social expenditures by democracy index, 2004 4.4. Predicted social income share by democracy score 4.5. Predicted real income, 2005, by interaction term 4.6. Predicted inequality, 2006, by interaction term 4.7. Predicted share of income from property by democracy score 5.1. Predicted earned income of employed persons by region by democracy score 5.2. Predicted cash income of household by region by democracy score 5.3. Predicted total household income by democracy score 5.4. Predicted mean social share of household income 5.5. Predicted mean household wage income of top decile

page 6 7 8 8 9 29 37 39 39 68 69 116 119 121 123 125 126 129 141 143 145 148 148 vii

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5.6. Predicted mean total household income of top decile 6.1. Predicted incidence of bribes by region 6.2. Predicted affordability of courts 6.3. Predicted likelihood of investment growth 6.4. Percent of time managers spend talking with officials 6.5. Ease of obtaining information about law 6.6. Consistency of interpretations of laws, regulations 6.7. Regulatory uncertainty 6.8. Problems with tax administration 7.1. Predicted democracy score, 2001–2006, by literacy rate, 1926 7.2. Predicted democracy score, 2001–2006, by literacy rate, 1897 7.3. Competitiveness of governor’s race, 1996, by predicted democracy score 7.4. Turnout in governor’s race, 1996, by predicted democracy score 7.5. Party saturation, legislative elections, 1996, by predicted democracy level 7.6. Distribution of democracy scores by administrative status of region 7.7. Democracy score by enterprise dispersion, 1990 (by employment) 7.8. Democracy score by enterprise dispersion, 1990 (by output)

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149 163 164 164 165 166 166 167 168 179 179 181 181 182 185 193 194

Tables

1.1. Determinants of Average Regional Real Wage, 2000 page 28 2.1. Incomes and Social Benefits by Source and Type 41 2.2. Selected European Country Gini Indexes, Mid-1980s 43 2.3. Nonmonetary Social Benefits, NOBUS Survey, 2003 49 4.1. Determinants of Democracy 113 4.2. Predicted Vote for Yeltsin, April 1993 Referendum 114 4.3. Predictors of Income and Inequality, 2006 115 4.4. Effect of Democracy Score on Gross Regional Product per Capita 118 4.5. Predicted Real Wage, 2005, by Democracy Score 119 4.6. Predicted Social Expenditures, 2004, by Democracy Score 121 4.7. Predicted Social Dependency Rate, 2006, by Democracy Score 122 4.8. Effect of Interaction of Democracy and Income in 1990s on Income in 2000s 125 4.9. Effect of Interaction of Democracy and Inequality in 1990s on Inequality in 2000s 126 4.10. Descriptive Statistics 134 5.1. Cash Benefits 138 5.2. Individual Wage Income 141 5.3. Household Cash Income 142 5.4. Household Spending 143 5.5. Predicting Total Household Income 144 5.6. Household Wage Income 145 5.7. Household Social Income 146 5.8. Share of Social Income in Household Total Income 146 7.1. Democracy Score, 2001–2006, by Regional Literacy Rates 178 7.2. Democracy Levels by Pre-Soviet Development Levels 180 7.3. Democracy Scores by Territorial Administrative Status 185 7.4. Ethnic Composition and Modernization as Predictors of Democracy Scores 186 ix

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7.5. Ethnic Heterogeneity and Modernization as Predictors of Democracy Scores 7.6. Ethnic Heterogeneity Interacted with Share Non-Russian as Predictors of Democracy Scores 7.7. Ethnic Fractionalization Scores by Territorial Administrative Status 7.8. Democratic Over- and Underperformers

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The Politics of Inequality in Russia Thomas F. Remington Book DOI: http://dx.doi.org/10.1017/CBO9780511973024 Online ISBN: 9780511973024 Hardback ISBN: 9781107096417 Paperback ISBN: 9781107422247

Chapter Preface pp. xi-xiv Chapter DOI: http://dx.doi.org/10.1017/CBO9780511973024.001 Cambridge University Press

Preface

This study began out of a nagging curiosity about the nature of income inequality in Russia. Why did it rise so sharply after the transition from communism, and why has it stayed so high? Is income inequality in Russia driven by similar forces to those that have been deepening inequality in the United States for the last three decades? What are the effects of democratization on inequality? My initial assumption was that, generally speaking, where democratic political institutions were more effective, inequality would be lower, although whether this was a result of redistribution after market forces had yielded an initial differentiation of earnings, or affected the very structure of earnings, seemed an open question. I also wanted to understand the three-way interaction among inequality, democracy, and that diffuse, intangible quality of public life that is often termed “governance.” Governance is a multifaceted concept, arguably too diffuse to be treated as a single concept at all. As Daniel Kaufmann and his associates at the World Bank Institute treat it, it is a way of characterizing “the set of traditions and institutions by which authority in a country is exercised.”1 This is reasonably broad, but the multiple studies of governance carried out by the World Bank Institute team have demonstrated that assessments of the quality of six sets of institutions by which governance is defined tend to be well correlated, and in fact help predict countries’ economic performance. A number of studies have suggested that high inequality subverts governance, thus in turn harming the long-term prospects of economic development. My simplistic notion starting this study was therefore roughly as follows:  Early ­democratization and market reform in Russia, as in other postcommunist countries, had brought about an initial explosion of inequality as wages were decompressed, but with time, more democracy would gradually bring down inequality through the provision of public goods (such as education and public health care) that would equalize conditions for the population, as 1

Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi, Governance Matters 2006: Worldwide Governance Indicators (Washington, DC: World Bank Institute, 2006).

xi

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well as through redistributive mechanisms such as effective pension coverage, unemployment assistance, and poverty relief programs. If at the national and subnational regional levels, more democratic regimes undertook policies that succeeded in reducing inequality, in turn, governance would improve, and with it the country’s ability to take advantage of economic opportunities. Where governments failed to reduce inequality, on the other hand (perhaps because they fell captive to powerful “early winners” that sought to lock in the rents from the initial liberalization and privatization efforts), persistent inequality would subvert governance and injure the country’s prospects for economic development. My reasoning was similar to the argument that Eric Uslaner makes about the effect of inequality on corruption. Even though inequality itself has a relatively weak relationship with corruption, he finds, it acts to undermine basic trust, the ability to trust people other than family and close friends, and thus to undermine faith in the rule of law. This syndrome of generalized mistrust then increases corruption, which then feeds back onto inequality by perpetuating the gap between haves and have-nots.2 Similarly, my basic expectation about Russia was that democratization would lower inequality (at least over time), and that lower inequality would improve governance. Improved governance would produce both higher growth and a more equal distribution of its benefits, reinforcing democracy. I decided to test this argument by taking advantage of the diversity of regional regimes within Russia itself, which have been extensively studied by both Russians and outsiders. In particular, the degree to which the regional regimes reflect democratic characteristics has been measured systematically by a team of experts based in Moscow, who, through their network of contacts in the regions, were able to code each region’s regime by scoring each of ten attributes on a fivepoint scale. I discuss this rating system in more detail in Chapter 1. Suffice it to say here that their scores are widely used and generally trusted. I proceeded to collect a substantial body of data on incomes, income inequality, wages, and a host of social and economic conditions for each region from the early 1990s through the present. Much of this data comes from Russian official sources, as well as from World Bank–sponsored studies of incomes and of government-business relations. In some cases, I have employed regional-level data collected and shared by other scholars, including the measure of the level of democracy in each region. To my surprise, I found that it was the regional regimes scoring highest on the democracy scale that have the highest income inequality – even after controlling for other factors that are related to income inequality (such as natural resource wealth). Generally, regions with higher incomes have higher income inequality. But even after accounting for the effects of income, more democracy is positively associated with higher inequality. Trying to understand the causal ­pathway for this effect led me to study the political forces that shape the structure 2

Eric M. Uslaner, Corruption, Inequality, and the Rule of Law (Cambridge: Cambridge University Press, 2008).

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of employment, wages, incomes, and welfare region by region. My conclusions remain tentative, necessarily, because not all links in the chain of reasoning are amenable to measurement and empirical verification. The evidence, however, is reasonably strong, and the pieces of the argument fit together. Briefly, I conclude that: 1. The effect of democracy on income inequality runs through earnings, not post-tax or post-transfer policy. Where wage differentiation is greater, that dispersion translates directly into income inequality. 2. More democratic regimes are those where the political authorities have institutionalized greater participation in decision making by economic and social elites and maintain more consultative relations with local firms. They have accepted some constraints on their power to confiscate the gains of business, including greater media freedom and electoral competition. Less democratic regimes not only block competition and consultation in the political arena, but they are also more predatory toward local enterprises. 3. Regions with more cooperative relations between government and regional firms encourage managers to pay higher average earnings. Earnings are higher at both the lower and the higher ends of the spectrum, and there is greater dispersion between the lower and upper ends of the distribution than in lower-wage, lower-democracy regions. Thus this decompression of earnings appears to improve wages for both ­lower-paid and higher-paid employees, but at the cost of greater inequality. Poverty and social dependency are higher in less democratic regions. Small-business development and other indications of secure property rights are stronger in more democratic regions. 4. Some portion of the higher inequality of earned incomes in the more democratic regions is a function of their greater openness. In other words, it may be that income inequality in less democratic regions is also high, but that much less of earned income is reported to the authorities, taxed, and returned to the public in the form of collective goods and redistributive transfers. But because the practice of under-the-table earnings is not amenable to systematic study, only to anecdotal reports, I have no direct evidence of this. However, it is worth noting that the current economic crisis in Russia is driving more and more earned income back into the shadows, which will certainly increase inequality. 5. Finally, even though the more democratic regional regimes seem to have done a better job of adapting the regional economies to the conditions of market competition, they did so at the expense of allowing some of Russia’s inefficient giant industrial firms to survive, often because the life of an entire city or region depends on it. This left Russia’s economy susceptible to the devastating effects of the global 2008–2009 crash. This book addresses the political determinants of income inequality in Russia rather than its short-term or long-term consequences. It is certainly contrary

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to my initial expectations to find that it is the more democratic regions where inequality is greatest. However, because this effect runs through the organization of the labor market, which is deeply embedded in the institutional matrix of state-business relations in each region, the implications are not straightforward. On the evidence I have examined, the prospect for a reduction in income inequality over time in Russia rests on three factors: how wages are distributed in the labor market, how much redistribution there is through government taxes and transfers, and how open versus how informal wage payment is. I agree with Vladimir Putin and Dmitrii Medvedev that the level of income inequality in Russia at present is much higher than is good for Russia’s long-term economic and social performance, and that it would be in Russia’s interest for a middle class to expand at the expense of the poor and the rich. However, achieving a reduction in income inequality will require changes in the structure of power in the labor market (in particular, greater collective-bargaining capacity on the part of employees across enterprises), more effective representative institutions so that the producers of wealth have some assurance that their taxes are going to benefit the larger public good rather than lining the pockets of corrupt officials, and a public commitment to open and honest reporting of incomes. If the current economic crisis works to bring these changes about, its effect will be salutary. In writing this book, I have incurred more than the usual number of debts. It is a pleasure to acknowledge my gratitude to Daniel Berkowitz, Linda Cook, Lev Freinkman, Tim Frye, Jennifer Gandhi, Vladimir Gel’man, Henry Hale, Tomasz Inglot, Jana Kunicova, Edmund Malesky, Stanislav Markus, Nikolai Petrov, Mikhail Pryadil’nikov, Alexander Remington, Elina Treyger, and Xin Zhang, as well as two anonymous reviewers, for comments on some portions or all of the manuscript; for research assistance by Dimitry Doohovskoy, Alexander Remington, and John Reuter; for statistical advice by Marcus Alexander, Nealia Khan, and Adam Okulicz-Kozaryn; for data shared by Rudiger Ahrend, Daniel Berkowitz, Scott Gehlbach, Nikolai Petrov, Elina Treyger, and Ekaterina Zhuravskaia; and for a Senior Fellowship from the Davis Center at Harvard University, which made possible much of the research on which this book is based and provided a wonderfully stimulating and collegial atmosphere in which to write it. This book is dedicated to Jill Adler and Vladimir Podoprigora, cherished friends and colleagues in the work of the East-West Parliamentary Practice Project in Russia.

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The Politics of Inequality in Russia Thomas F. Remington Book DOI: http://dx.doi.org/10.1017/CBO9780511973024 Online ISBN: 9780511973024 Hardback ISBN: 9781107096417 Paperback ISBN: 9781107422247

Chapter 1 - The Political Sources of Income Inequality in Russia pp. 1-34 Chapter DOI: http://dx.doi.org/10.1017/CBO9780511973024.002 Cambridge University Press

1 The Political Sources of Income Inequality in Russia

Income inequality in Russia has almost doubled since the end of the communist era. It has risen in waves: first as a sharp burst in the early years of the transition; then, following a decline in the late 1990s and early 2000s, it rose again slowly and steadily for much of the 2000s as incomes increased for all strata but more rapidly for those at the upper end of the scale. The deepening of inequality in the 1990s and 2000s also had a strong regional dimension as some regions prospered whereas others were stuck in poverty. The economic crisis of 2008–2009 halted the growth of incomes and cost millions their jobs. Since incomes leveled off more at the top end than the bottom, the crisis has also temporarily halted the increase in inequality. As of 2008, Russia’s Gini index stood at 42.3, same as in 2007, according to the state statistical agency, whereas the ratio of the income of the top decile to that of the bottom was 16.9 (up from 16.8 in 2007). The richest quintile received about 47.9% of total income, the same share as in 2007. Overall inequality in Russia is comparable to that of the United States and greater than that of most other postcommunist countries – comparisons we will explore in more detail later. First, however, let us consider what the trends in income inequality in Russia tell us about the political and economic transition the country has undergone since the end of the communist regime. At first glance, it might appear that the growth in income inequality in Russia is simple to explain. In the early years of the transition, 40% or more of the population fell into poverty as a result of unemployment, the lag of earnings behind prices, and the failure of the state social safety net. Meantime a small number of well-positioned individuals gained enormously from the transition. The economic recovery following the 1998 financial crash briefly narrowed the gap between rich and poor. Then the prolonged boom of the 2000s raised incomes across the board but boosted those at the top faster than those at the bottom. Similarly, in both waves, interregional differences widened. Regions that entered the postcommunist era with usable endowments of natural resources and human capital and that were centers of trade and banking benefited disproportionately from the opening to a market economy, whereas regions that lacked these advantages lagged. 1

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The Politics of Inequality in Russia

Political institutions have also shaped earnings and incomes by determining the minimum-wage level and the degree of redistribution effected through taxation and social spending. These political mechanisms operate both at the federal level and at the level of each of Russia’s eighty-three federal territories, called “subjects of the federation.” The far-reaching decentralization of power in the 1990s brought about wide differences in governing arrangements at the regional level following the end of the planned economy. Formal and informal institutions of coordination and consultation among government, business, and labor varied widely from one region to another. Inherited endowments of human and physical capital changed much less rapidly than did the political relations among policy makers, enterprise directors, and other organized actors. These relations, I intend to show, were reflected in considerable variation in income levels and distribution, social welfare spending, poverty rates, investment, and overall economic performance. Thus analyzing the political sources of income inequality operating at the regional level sheds light on the structure of power in the postcommunist state more generally. This is the task I undertake in the present study. 1.1.  Inequality and Globalization Russia is certainly not the only country in the world to experience rising income inequality over the past two decades. The growth of inequality in many developed and developing countries has engaged the attention of scholars and policy makers around the world. The older conviction that economic development would bring about a convergence of incomes across and within societies has faded with the realization that global inequality has grown in recent decades, whether measured by mean national income or aggregated globally across households.1 The dramatic rise in mean incomes in China and India mitigates the trend toward rising inequality by the first measure but not the second. The once widely accepted Kuznets economic growth model predicted that inequality within societies would first rise and then decline with industrialization. The reasoning was that the early stages of development would see higher returns to capital than to labor, where in later stages of economic development, the returns to skilled labor would increase relative to the returns to capital. This would raise the share of wage income in Gross Domestic Product (GDP) and thus reduce the gap in income between workers and owners of capital. Convergence, however, has been elusive, both within and across countries. Branko Milanovic observes that since 1960, rich 1

Branko Milanovic distinguishes among three distinct measures of global inequality:  by simple unweighted measures of inequality across national mean income levels; inequality among ­population-weighted national income means; and as a global aggregate where all households or individuals in all countries are treated as if they belonged to a single society. Branko Milanovic, Worlds Apart: Measuring International and Global Inequality (Princeton, NJ: Princeton University Press, 2005).

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The Political Sources of Income Inequality

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countries have tended to remain rich and poor countries to remain poor, and most countries in the middle have tended to lose ground.2 The Asian countries are the exception. Globally, treating all households as if they belonged to a single society, Milanovic calculates that the Gini index of inequality rose from 61.9 in 1988 to 65.2 in 1993 and fell slightly to 64.2 by 19983 – a level roughly equal to that of Brazil. He speculates about the consequences of living in a world with a shrinking middle class: Only 17% of the world’s population lives on incomes that fall within 75% and 125% of the world median income.4 Given the persistent growth of inequality within and across national societies despite increases in the mean incomes of developed and many developing societies, the World Bank recently concluded “that no straightforward relation between income and inequality can be established.”5 Instead, institutional factors affecting the relative bargaining power of labor and capital in the marketplace and the ideological orientation of governing coalitions determine whether earnings differentials in the labor market are high or low, how progressive the tax structure is, and how much government welfare policy equalizes incomes.6 Russia’s transition to a market economy occurred at a time of intensified worldwide competition in markets for finance, labor, products, and ideas. Russia not only replaced a system of state ownership and central planning with one oriented to private ownership and market competition, but exposed its economy to the same forces of globalization that have affected all countries in recent decades and that, in many, have tended to widen income differentials. Globalization widens the gap between the relative returns to human and ­physical assets. A large literature has demonstrated that the economic returns to skill and education are growing everywhere relative to the returns to unskilled labor.7 Many fear a “race to the bottom,” as countries compete in the international marketplace by reducing their tax and social spending obligations and suppressing wage levels and other production costs. The literature shows that, except in the East Asian newly industrializing countries (NICs), greater exposure to international trade and investment tends to increase income and Milanovic, Worlds Apart. Milanovic, Worlds Apart, 108. 4 Milanovic, Worlds Apart, 128. 5 World Bank, Governance Matters 2006: A Decade of Measuring the Quality of Governance (Washington, DC: The World Bank, 2006), p. 44. 6 Gøsta Esping-Andersen, The Three Worlds of Welfare Capitalism (Princeton, NJ: Princeton University Press, 1990); Peter A. Hall and David Soskice, Varieties of Capitalism:  The Institutional Foundations of Comparative Advantage (New York:  Oxford University Press, 2001); Torben Iversen, Capitalism, Democracy, and Welfare (Cambridge: Cambridge University Press, 2005); Jonas Pontusson, Inequality and Prosperity: Social Europe vs. Liberal America (Ithaca, NY: Cornell University Press, 2005). 7 Claudia Goldin and Lawrence F. Katz, The Race between Education and Technology (Cambridge, MA: Harvard University Press, 2008); Dani Rodrik, The New Global Economy and Developing Countries: Making Openness Work (Washington, DC: Overseas Development Council, 1999). 2 3

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wealth inequality within countries.8 Dani Rodrik cites Chile as a particularly notable example: “During the period of liberalization, the Gini coefficient in Chile registered a 12-point increase (from 0.46 in 1971 to 0.58 in 1989), one of the largest jumps ever witnessed in any country over such a short period.”9 In the United States, Goldin and Katz argue that trends in wage inequality reflect “a race between education and technology”: Advances in technology bring relative gains in the return to education, but periods of rising levels of educational attainment mitigate the resulting wage inequality, whereas periods when educational attainment levels stagnated – as has been the case since the early 1980s – have seen renewed increases in wage inequality.10 In the case of Russia and other postcommunist states, globalization deepened the shock of the transition from state socialism to capitalism. Globalization’s impact on income and income inequality depended on the way economically relevant assets (natural resources, physical capital, and human capital) were distributed at the point of transition. The end of price controls on many products and liberalization of markets resulted in rapid short-term differentiation in incomes by region, social stratum, or economic branch as the relative value of assets shifted markedly. For example, the ability to sell natural resources on world markets gave the holders of those assets the opportunity to realize windfall profits and sharply raise the earnings levels of workers and managers in the energy sector. A similar boom in financial activity in the 2000s pushed salaries of managers in the financial sector through the roof: As of early 2008, the starting salary of the director of a financial institution in Russia was around $120,000 per year, more than the base salary of a government minister, and fourteen times greater than the average compensation in the country.11 Meantime, industries and regions built around obsolete production technology and high production costs could not survive except through heavy government subsidies. The same point applies, albeit less dramatically, to the relative value of human capital on the global marketplace: Those with professional and managerial skills that could be applied to the new conditions benefited, whereas many strata (including some that had been relatively favored under the old system) possessed skills that were ill-suited to the new environment. Aggregated across the workforces of enterprises, branches, and regions, these differentials in the relative market value of inherited human and physical assets contributed to sharp increases in income inequality in Russia and other postcommunist countries. 1.2.  Income Inequality in the United States and Russia: Toward Convergence It is instructive to compare Russia with the United States with respect to income inequality. In inequality, if in little else, the old prediction of convergence Rodrik, The New Global Economy: 13. Rodrik, The New Global Economy: 14. 10 Goldin and Katz, The Race between Education and Technology. 11 Polit.ru, March 6, 2009, citing figures from a survey of 185 firms in several branches. 8 9

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between the two countries has been realized. The United States and Russia are alike both in the overall level of income inequality and in the distribution of income shares by population quintile. Both have far outpaced their peers in inequality: The United States’ level of inequality is greater than that of every other advanced industrial democracy, and Russia’s inequality is greater than that of nearly every other postcommunist country. To be sure, the differences are also considerable. Not only is personal income in the United States about three times that of Russia, but the trendlines differ between the two countries. In the United States, inequality has risen gradually and steadily since the late 1970s, whereas in Russia, it has risen in waves – a sharp hike in the 1990s was followed by a brief leveling off, then a slower rise in the 2000s. In the United States, after a period following World War II when inequality fell, a protracted period of rising income inequality since the 1970s has brought the Gini index for aggregate household income inequality from 39.7 in 1967 to 46.6 in 2008.12 As many observers have pointed out, the increase in inequality is above all driven by a sharp increase in incomes at the high end. Between 1979 and 2002, the average after-tax income of the richest 1% of Americans more than doubled, from $300,000 (in 2002 dollars), to more than $630,000.13 By the end of the 1990s, the top 10% of income earners received more than 40% of all income (up from about 30% immediately after World War II); the top 1% earned about 15% of all income.14 Piketty and Saez show that the increase in inequality is primarily driven by increases in the earnings of the top 10%, and particularly the top 1%, rather than changes in the earnings at the bottom. Inequality in the distribution of wealth is even more skewed than inequality in income: The top 1% of American households hold 38% of the wealth.15 By 2006, Saez finds that the top decile in the United States received 49.7% of total income, a higher level of income concentration than at any time since 1917.16 Moreover, income volatility has risen even more U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage: 2008,” U.S. Department of Commerce, Economics and Statistics Administration (Washington, DC, 2009), p. 30. The Gini index represents a cumulative total deviation from perfect equality of distribution of a given quantity such as income. A society in which income was distributed completely equally, such that every person or household received the same share, would have a Gini index of 0. A society in which a single person or household received 100% of the income would have a Gini index of 1 (100%). Therefore, the Gini index is technically expressed as a percentage between 0 and 1. For simplicity’s sake, however, it is often expressed as an integer between 1 and 100. I will follow the latter convention in this book. 13 Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution & the Erosion of American Democracy (New Haven, CT: Yale University Press, 2005), p. 112. 14 Thomas Piketty and Emmanuel Saez, Income Inequality in the United States, 1913–1998. NBER Working Paper Series (Cambridge, MA:  National Bureau of Economic Research, 2001), pp. 60, 62. 15 Jacob S. Hacker, Suzanne Mettler, and Dianne Pinderhughes, “Inequality and Public Policy,” in Inequality and American Democracy:  What We Know and What We Need to Learn, ed. Lawrence R. Jacobs and Theda Skocpol (New York:  Russell Sage Foundation, 2005), pp. 156–213, esp. p. 164. 16 Emmanuel Saez, “Striking It Richer:  The Evolution of Top Incomes in the United States (Update using 2006 preliminary estimates),” March 15, 2008, unpublished manuscript. 12

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50 45 40 35 30 United States Russia

25 20 15 10 5

07

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Figure 1.1.  Gini index of income inequality, United States and Russia, 1992–2008. Source:  United States: U.S. Census Bureau, Current Population Survey, 1968–2009 Annual Social and Economic Supplements. Table A-3: Selected Measures of Household Income Dispersion, 1968–2008, http://www.census.gov/hhes/www/income/histinc/ f04.html; Russia:  Federal Service for State Statistics, http://www.gks.ru/free_doc/ new_site/population/urov/urov_32g.htm (last accessed January 3, 2010).

rapidly than inequality. The severity of oscillations in household incomes over a lifetime has grown as a result of the deterioration of shock absorbers such as health insurance protection and unemployment insurance. Both risk and reward, in short, are more unevenly distributed across the population. As a result, struggles over redistributive policies have grown intense and have fueled political conflict between the two major parties.17 Postcommunist Russia has undergone an increase in income ­inequality greater in magnitude than the United States, and over a far shorter span of time (the Gini index rose from about 29 in 1992 to 42.3 in 2008) (see Figure 1.1). But from different starting points, the two countries have reached comparable aggregate levels of income inequality. Figure 1.1 shows the trends in the ­estimated Gini indexes for the two countries (the U.S. figure reflects household income dispersion).

17

Larry M. Bartels, Unequal Democracy:  The Political Economy of the New Gilded Age (Princeton, NJ:  Princeton University Press, 2008); Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Polarized America:  The Dance of Ideology and Unequal Riches (Cambridge, MA: MIT Press, 2006).

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50 Russia: top quintile U.S.: top quintile Russia: 4th quintile U.S.: 4th quintile Russia: 3rd quintile U.S.: 3rd quintile Russia: 2nd quintile U.S.: 2nd quintile Russia: bottom quintile U.S.: bottom quintile

40

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93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

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Figure 1.2.  Income distribution by quintile, Russia and United States, 1998–2008. Source:  United States: U.S. Census Bureau, Current Population Survey, 1968–2009 Annual Social and Economic Supplements. Table A-3: Selected Measures of Household Income Dispersion, 1968–2008, http://www.gks.ru/free_doc/new_site/population/ urov/urov_32g.htm (last accessed January 3, 2010).

More striking is the similarity in income distribution by quintile. In both countries, the increase in inequality has come about because the income of the richest quintile has risen whereas the incomes of the middle and poorer strata have remained flat or declined. The result is that the distribution of incomes by quintile in the two countries is nearly identical, with around half of the income going to the richest top 20% of the population and 3–5% going to the poorest quintile (see Figure 1.2). If we focus on another measure of inequality, however, the ratio of the income of the 90th percentile of the population to that of the poorest decile, Russia has pulled away from the United States (Figure 1.3). On the other hand, the two countries have converged in their levels of poverty. Figure 1.4 indicates that poverty has tended to fall in Russia to the point where the official reported share of the population living below the poverty threshold was virtually identical to that of the United States. Both countries stand out among their peers for their high levels of inequality. Although inequality in wage and salary incomes (sometimes called “market income inequality”) has risen in other capitalist economies beside the United States, incomes after taxes and transfers remain significantly more unequal in the United States than in other Organization of Economic Cooperation and Development (OECD) countries. According to Brandolini and Smeeding, most OECD countries “experienced a modest increase in the inequality of disposable incomes in the latter 1980s through the 1990s, but then showed a

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18 16 14 12 10 8

United States Russia

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Figure 1.3.  Decile ratios, United States and Russia, 1995–2008. Source:  See Figure 1.2. 40.0 35.0 30.0 25.0 20.0

U.S. Poverty rate Russia Poverty Rate

15.0 10.0 5.0

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

0.0

Figure 1.4.  Official reported poverty, United States and Russia, 1992–2008.

flattening trend as they approached the end of the century.”18 They conclude that “national policies and institutions can and do make a difference … the 18

Andrea Brandolini and Timothy M. Smeeding, “Patterns of Economic Inequality in Western Democracies: Some Facts on Levels and Trends,” PS: Political Science and Politics 39:1 (2006): 24.

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50 Belarus Bulgaria Estonia Hungary Kazakhstan Kyrgyz Republic Latvia Lithuania Poland Romania Russia Slovenia

40

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0 1987–90

1993–94

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Figure 1.5.  Gini index, 1987–2005: Selected postcommunist countries. Source:  World Development Indicators.

United States appears an outlier with the least effective redistributive policies either at a point in time or over the past 25 years.”19 The Gini index of income before government taxation and spending (“pre-fisc income”) in France is 49, in Germany 43, in the United Kingdom 45, in the Netherlands 42, in Belgium 50, but the highly redistributive taxation and spending policies of continental Europe bring post-fiscal income inequality down significantly compared with the United States (29 in France, 25 in Germany, 37 in the United Kingdom, 25 in the Netherlands, 26 in Belgium).20 Alesina and Glaeser also note that the minimum wage in the United States is lower relative to the average wage than in Europe, and that the poorest strata are much poorer relative to the median than are the poor in Europe.21 Likewise, Russia’s level of income inequality is higher than that of most of its postcommunist neighbors. Figure 1.5 compares Russia with eleven other postcommunist countries, using World Bank Gini index figures, which for Russia tend to be lower than those reported by Russia’s state statistical service. Inequality rose in all the postcommunist societies that opened their economies to market competition, but Russia stands out even among the former Soviet states: No country underwent a steeper initial rise, and Russia remains the highest in the group (see Figure 1.5). The World Bank estimates are substantially lower than Russia’s own reported inequality figures, but the trends are clear:  Inequality resumed its Brandolini and Smeeding, “Patterns”: 26. Timothy M. Smeeding, “Public Policy, Economic Inequality, and Poverty: The United States in Comparative Perspective,” Social Science Quarterly 86:S1 (2005): 972. 21 Alberto Alesina and Edward L. Glaeser, Fighting Poverty in the US and Europe: A World of Difference (New York: Oxford University Press, 2004), pp. 38, 47. 19

20

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growth in Russia in the 2000s (as it did in some other postcommunist countries), and Russia’s aggregate level was the highest in the region. Obviously the economic processes driving the changes in the distribution of incomes are very different in the United States and Russia, and the two countries differ sharply in their levels of income and development. GDP per capita in 2007, using the purchasing power parity method and expressed in current international dollars, was 45,592 in the United States and 14,690 in Russia. Mean nominal per capita income in dollars in 2007 was about $6,000 in Russia, whereas mean real income in the United States in the mid-2000s was $33,000.22 Russia underwent a wrenching decline in incomes and living standards in the 1990s as a result of the transition from communism, and then experienced a decade of 7–8% average annual increases in economic growth from 1999 to 2008 before succumbing to the global economic crisis. Russia’s economic performance therefore has not only occurred at a much lower level of overall economic development, but has been far more volatile than in the United States. Notwithstanding the differences, the rising gap between rich and poor is a concern for policy makers in both countries. In his address to the State Council on February 8, 2008, President Putin declared that the current level of income inequality in Russia was “absolutely unacceptable” and should be reduced to more moderate levels; he called for measures that would bring about an expansion of the middle class. Its share of the social structure, he declared, should reach 60% or even 70% by 2020.23 The co-chair of one of the discussion clubs of the dominant party, United Russia, commented in November 2008 (after the effects of the worldwide economic crisis were beginning to be felt) that “the crisis is a chance for the middle class, to protect it against excessive taxes and collections. Maybe the crisis will force us to build a country of the middle class, and not a country of rich and poor, such as Russia has always been. It is necessary to create the possibility for every office employee to start his own business, to become master of his own future.”24 Soon after this, another United Russia leader echoed the same thought: “[T]he so-called office plankton, and ordinary working stiffs, are the first victims of the crisis; but in fact they are the guarantee of the future of Russia as a normal European country, a country in which there are no longer any rich or poor.”25 Shortly GDP figures from WDI. U.S. median household income figures from OECD: http://stats.oecd. org/Index.aspx?QueryId=11112&QueryType=View; Russian income figure from Regiony Rossii: Sotsial’no-ekonomicheskie pokazateli, 2008, Table 5.2, http://udbstat.eastview.com. ezp-prod1.hul.harvard.edu/catalog/readbook.jsp?issue=818876. The Russian figure is estimated on the basis of an average per capita monthly nominal ruble income of 12,601 and an exchange rate of 25 rubles to the dollar. 23 Quoted from Vladimir Putin’s address to an expanded session of the State Council, February 8, 2008, “On the strategy of development of Russia to 2020,” http://president.kremlin.ru/text/ appears/2008/02/159528.shtml 24 Polit.ru, November 20, 2008. 25 Polit.ru, November 27, 2008. 22

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thereafter, the Kremlin’s political strategist, Vladislav Surkov, gave a speech in which he went so far as to quote Barack Obama and to call the middle class “the silent heroes” of society: those who save money for a new refrigerator or an apartment, “owners of ordinary housing, modest cars, small companies,” as well as doctors, teachers, officers, skilled workers, rural specialists, state employees, and office workers. The wealthy, he said, have done well under the transition. The state’s task now is to save the middle class during the ­current crisis.26 Inequality has also been a source of growing concern in the United States. In 2004, a task force of the American Political Science Association published a report addressing the question of “Inequality and American Democracy.” The task force concluded that inequality was threatening democracy: “Disparities of income, wealth, and access to opportunity are growing more sharply in the United States than in many other nations, and gaps between races and ethnic groups persist. … Failure to take urgent and concerted steps to expand political participation and enhance democratic responsiveness  – and failure to use democratic means creatively to temper rising social disparities  – will surely endanger our longstanding democratic ideals at home and undermine our country’s efforts to spread the hope of equal citizenship abroad.”27 Rising inequality also figured as an issue in the 2008 presidential campaign. In a 2008 article published before he became president, Obama’s first director of the National Economic Council, Larry Summers, wrote: From 1979 to today, those in the bottom 80 percent of the income distribution lost 7 percent of their real annual income. Those in the top 1 percent gained 7 percent of their real annual income  – and 43 percent of all their income was attributable to the shift in income distribution – in other words, to greater inequality. The magnitude of the transfer is $640 billion for the top 1 percent – or a gain of nearly $600,000 per family – and a decline of $7,000 for each household in the bottom 80 percent of the distribution.28

Immediately after the election, President Obama formed a White House task force to address the stagnation in earnings of the middle class as a result of the rise in inequality. In February 2010, the task force released its first report, noting that even though income and productivity had risen markedly in recent years, the benefits were confined to a small stratum of high-income households: The well-documented increase in income inequality during these years [2000 to 2007] suggests that much of [the increase in income] accrued to households

Vedomosti, December 1, 2008. American Political Science Association Task Force on Inequality and American Democracy, “American Democracy in an Age of Rising Inequality,” (Washington, DC: American Political Science Association, 2004), pp. 1–2. 28 Lawrence H. Summers, “The Economic Agenda:  Challenges Facing the Next President,” Harvard Magazine (2008): 29. 26 27

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The Politics of Inequality in Russia in the top reaches of the income scale. … In the most recent year of available data – 2007 – over 23 percent of income was held by the top 1 percent, the highest level of income concentration since 1928, the year before the market crash that began the Great Depression. In other words, there is strong evidence that a major cause of the middleclass squeeze is the wedge of inequality: the fact that, at any given level of growth, a smaller share of the benefits of that growth is flowing to the middle on down.29

The comparison of Russia and the United States is more than an allusion to Cold War-era convergence theory. It can be argued that the similarity of income inequality levels in the United States and Russia has some common sources. Apart from the legacy of military and political competition that still burdens their economies, the two countries share three features that help account for the fact that both have markedly higher levels of income inequality than other countries at comparable levels of development. First, in both, government fiscal policy is relatively nonredistributive; in both, political resistance blocks impulses to make taxation more progressive and to use social policy for redistributive ends. In both countries, in recent years, the earned incomes of the highest-paid groups have diverged from those  of middle and lower-wage groups at the same time that the marginal rates of taxation of incomes have become regressive (Russia has a flat income tax of 13%), while government spending policies have only weak redistributive effects. As a result, in Russia and the United States, most of the inequality of earnings (and other pre-tax, pre-transfer sources of income) carries over into post-tax and post-transfer income inequality. Second, organized labor in both countries is weak, with the result that inequality in earnings in both is high. Only 12.3% of American wage and salary employees are members of trade unions;30 for Russia, although nominal membership is much higher, most union members have very weak ties to their unions (a survey in one region found that only 15% of workers considered themselves union members).31 The Gini index of pre-tax income in the United States in the mid-2000s was about 45; that for earnings from the principal place of employment for employed persons in Russia was about 42.32 Much comparative literature has shown countries with dense, centralized labor Annual Report of the White House Task Force on the Middle Class, http://www.whitehouse. gov/blog/2010/02/26/our-annual-report-and-growing-support-our-middle-class-agenda (accessed September 9, 2010). 30 Figure for 2009 from the U.S. Bureau of Labor Statistics: http://www.bls.gov/news.release/ union2.nr0.htm 31 Ol’ga Morozova, “Profsoiuzy ne pomogaiut,” Vedomosti.ru, July 8, 2008. 32 U.S. figure from Timothy M. Smeeding, “Public Policy, Economic Inequality, and Poverty: The United States in Comparative Perspective,” Social Science Quarterly 86:S1 (2005):  972; Russian figure calculated by author from the NOBUS sample, 2003, using rspread utility in STATA. This is the Gini index for reported earnings from the primary place of employment for all individuals in the sample who had at least some earned income. 29

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federations have lower inequality in wages than countries where organized labor is less powerful.33 In the next chapter we shall examine the relatively limited role that organized labor in Russia has played in structuring earnings and fiscal policy. Finally, both countries are larger and more diverse than their peers. Larger countries tend to have higher inequality both due to spatial disparities and to weaker redistributive mechanisms. Alesina and Glaeser find that countries with larger land areas tend to be less redistributive in their policies (and to have social attitudes less favorable to redistribution).34 Aggregate income inequality of several other large, diverse countries (such as India, Brazil, and China) is comparable to that of the United States and Russia.35 The parallels between the United States and Russia, particularly the fact that each is an outlier among a peer group of countries that are comparable in terms of political and social development, suggest that simple economic explanations of inequality centering on the relative value of asset endowments in the face of globalization are insufficient to explain cross-national differences. To understand inequality in a given country, we need to look more closely at the way economic, social, and political forces intersect. The present book attempts to do so in the context of postcommunist Russia. I do not propose a general theory of income inequality in Russia, still less in contemporary societies generally. But by identifying the political factors shaping trends in incomes and income distribution in Russia, I do offer a theory about the way political institutions affect incomes, income distribution, income growth, poverty, and social spending. This I do by analyzing variation in incomes and income distributions across Russia’s regions – its “subjects of the federation.” These regions differ from one another in their social and economic development even more widely than do American states, and the divergence has widened in the 1990s and 2000s. Measured by the coefficient of variation (the ratio of the standard deviation of a distribution to its mean, which yields a dimensionless statistic useful for comparing dispersions of a value across widely different settings), the diversity of Russia’s regions with respect to their average incomes is about twice as great as in the United States and close to that of China, India, and Jonas Pontusson, Inequality and Prosperity:  Social Europe vs. Liberal America (Ithaca, NY: Cornell University Press, 2005); David Rueda and Jonas Pontusson, “Wage Inequality and Varieties of Capitalism,” World Politics 52 (2000):  350–383; Jonas Pontusson and David Rueda, “The Politics of Inequality: Voter Mobilization and Left Parties in Advanced Industrial States,” Comparative Political Studies 43:6 (2010): 675–705. Note, however, that a recent paper by Scheve and Stasavage finds no evidence that over the long run, wage or income inequality in OECD countries was affected by the existence of centralized wage bargaining institutions or by the partisan composition of government. They suggest, instead, that levels of pre-tax and post-tax income inequality may be affected by the ways states respond to economic and international crises. Keneth Scheve and David Stasavage, “Institutions, Partisanship, and Inequality in the Long Run,” World Politics 61:2 (2009): 215–253. 34 Alesina and Glaeser (2004): 212–213. 35 The Gini indexes in 2005 were:  for Brazil  – 56.4, for China  – 41.5, and for India  – 36.8, according to the World Bank’s World Development Indicators. 33

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Brazil. (See Table A.1 in the Appendix [available on the website associated with the book] on regional disparities in income for Russia, U.S., Brazil, China, India.) According to the 2007 United Nations National Development Report, some regions of Russia were at a level of human development comparable to that of Central Europe, whereas others were closer to an African level.36 In Russia, Moscow had a mean income nearly six times the (regional) subsistence income in 2005, whereas in Tuva, one of the poorest regions in the country, mean income was only 30% higher than the (regional) subsistence minimum. Thus income inequality across Russia’s regions is considerably greater than that across the American states, although inequality within the regions is comparable to that found within the American states. 1.3.  Democracy and Inequality The political sources and consequences of inequality have been studied extensively in political science. Many classic and recent studies of the relationship between development and democracy emphasize the importance of inequalities in income, wealth, and life opportunities for the stability and character of political regimes. Samuel Huntington – echoing Kuznets – warned of the destabilizing implications of development: “[I]n the short run … the immediate impact of economic growth is often to exacerbate income inequalities.”37 Seymour Martin Lipset, in his famous 1959 article on the “Social Prerequisites of Democracy,” compared developmental levels by examining mean incomes, but emphasized the importance of how incomes and wealth were distributed for the political consequences of development:  Rising incomes could raise instability by sharpening the gap between haves and have-nots, or they could alter “the shape of the stratification structure from an elongated pyramid, with a large lower-class base, to a diamond with a growing middle class.”38 Such a middle class would be expected to temper extremism and class conflict, and therefore foster the conditions favorable to democracy. This theme was sounded as well by Londregan and Poole, who cited the example of Spain under Franco, where the growth of a “middle-income paunch of bourgeois affluence … made it much less likely that the Spanish electorate would exercise the option of voting for confiscatory redistribution.”39 Examining patterns of landholding in pre–World War I Prussia, Daniel Ziblatt finds that inequality

UNDP Russia, National Human Development Report, Russian Federation 2006/2007:  Russia’s Regions: Goals, Challenges, Achievements. Moscow, United Nations Development Programme (2007), p. 8. 37 Samuel P. Huntington, Political Order in Changing Societies (New Haven, CT: Yale University Press, 1968), pp. 56–57. 38 Seymour Martin Lipset, “Some Social Prerequisites of Democracy: Economic Development and Political Legitimacy,” American Political Science Review 53:1 (1959): 69–105, esp. 83. 39 John B. Londregan and Keith T. Poole, “Does High Income Promote Democracy?” World Politics 49 (1996): 24. 36

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in land ownership was directly related to Germany’s failure to democratize until the war and the revolution it precipitated.40 Alesina and Perotti argue that high inequality reduces the security of property rights and poses a greater threat of political instability, reducing incentives compatible with growth.41 Boix and Posner speculate that the level of inequality affects a society’s capacity to accumulate social capital and thus increase its ability to engage in cooperative ventures promoting the common good.42 Muller finds that young democracies with high inequality have substantially higher rates of breakdown.43 Friedman observes of new democracies: “Historical experience strongly suggests that among these new democracies the ones that succeed in achieving a rising standard of living for the broad majority of their citizens will be those most likely to survive.”44 Houle finds that inequality has a pronounced negative impact on the chances that a young democracy will become consolidated, although none on the probability of a transition to democracy.45 There is even some evidence that at the level of regions within countries, income inequality itself has a negative effect on a population’s health, particularly for the poor, even holding constant the effects of poverty and other factors.46 A correlation between interregional inequality and homicide rates has been one of the most robust findings in the cross-national literature, holding up to a variety of controls.47 Moreover, a growing body of literature suggests that inequality subverts governance.48 Several studies have shown that polarized societies (whether

Daniel Ziblatt, “Does Landholding Inequality Block Democratization? A Test of the ‘Bread and Democracy’ Thesis and the Case of Prussia,” World Politics 60:4 (2008):  610–641; Daniel Ziblatt, “Shaping Democratic Practice and the Causes of Electoral Fraud: The Case of Nineteenth-Century Germany,” American Political Science Review 103:1 (2009): 1–21. 41 Alberto Alesina and Roberto Perotti, “Income Distribution, Political Instability, and Investment,” NBER Working Paper Series No. 4486 (1993). 42 Carles Boix and Daniel N. Posner, “Social Capital:  Explaining Its Origins and Effects on Government Performance,” British Journal of Political Science 28:4 (1998): 686–693. 43 Edward N. Muller, “Democracy, Economic Development, and Income Inequality,” American Sociological Review 53:1 (1988): 50–68. 44 Benjamin M. Friedman, The Moral Consequences of Economic Growth (New York: Vintage, 2005), p. 325. 45 Christian Houle, “Inequality and Democracy:  Why Inequality Harms Consolidation but Does Not Affect Democratization,” World Politics 61:4 (2009): 589–622. 46 John Mullahy, Stephanie Robert, and Barbara Wolfe, “Health, Income, and Inequality,” in Social Inequality, ed. Kathryn M. Neckerman (New York: Russell Sage Foundation, 2004), pp. 523–544. 47 “There have now been over fifty studies showing a clear tendency for violence to be more common in societies where income differences are greater.” Richard Wilkinson, The Impact of Inequality: How to Make Sick Societies Healthier (New York: New Press, 2005), p. 47. 48 Larry M. Bartels, Unequal Democracy:  The Political Economy of the New Gilded Age (Princeton, NJ: Princeton University Press, 2008); Edward Glaeser, Jose Scheinkman, and Andrei Schleifer, “The Injustice of Inequality,” National Bureau of Economic Research Working Paper Series Working Paper 9150 (2002); Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution and the Erosion of American Democracy (New 40

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polarization stems from ethnic antagonism or mutual hostility between wealthy and impoverished strata) are less likely to support policies that provide public goods to all (thus reducing the dominance of one group over another), and still less redistributive policies that tax the wealthy in order to improve the income security of the poor.49 High inequality can become self-perpetuating. In such societies, as the World Bank report observes, resources are denied to the poor, distorting the allocation of talent, to the long-term detriment of the economy’s growth.50 The question of whether democracies tend to reduce income inequality has been explored extensively. Many studies have used large-N cross-sectional statistical methods to test the theory that democracy is associated with lower income inequality. Findings have been mixed. Studies by Rubinson and Quinlan, as well as Bollen and Jackman, found little evidence that, in and of themselves, higher levels of democracy were associated with lower levels of income inequality once factors accounting for the level and distribution of income were taken into account.51 Reviewing a number of studies, Sirowy and Inkeles found inconclusive results for hypotheses linking democracy either to growth or to lower inequality, and noted that the inconsistent findings were probably due to differences in sample construction, measurement of key variables, and difficulty in accounting for dynamic effects.52 There has been more support for the proposition that inequality subverts democracy. Rubinson and Quinlan found that higher levels of inequality predicted lower levels of democracy, and emphasized that simple measures of income inequality reflected particular configurations of social classes that were likely to affect the likelihood and character of democracy. Muller observed that democracy’s predicted effect in reducing inequality was probably dependent on time-related factors, and that young democracies were more likely to manifest high inequality. Likewise inequality would be predicted to threaten the stability of new democracies. He Haven, CT:  Yale University Press, 2005); Lawrence R. Jacobs and Theda Skocpol, eds, Inequality and American Democracy:  What We Know and What We Need to Learn (New York: Russell Sage, 2005); Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Polarized America:  The Dance of Ideology and Unequal Riches (Cambridge, MA:  MIT Press, 2006). 49 Alberto Alesina, Reza Baqir, and William Easterly, “Public Goods and Ethnic Divisions,” Quarterly Journal of Economics 114:4 (1999):  1243–1284; William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics (Cambridge, MA: MIT Press, 2002); William Easterly and Ross Levine, “Africa’s Growth Tragedy: Policies and Ethnic Divisions,” Quarterly Journal of Economics 112:4 (1997): 1203–1250. 50 World Bank, World Development Report 2006: Equity and Development (Washington, DC, and New York: World Bank and Oxford University Press, 2005). 51 Kenneth A. Bollen and Robert W. Jackman, “Political Democracy and the Size Distribution of Income,” American Sociological Review 50:4 (1985): 438–457; Richard Rubinson and Dan Quinlan, “Democracy and Social Inequality: A Reanalysis,” American Sociological Review 42:4 (1977): 611–623. 52 Larry Sirowy and Alex Inkeles, “The Effects of Democracy on Economic Growth and Inequality:  A Review,” Studies in Comparative International Development 25:1 (1990): 126–157.

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confirmed that the duration of democracy indeed mattered for inequality, and that longer-lived democracies were likelier to manifest lower inequality than young democracies or nondemocracies.53 Like Rubinson and Quinlan, Lipset, Huntington, and many other authors, Muller observed that the formation of a large middle class is conducive to the establishment and stability of democracy, whereas a society characterized by polarization between rich and poor was inhospitable for stable democracy.54 Recent empirical studies by Przeworski et al., Londregan and Poole, Friedman, and Houle reach similar conclusions.55 Robert Dahl emphasized that whereas pluralist democracy is consistent with a system of “dispersed inequalities” in the distribution of skills, organization, wealth, and other politically relevant resources, severe inequalities in access to resources are likely to jeopardize democracy’s survival.56 Some authors have examined other pathways through which differences in the levels of democracy across countries or within countries over time might be related to the distribution of income and social well-being. For instance, Rodrik finds that, even after controlling for development level and factor productivity, wage levels are higher in democracies.57 Przeworski et al. find that the labor share of national income is higher under democracy than in dictatorships.58 However, Ross finds that infant and child mortality rates are no lower under democracy than under dictatorships once a more appropriate dataset is considered. He notes that although democracies tend to spend more on public services, much of their spending benefits middle and upper class strata, so that the health of the poor may be no better than under welfare-state authoritarian regimes (such as the pre-transition communist world).59 Research on the effects of globalization and democratization on social policy in Latin America by Kaufman and Segura-Ubiergo found that democratization tended to be associated with higher levels of social spending, particularly in health and education, but that globalization exerted a modest negative effect on social transfers; they posited a possible trade-off in social policy between investments Edward N. Muller, “Democracy, Economic Development, and Income Inequality,” American Sociological Review 53:1 (1988): 50–68. 54 Samuel P. Huntington, Political Order in Changing Societies (New Haven, CT: Yale University Press, 1968); Seymour Martin Lipset, “Some Social Prerequisites of Democracy: Economic Development and Political Legitimacy,” American Political Science Review 53:1 (1959): 69–105. 55 Benjamin M. Friedman, The Moral Consequences of Economic Growth (New York: Vintage, 2005); John B. Londregan and Keith T. Poole, “Does High Income Promote Democracy?” World Politics 49 (1996):  1–30; Adam Przeworksi et al., Democracy and Development:  Political Institutions and Well-Being in the World, 1950–1990 (Cambridge:  Cambridge University Press, 2000); Houle, “Inequality and Democracy.” 56 Robert A. Dahl, Polyarchy: Participation and Opposition (New Haven, CT: Yale University Press, 1971). 57 Dani Rodrik, “Democracies Pay Higher Wages,” Quarterly Journal of Economics 114:3 (1999): 707–738. 58 Przeworski et al., Democracy and Development. 59 Michael Ross, “Is Democracy Good for the Poor?” American Journal of Political Science 50:4 (2006): 860–874. 53

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in public health and education (which tend to benefit middle-class constituencies) and spending on social transfers (including pensions), which would more directly redistribute incomes from the rich to the poor.60 Consistent with the argument that the effect of democracy on inequality may be time-dependent (effects that cross-sectional studies may overlook if the democracy interacts with country-specific characteristics), some studies have sought ways to detect a developmental dynamic. Simpson found evidence of a robust nonlinear association between democracy and inequality, as did Chong.61 Chong notes that one reason cross-sectional analyses may fail to find a robust statistical relationship between democracy and inequality is that inequality tends to be a persistent attribute of social structure and may, therefore, shape the way democratization proceeds. Reuveny and Li also found that democracy, along with economic openness, was significantly related to lower inequality once values for inequality in the previous decade were included as right-hand-side variables.62 Chong found the nonlinear nature of the relation between democracy and inequality consistent with the idea of a “political Kuznets curve,” a notion also explicitly proposed by Acemoglu and Robinson.63 Like Chong and other authors, Acemoglu and Robinson observe a significant reduction in inequality in a number of countries once the “political Kuznets curve” reached its peak, roughly ­coinciding with the timepoint in western democracies when the franchise had been extended to all males. Acemoglu and Robinson, Boix, Justman and Gradstein, Bourguignon and Verdier, and other authors propose formal theoretical models for such a “political Kuznets curve,” in which the early stages of a process of democratization may be associated with rising income inequality, followed by reduced inequality in the later stages.64 Acemoglu and Robinson’s account of democratization rests on the strategic concessions made by an elite possessing both Robert R. Kaufman and Alex Segura-Ubiergo, “Globalization, Domestic Politics, and Social Spending in Latin America: A Time-Series Cross-Section Analysis, 1973–97,” World Politics 53 (2001): 553–587. 61 Alberto Chong, “Inequality, Democracy, and Persistence: Is There a Political Kuznets Curve?” Economics and Politics 16:2 (2004): 189–212; Miles Simpson, “Political Rights and Income Inequality: A Cross-National Test,” American Sociological Review 55:5 (1990): 682–693. 62 Rafael Reuveny and Quan Li, “Economic Openness, Democracy, and Income Inequality,” Comparative Political Studies 36:5 (2003): 575–601. 63 Daron Acemoglu and James A. Robinson, “Why Did the West Extend the Franchise? Democracy, Inequality, and Growth in Historical Perspective,” Quarterly Journal of Economics 115:4 (2000): 1167–1199; Daron Acemoglu and James A. Robinson, Economic Origins of Dictatorship and Democracy (Cambridge: Cambridge University Press, 2006). 64 Ibid.; Carles Boix, Democracy and Redistribution (Cambridge: Cambridge University Press, 2003); Francois Bourguignon and Thierry Verdier, “Oligarchy, Democracy, Inequality and Growth,” Journal of Development Economics 62:2 (2000):  285–313; Moshe Justman and Mark Gradstein, “The Industrial Revolution, Political Transition, and the Subsequent Decline in Inequality in 19th-Century Britain,” Explorations in Economic History 36:2 (1999): 109–127. 60

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wealth and power and fearful of the potential loss of its wealth if social unrest or revolution erupt. Early stages of democratization benefit the ­interests of the owners of capital, resulting in economic growth and rising average incomes, with median incomes lagging behind. Boix similarly postulates an elite ­offering democratizing concessions out of the fear of the loss of wealth through revolution, but affected by the nature of its wealth: An elite vested in land or other immobile assets faces prospectively higher losses and cannot credibly threaten to move its wealth abroad, as can an elite whose wealth is invested in more liquid assets. Justman and Gradstein propose a model in which industrialization tends to raise the mean income of society from a point well below the income of the decisive voter (who in a society with a restricted franchise belongs to a social elite) to a point above it. Over time, the interests of the poor begin to converge with those of the middle classes in calling for extension of the franchise and investment in public goods such as education. This model yields a “political Kuznets curve,” in that early phases of democratization are accompanied by widening inequality as the mean income level rises with economic development but median incomes drop as wage differentiation widens, followed by a later phase in which labor’s bargaining position improves and the poor are incorporated politically. Full democracy brings policies such as public health care improvement and mass education, which raise levels of human capital and wages and reduce income differentials between rich and poor. Bourguignon and Verdier propose a related model in which a ruling elite chooses a level of redistributive taxation and spending for public education. The rulers see education as a means for modernizing society and encouraging growth but face a risk that a widely educated public will mount demands through the political process for further redistribution. If the rulers opt for a system of public universal education, they are redistributing resources from themselves and encouraging growth but at the risk of the loss of political control. If they choose to educate a limited stratum of society – a middle class, for example – they may succeed in sharing the benefits of exclusive political control with the middle class but at the risk of lower growth rates. On the other hand, as Bourguignon and Verdier acknowledge, continuing economic growth may enable the poor to finance their own education, successfully demand enfranchisement, and redistribute power and wealth from the rich anyway. Economic development may therefore have an autonomous impact on demands for further democratization. Elite-oriented strategic theories such as these help explain the decision to democratize in societies where political and economic power is narrowly concentrated, but they lead logically to applications of simple or modified “median voter” models in settings where the entire adult population is enfranchised. Many such models begin with Meltzer and Richard, in which policy choices over taxation and redistribution are explained by the distance between the median voter and the mean point in the income distribution, and the trade-off between redistributive taxing and spending policies and

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the potential drag on economic growth that they are presumed to impose.65 However, a number of studies have demonstrated the limits of median-voter models for ­explaining differences in redistributive policies or income inequality both in developing and developed contexts.66 In the context of studies of the United States, Hacker and Pierson note that it is impossible to explain the political sources of the steady increase in inequality observed in the United States since the late 1970s without considering two factors: the need for political parties to appeal to their “base” constituencies rather than to the median voter, and the power of well-organized, well-funded interest groups to manipulate agenda setting, issue framing, and policy design.67 Bartels has attributed the significantly greater increases in income inequality in the United States observed under Republican presidents to three factors: the effects of myopia in retrospective evaluations of partisan economic performance by voters; the ­substantially larger volume of funds spent on electoral campaigns by Republic candidates; and the voters’ apparent willingness to reward Republican candidates for high growth in the incomes of high-income strata.68 According to McCarty, Poole, and Rosenthal, increasing inequality in the United States is partly explained by the large immigrant population, which creates a substantial gap between the median income of those who vote as opposed to the median income of all income earners in the country. The median income of voters is substantially higher than the median income in the country, in part because non-voting is disproportionately more prevalent among the poorer strata and in part because of the number of noncitizens in the economy. As a result, in 2000, the median income of those who voted was higher than that of 60% of Americans.69 Median-voter theory also fails to account for the substantial differences in income inequality among democratic states. As Iversen and Soskice, Iversen and Stephens, and Rueda and Pontusson, building on Esping-Andersen, observe, differences in the complementary bundles of electoral, labor market, In the Meltzer-Richard framework, taxation is a deadweight loss, and the median voter considers the dampening impact of taxation on investment and growth in setting the optimum tax rate. Other models treat some forms of redistribution  – particularly those that lead to the accumulation of human capital – as investments yielding positive externalities and economic growth. cf Allan H. Meltzer and Scott F. Richard, “A Rational Theory of the Size of Government,” Journal of Political Economy 89:5 (1981):  914–927; Torben Iversen and David Soskice, “Electoral Institutions and the Politics of Coalitions: Why Some Democracies Redistribute More Than Others,” American Political Science Review 100:2 (2006): 165–181; Torben Iversen and John D. Stephens, “Partisan Politics, the Welfare State, and Three Worlds of Human Capital Formation,” Comparative Political Studies 41:4–5 (2008): 600–637. 66 In the context of the developing world, cf. Dimitri Landa and Ethan B. Kapstein, “Inequality, Growth, and Democracy,” World Politics 53 (2001): 264–296. 67 Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution & the Erosion of American Democracy (New Haven, CT: Yale University Press, 2005). 68 Larry M. Bartels, Unequal Democracy:  The Political Economy of the New Gilded Age (Princeton, NJ: Princeton University Press, 2008). 69 McCarty, Poole, and Rosenthal, 2006; Hacker and Pierson, 2005: 113. 65

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human capital, social protection, and electoral institutions among democratic capitalist states tend to be self-reinforcing over time and, indeed, reflect longstanding differences in historical development.70 These “varieties of ­capitalism” help explain the stability of patterns of redistributive spending, human capital investment, and income distribution among advanced democracies. Iversen and Soskice argue, for example, that majoritarian and ­proportional representation (PR) electoral systems tend to produce differing types of governing coalitions by partisan complexion. PR electoral systems more frequently yield center-left coalitions whereas single-member district (SMD)/plurality-rule systems tend more often to produce center-right governments. The different types of government reflect differences in the cross-class coalitions that shape ­government policies. Where middle-class parties can ally with left parties without fear of extensive redistribution, but can support human capital investment through public education, social spending tends to be higher and income differentials lower, even when pre-tax income levels are considered. Rueda and Pontusson similarly find that, even controlling for the partisan complexion of governments, societies with higher bargaining power for labor are associated with lower pre-tax wage level differentials, particularly in coordinated market economies. The varieties of capitalism literature makes it clear that a number of institutional factors, among them union density, centralization of bargaining, coordination of social policy setting on the part of employers, government, and labor, as well as electoral system features, affect both the pre-tax distribution of earned income and redistributive policy. The weight of theoretical and empirical evidence from the noncommunist world thus suggests that the causal arrow runs both ways between democratization and inequality. The literature offers substantial theoretical and ­empirical evidence in support of arguments that elites in nondemocratic societies adopt strategies concerning democratization with a view to their prospective effects for redistribution. Once full democracy is achieved, electoral competition may result in redistributive fiscal policies that govern the progressivity of taxation, levels of spending on public education, health care, and other investments in human capital. All of these affect income inequality. Moreover, particular institutional features of a democratic polity, such as the arrangements governing electoral contestation, the distribution of resources among subgroups and organization in society, and the degree to which the labor market is centrally coordinated and regulated, also affect the distribution of incomes, including the level and differentiation of pre-tax earned incomes. Thus even though Gøsta Esping-Andersen, The Three Worlds of Welfare Capitalism (Princeton, NJ: Princeton University Press, 1990); Torben Iversen and David Soskice, “Distribution and Redistribution: The Shadow of the Nineteenth Century,” World Politics 61:3 (2009): 438–486; Iversen and Stephens, “Partisan Politics”; Iversen and Soskice, “Electoral Institutions”; David Rueda and Jonas Pontusson, “Wage Inequality and Varieties of Capitalism,” World Politics 52 (2000):  350–383; Jonas Pontusson and David Rueda, “The Politics of Inequality:  Voter Mobilization and Left Parties in Advanced Industrial States,” Comparative Political Studies 43:6 (2010): 675–705.

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democratization in a highly unequal society is likely, especially over time, to bring about a reduction in income inequality through the political process, the existence of democracies with high inequality and authoritarian regimes with low inequality should warn us against drawing any simple causal inferences from the association. 1.4.  Explaining Inequality in Russia For the most part, I shall be concerned in this book with the sources rather than the consequences of income inequality in Russia. It is premature to judge how inequality may have affected, or may yet affect, growth, governance, or other outcomes given the brief time that has elapsed since the transition and the enormous and continuing shifts in the structure of the economy. Rather, this book attempts to explore the political factors that account for the rise in inequality in Russia since the end of the Soviet regime. In particular, I wish to explain why – even holding constant the economic factors affecting earned income inequality – the regional regimes that are ranked highest on a scale of democratic attributes are also those that have witnessed the greatest increases in inequality. These regions also registered the greatest increases in average incomes and the sharpest decreases in poverty. The least democratic regimes in turn display lower average incomes, higher poverty, and lower inequality. Thus contrary to findings that democratization brings about a narrowing of income differentials, Russia’s most democratic regions are those where income inequality has risen most. To discover why this should be so, I investigated the relations between the political leaders of those regions and heads of the major economic enterprises that employ the largest numbers of workers and provide most of the social services of the region. The variation in the regional regime characteristics turns out to be significantly associated with a number of social and economic features of the region that affect incomes and income inequality, as well as social welfare. I emphasize the two-way ­government-enterprise relationship, rather than the three-way relations among government, ­enterprise managers, and labor, because in Russia, as Chapter 2 will show, labor has been by far the weakest side of the triangle. I argue that regional regime characteristics account for a statistically significant, if modest, share of the variation we observe across regions in such measurable outcomes as the levels and distribution of incomes and wages, as well as rates of poverty, social spending, and social dependency. The data show that for much of the period since the transition, poverty and inequality have moved in opposite directions. Inquiring why poverty has fallen while inequality has risen – and why poverty has fallen most where inequality has risen most – requires examination of the relations among employment, social welfare, and wages in Russia, particularly the ways in which characteristics of the regional regime affect those relations. To substantiate the argument that the political regime has an observable effect on income determination

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apart from the structural characteristics of the region, I tap three different sets of data: the official economic and social indicators reported by the Russian state statistical agency (formally called the Federal Service for State Statistics, also known as Goskomstat or Rosstat), a survey of businesses conducted by the World Bank in 2005, and a survey of household incomes sponsored by the World Bank in 2003. These three sources tell a consistent story about the covariation of regime characteristics with income structure among Russia’s regions. To repeat, political institutions only explain part of interregional variation in income inequality. The inherited differences in natural resource endowments and industrial development with which the regions began the transition period explain most of the divergence in the trajectories of their economic performance. The heavily redistributive Soviet system was succeeded by a regime that has been far less redistributive than most European democracies (and, in some respects, even less redistributive than the United States). As many economists have shown, regions possessing substantial deposits of oil, gas, and other exportable natural resources have experienced enormous increases in incomes and output since the transition. So have regions able to take advantage of the opening to international trade, such as “hub” regions with welldeveloped transportation infrastructure.71 Regions dependent on industries that are low in productivity and profitability have been worse off or have barely raised living standards. Whereas the Soviet planned economy insulated both resource-rich and resource-poor regions from the forces of world market prices (effectively redistributing the rents from natural resource-rich regions to other regions), the post-transition economy quickly differentiated among regions’ capacity to adapt to change. The same was true across strata of the labor force, as the decompression of the Soviet wage structure brought wage premiums favoring workers with education and skill.72 However, a good deal of inequality in the structure of incomes across regions and workers remains after accounting for these legacy factors. For example, decomposing the sources of wage inequality in industry, Simon Clarke estimates that only Philip Hanson, “Regional Income Differences,” in Russia’s Post-Communist Economy, ed. Brigitte Granville and Peter Oppenheimer (New York:  Oxford University Press, 2001), pp. 419–444; Douglas Sutherland and Philip Hanson, “Structural Change in the Economies of Russia’s Regions,” Europe-Asia Studies 48:3 (1996): 367–392; Bert van Selm, “Economic Performance in Russia’s Regions,” Europe-Asia Studies 50:4 (1998): 603–619. 72 Elizabeth Brainerd, “Winners and Losers in Russia’s Economic Transition,” American Economic Review 88:5 (1998): 1094–1116; Simon Commander and Andrei Tolstopiatenko, “Unemployment, Restructuring and the Pace of Transition,” in Lessons from the Economic Transition:  Central and Eastern Europe in the 1990s, ed. Salvatore Zecchini (Dordrech/ Boston/London:  Kluwer Academic Publishers, 1997), pp. 331–350; Simon Commander, Andrei Tolstopiatenko, and Ruslan Yemtsov, “Channels of Redistribution:  Inequality and Poverty in the Russian Transition,” Economics of Transition 7:2 (1999):  411–447; Klara Sabirianova Peter, “Skill-Biased Transition:  The Role of Markets, Institutions, and Technological Change,” IZA Discussion Paper Series IZA DP No. 893 (2003). 71

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between 4% and 11% of variation can be attributed to human capital differences.73 Moreover, interregional differences only account for about a third of total income inequality in Russia.74 Within every wage category, women’s wages lost ground relative to men’s after the transition.75 Clearly other forces, including social and political institutions that reflect the distribution of power in localities and workplaces, continue to exert a substantial influence over the determination of incomes. In addition to the effect of inherited human and material assets, income distribution in Russia has been strongly affected by the institutional legacy of the Soviet state. As Chapter 2 will show, the Soviet social welfare system was closely linked to the enterprise. Enterprises were units both of production and of social provision, so that they could not immediately be turned into profit-seeking capitalist firms until some alternative mechanisms were devised for maintaining basic public goods and services. Related to this was the fact that much of the social welfare system took the form of nonmonetary benefits that were supplied by state administrative structures or by enterprises. Until alternative means of financing the production and consumption of these benefits were found, the effect of the transition on the distribution of (cash) incomes could not reflect or influence actual purchasing power or social influence. Finally, the transition in Russia witnessed a substantial  – but almost completely unmeasurable – increase in informal, off-the-books, untaxed incomes, perhaps even more so than in East Central Europe. Only the vaguest of estimates are available as to the scale of the informal economy. Informal mechanisms for determining wages were prevalent, as we shall see, even in the Soviet enterprise (where bonus and incentive pay, determined on an individual basis by line supervisors, could often exceed base wages, and where black and grey markets in many goods and services were common). But the shift of labor and incomes out of reported forms and into undeclared, unregistered conduits in the 1990s was enormous, and only partially reduced in the 2000s as the economy recovered. (And there is some evidence that the 2008–2009 crisis spurred a new increase in informal earnings.) Although informal employment may have mitigated unemployment and poverty for some, the net effect of informality is certainly to increase income inequality. Those with the power to avoid taxes, to claim rents from control over resources, and to extract bribes benefit disproportionately from a weak state unable to enforce its own laws and policies. Even in the Soviet era, the elements of informality in income distribution – both cash-based and in-kind Simon Clarke, “Market and Institutional Determinants of Wage Differentiation in Russia,” Industrial and Labor Relations 55:4 (2002), p. 639; Douglas Sutherland, Michael Bradshaw, and Philip Hanson, “Regional Dynamics of Economic Restructuring across Russia,” in Regional Economic Change in Russia, ed. Philip Hanson and Michael Bradshaw (Northampton, MA: Edward Elgar Publishing, 2000), p. 66. 74 Pradeep Mitra and Ruslan Yemtsov, “Increasing Inequality in Transition Economies: Is There More to Come?” World Bank Policy Research Working Paper 4007 (2006): 24. 75 Elizabeth Brainerd, “Winners and Losers in Russia’s Economic Transition.” 73

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incomes – enabled those positioned more closely to the sources of power to benefit disproportionately from the nominal universalism and egalitarianism of the wage and welfare system. The Soviet system also featured a highly compressed wage structure. Earned income reflected a very low return to skill and education and other variable determinants of productivity. Productivity at state enterprises was relatively low and there were no legal private enterprises. Consequently, the stabilization and privatization measures adopted in 1992 account for much of the sharp increase in income inequality in the early years of the transition. Commander, Tolstopiatenko, and Yemtsov list five factors in particular:  privatization of state enterprises (enabling a small cohort of new owners to realize windfall gains); the poor quality of state social assistance; the rapid increase in wage differentiation as the old Soviet wage scale broke down; rising unemployment (with only a small fraction of the unemployed receiving even the most minimum unemployment compensation); and steep price inflation.76 Initially, many economists expected that the structural distortions in the distribution of labor and capital would eventually be eliminated. This would lead to a reduction in wage differentiation as low-productivity, heavily subsidized manufacturing branches experienced a sharp decline in incomes and employment, and more productive sectors – particularly in the private sector – picked up the slack. These expectations proved premature at best.77 Compared with postcommunist economies in Central Europe, Russia has witnessed an excruciatingly slow shift in the structure of the economy away from low-productivity industrial and agricultural sectors to services and entrepreneurship.78 Moreover, Russia experienced a far steeper fall in output (although its magnitude continues to be disputed), a much lower increase in unemployment, a greater increase in poverty, and steeper rise in inequality. In Russia and Ukraine, for example, aggregate income inequality approximately doubled between 1987–1988 and 1993–1995, whereas in Central and Eastern Europe, inequality rose but by far smaller amounts. Milanovic estimates that the Gini index for Russia rose from approximately 24 to approximately 48 over this period, whereas that for

Simon Commander, Andrei Tolstopiatenko, and Ruslan Yemtsov, “Channels of Redistribution: Inequality and Poverty in the Russian Transition,” Economics of Transition 7:2 (1999): 411–447. 77 Philippe Aghion and Simon Commander, “On the Dynamics of Inequality in the Transition,” Economics of Transition 7:2 (1999):  275–298; Simon Clarke, “Market and Institutional Determinants of Wage Differentiation in Russia,” Industrial and Labor Relations 55:4 (2002): 628–648. 78 Nauro F. Campos and Fabrizio Coricelli, “Growth in Transition:  What We Know, What We Don’t, and What We Should,” Journal of Economic Literature 40:3 (2002):  793–836; Simon Commander and Andrei Tolstopiatenko, “Unemployment, Restructuring and the Pace of Transition,” in Lessons from the Economic Transition:  Central and Eastern Europe in the 1990s, ed. Salvatore Zecchini (Dordrech/ Boston/ London: Kluwer Academic Publishers, 1997), pp. 331–350; Douglas Sutherland and Philip Hanson, “Structural Change in the Economies of Russia’s Regions,” Europe-Asia Studies 48:3 (1996): 367–392. 76

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the Czech Republic rose from 19 to 27, for Hungary from 21 to 23, and for Poland from 26 to 28. 79 Wages in Russia lagged far behind prices as price liberalization took effect, and social benefits were nugatory. Whereas real wages by the end of 1995 were less than one-fifth of 1992 levels, unemployment benefits were less than 10% of the average wage in the mid-1990s.80 Coupled with the fact that unemployment rose much less than output fell, the low wage and benefit levels indicate that many Russian workers remained formally employed in their former state enterprises, but at low or nominal wages. (In the next chapter, we will explore some of the reasons for this fact.) One of the major drivers of the sharp increase in income inequality in the early years of the transition was the exodus of labor from state enterprises. For most workers, losing a job at the state enterprise (or being put on short hours or unpaid leave) resulted in a loss of income, only partly offset by social benefits. For a smaller number who entered the entrepreneurial sector, earned incomes rose significantly. Both private income and pension income increased as a share of total income, whereas wage income’s share declined: In Russia, wages as a share of total income fell from about 74% in 1989 to about 49% in the mid-1990s.81 However, the movement of labor from low-wage, low-productivity jobs in the state sector to new private enterprises was far slower than the reformers anticipated. A number of factors impeded labor mobility, among them the absence of a market for housing and workers’ dependence on their enterprises for housing and other essential benefits. To be sure, there has been a good deal of labor turnover within regions.82 However, interenterprise mobility has tended to reinforce rather than undercut differences across enterprises in both wage levels and wage differentiation. For example, according to studies by Simon Clarke, as much as half of the wage inequality within cities is due to differences in compensation for the same occupation in the same branch, often between enterprises.83 It is difficult to explain differentials of this magnitude purely by labor market considerations or the effect of “skill-biased Branko Milanovic, Income, Inequality, and Poverty during the Transition from Planned to Market Economy (Washington, DC: The World Bank, 1998), p. 41; cf Mark Gradstein and Branko Milanovic, “Does Liberte=Egalite? A Survey of the Empirical Links between Democracy and Inequality with Some Evidence on the Transition Economies,” Journal of Economic Surveys 18:4 (2004): 515–537. 80 Commander and Tolstopiatenko, “Unemployment, Restructuring, and the Pace,” p. 337. 81 Branko Milanovic, “Explaining the Increase in Inequality during Transition,” Economics of Transition 7:2 (1999): 313. 82 Andrienko and Guriev estimate that overall, about 2% of the population change residence each year, compared with 3–4% in the Soviet period. Consequently, spatial migration does little to counteract widening interregional income differences. Yuri Andrienko and Sergei Guriev, “Determinants of Interregional Mobility in Russia:  Evidence from Panel Data,” Economics of Transition 12:1 (2004): 1–27. 83 Simon Clarke, “Market and Institutional Determinants of Wage Differentiation in Russia,” Industrial and Labor Relations 55:4 (2002): 638. 79

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technological change.”84 Rather, noneconomic factors, such as power relations within enterprises or between enterprises and regional political elites, affect wage levels and distribution. According to Clarke, much of the reason for the differences in wage levels for the same jobs in different enterprises has to do with the characteristics of enterprises themselves, such as their competitiveness, size, and stability. Although Clarke does not elaborate on the point, enterprise relations with regional political elites may also play a role in wage policy; some regional leaders, he noted, demand that enterprises pay higher minimum wages than required by the federal law.85 There are other difficulties with arguments that emphasize purely economic determinants of wage and income differentiation in Russia. As a number of studies have shown, the relative capacity of the state to enforce laws and policies – quite apart from the content of policy and law – affects income differentiation. The Russian state’s inability to collect taxes and administer the modest social assistance programs that it had adopted exacerbated the effect of economic forces on income inequality.86 As Gerry and Mickiewicz point out, the structural shift argument that expects an early surge in inequality to be followed by its diminution as labor flows into higher-value-added sectors (i.e., the Kuznets curve applied to Russia) may not be borne out in a weak state if rent-seeking elites block the entry of capital and labor into entrepreneurship. Gerry and Mickiewicz find that postcommunist states where democratization did not weaken the state’s capacity to collect taxes saw inequality drop after its initial increase as democratization proceeded, whereas regimes in the former Soviet Union suffered both from weakened administrative capacity and limited movement toward democratization – and thus had higher overall initial levels of inequality that remained higher. Such regimes were more prone to capture by powerful rent-appropriating interests (such as firms in the oil-and-gas sector in Russia), reducing the state’s ability to implement equalization of incomes across regions and income strata.87 Indeed, in such regimes, state spending can well have regressive effects on income distribution, as the state’s contributions to favored enterprises enable them to pay higher wages.88 Aghion and Commander, “On the Dynamics of Inequality”; Klara Sabirianova Peter, “SkillBiased Transition:  The Role of Markets, Institutions, and Technological Change,” IZA Discussion Paper Series IZA DP No. 893 (2003). 85 Simon Clarke, The Development of Capitalism in Russia (London:  Routledge, 2007) pp. 63, 181. 86 Christopher J. Gerry and Tomasz M. Mickiewicz, “Inequality, Democracy and Taxation:  Lessons from the Post-Communist Transition,” Europe-Asia Studies 60:1 (2008): 89–111; Vladimir Popov, “Reform Strategies and Economic Performance of Russia’s Regions,” World Development 29:5 (2001): 865–886. 87 Tullio Buccellato and Tomasz Mickiewicz, “Oil and Gas: A Blessing for Few. Hydrocarbons and Within-Region Inequality in Russia,” London, Centre for the Study of Economic and Social Change in Europe, UCL School of Slavonic and East European Studies (2008). 88 Irina Dolinskaya, “Transition and Regional Inequality in Russia:  Reorganization or Procrastination?” IMF Working Paper WP/02/169 (2002). 84

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Table 1.1.  Determinants of Average Regional Real Wage, 2000 Dependent variable: Nominal wages as multiple of regional subsistence minimum, 2000 Model: OLS using robust standard errors Urbanization, 2000 Mineral resource extraction share in output, 2005 Foreign trade volume, per capita Port (dummy) Share with higher/specialized education, 1989 Constant No of observations r2

1.05* (.48) .03*** (.006) .00034*** (.0000) .159 (.162) .004* (.002) –.015 (.63) 70 .815

***p < .001; **p < .01; *p < .10.

The resource issue brings us back to the interregional dimension of inequality. The most commonly identified factors affecting variation in trends in regional mean income have to do with the region’s resource and industrial endowment and (relatedly) its participation in foreign trade, as well as its overall level of modernization.89 We can account for more than 80% of crossregional variation in average wage levels by regressing the price-adjusted mean wage level in 2000 on variables measuring urbanization (2000), the average share of value added from mineral resource extraction in total regional output in 2005,90 the per capita volume of foreign trade in the region (1997), a dummy variable indicating whether the region had a port city or not, and the number of people with higher or specialized secondary education in the region as of 1989 per 1,000 adults (to represent the level of human capital at the time of transition). All variables are significant and positive except for the dummy variable for port.91 Table 1.1 reports the results. Over time, as the literature on interregional differences has shown, the interregional differences in income levels have widened slightly. Figure 1.6 plots average real income in 2006 against average real income in 1995 by region. Dolinskaia, “Transition”; Leonid Fedorov, “Regional Inequality and Regional Polarization in Russia, 1990–99,” World Development 30:3 (2002): 443–456; Buccellato and Mickiewicz, “Oil and Gas”; Daniel Berkowitz and John E. Jackson, “Entrepreneurship and the Evolution of Income Distributions in Poland and Russia,” Journal of Comparative Economics 34 (2006): 338–356; Michael Bradshaw and Andrey Treyvish, “Russia’s Regions in the ‘Triple Transition’,” in Regional Economic Change in Russia, ed. Philip Hanson and Michael Bradshaw (Northampton, MA: Edward Elgar Publishing, 2000), pp. 17–42. 90 I use the 2005 figure because a corresponding figure for 2000 is not available. The assumption is that resource endowments change very little compared with shifts in political and economic institutions. Therefore, the share of mineral resource output in a regional economy is unlikely to change appreciably from 2000 to 2005. 91 The data used for this will be explained in more detail in Chapter 4. This dataset is based on all Russia’s federal territorial subjects but omits those that are physically incorporated into other regions, as well as (due to data deficiencies) Chechnia. 89

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6

The Political Sources of Income Inequality Moscow city

Real income, 2006 4 3

5

Tiumen oblast

St. Petersburg

1

2

Tatarstan Sverdlovsk oblast Kemerovo oblast Samara oblast Perm oblast

0

1

2 3 Real income, 1995

4

5

Figure 1.6.  Average regional real incomes, 2006 and 1995.

The graph divides the regions into two groups: those whose average real income (nominal income as a multiple of the subsistence minimum) was among the richest one-fourth in 1995, and all the rest. The difference in their growth trends from 1995 to 2006 is visible:  The richest quarter of regions have realized higher gains in average incomes than the others. Thus all regions increased in their average incomes, but a few rich regions pulled away from the pack. Federal policies have not had the effect of equalizing per capita incomes in the regions, whereas intraregional inequality has grown in almost all regions. It also has grown much faster in some regions than others for reasons that have to do with both economic and political differences. 1.5.  State Capacity and Regional Diversity The radical economic reform program of the early 1990s in Russia has provoked sharp debate. I do not intend to revisit those debates in this book. A crucial issue that must be accounted for in assessing the impact of the Gaidar and Chubais reforms is the degree to which the reformers had a real choice over economic strategy and the degree to which the state apparatus was under their control.92 The weakness of the state – caused to a large degree by the breakdown in mechanisms of control and accountability resulting from Gorbachev’s economic and political reforms  – meant that the Gaidar team had very little capacity to enforce their reform policies. Very little of the state Andrei Shleifer and Daniel Treisman, Without a Map:  Political Tactics and Economic Reform in Russia (Cambridge, MA:  MIT Press, 2000); William Tompson, “Was Gaidar Really Necessary? Russian ‘Shock Therapy’ Reconsidered,” Problems of Post-Communism 49:4 (2002): 12–21.

92

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administrative apparatus, including the Central Bank, much of the federal executive bureaucracy, and regional executive power, was under their actual control. Policy-making power, moreover, was divided by the intensifying confrontation between legislative and executive branches and the deep polarization between reformers and opposition.93 Normally we conceive state capacity to be an aggregate attribute of the state, that is, as an abstract summation of the activity of all the institutional agencies making up the state.94 However, a state is also a composite of numerous organizations and subnational governments, each of which can simultaneously be regarded as both arena and agent.95 When a state undergoes a breakdown in its steering capability, as Russia did, it is even more important to disaggregate our measures of state capacity. Different departments and territorial governments may vary widely in their ability to collect and pool information, to make effective policy, and to enforce rules. What might look to the central leadership like collusion by powerful regional actors, such as between local oligarchs and governors, may from the regions’ standpoint be efforts to preserve some degree of order in the face of a general breakdown in the old levers of coordination and control. The loss of state capacity at the center, in other words, may be offset by regional government initiatives to assume responsibility for public services. We face the old problem of judging whether a transfer of the power to initiate or block policy from actor A to actor B represents B’s usurpation of power from A, a tacit delegation of power from A to B, or simple drift.96 In the case of the loss of power by Russia’s federal center in the early 1990s and the rise in the autonomy of regional government, some of each is evident. For example, the central government’s abdication of control over tax collections and monetary policy was not intentional,97 but the center did deliberately hand the lion’s share of the responsibility for maintaining health, education, and social services over to the regions. As we will see in Chapters 2 and 3, regional governors responded in different ways to the breakdown of central power. For this reason, variation in the character and orientation of regional government was particularly important in the first Timothy J. Colton and Stephen Holmes, eds, The State after Communism (Lanham, MD: Rowman & Littlefield, 2006); Michael McFaul, Russia’s Unfinished Revolution: Political Change from Gorbachev to Putin (Ithaca, NY: Cornell University Press, 2001); Thomas F. Remington, The Russian Parliament:  Institutional Evolution in a Transitional Regime, 1989–1999 (New Haven, CT: Yale University Press, 2001). 94 J. P. Nettl, “The State as a Conceptual Variable,” World Politics 20:4 (1968): 559–592. 95 Kathryn Stoner-Weiss, Resisting the State: Reform and Retrenchment in Post-Soviet Russia. (Cambridge: Cambridge University Press, 2006). 96 Cf John M. Carey and Matthew Soberg Shugart, eds. Executive Decree Authority (Cambridge, Cambridge University Press, 1998); D. Roderick Kiewiet and Mathew D. McCubbins, The Logic of Delegation: Congressional Parties and the Appropriations Process (Chicago: University of Chicago Press, 1991). 97 Yegor Gaidar, Days of Defeat and Victory (Seattle: University of Washington Press, 1999); Juliet Johnson, A Fistful of Rubles: The Rise and Fall of the Russian Banking System (Ithaca, NY: Cornell University Press, 2000). 93

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years of the transition. Certainly it helps account for variation in regional economic performance, including levels and distribution of wages and incomes. The general crisis in the state and economy in the early 1990s meant that the challenge for regional governments was not to remove the state from managing the economy, but to replace the old Soviet administrative structures (for example, for central planning, allocation of supplies, and controls over prices and wages) with more adequate instruments for maintaining social stability and public services, and, if possible, to take advantage of the new opening to competitive market production. The situation was comparable to that of the response of states to crises of wartime or depression. World War II, for example, prompted a number of governments to establish coordinating mechanisms for industry and for industry-government consultation.98 I do not argue that at the regional or federal level, Russia was an Asian-style “developmental state,” but that in those regions that were relatively successful in responding to the crisis, success owed to the intervention of the regional government in promoting cooperation among major economic interests and between them and government – as in European and Asian states that forged coordinating mechanisms in the face of wartime crisis. Faced with the collapse of the old mechanisms for administering production, restraining wages, providing social services, and maintaining employment, some regional leaders succeeded in devising institutional means to facilitate market transition while protecting basic public services, and in return accepted modest constraints on their own ability to prey on business. This type of arrangement was the exception, not the rule. Still, it belies many of the neoclassical assumptions that successful reform required the “depoliticization” of the economy.99 At the same time, although successful regions reduced poverty and raised wages overall, and did more to provide public services, they also tolerated higher growth in wage inequality, which may have longer-term consequences for governance. Nevertheless, to understand intra- and interregional income inequality since the end of the Soviet regime, we must take account of regional regime characteristics. 1.6.  The Argument My general argument is that those regional regimes that were relatively more successful in managing the economic transition (insulating the region from major shocks while facilitating new productive investment and economic Cf Peter Gourevitch, Politics in Hard Times:  Comparative Responses to International Economic Crises (Ithaca, NY: Cornell University Press, 1986); Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Palo Alto, CA: Stanford University Press, 1982); Peter Katzenstein, Small States in World Markets: Industrial Policy in Europe (Ithaca, NY:  Cornell University Press, 1985); Robert Wade, Governing the Market:  Economic Theory and the Role of Government in East Asian Industrialization (Princeton, NJ: Princeton University Press, 1990). 99 Maxim Boycko, Andrei Shleifer, and Robert Vishny, Privatizing Russia (Cambridge, MA: MIT Press, 1995). 98

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growth) did so by creating a political environment where major actors shared the costs and opportunities generated by the transition. Such governments accepted greater openness and accountability, were less likely to engage in predation and rent seeking, and provided a higher level of public goods. Such arrangements encouraged cooperation among business enterprises and between business enterprises and the regional government. This set of institutions in turn facilitated higher income levels, lower poverty (both because minimum wage levels were higher – and more subject to tax – and because social spending was higher), and higher income inequality as incomes at the upper end of the distribution rose relative to the median. Less pluralistic regimes, where business lacked autonomy of the government, were run as personalistic patronage machines based on redistributing rents, and had little success in stimulating productive activity. In such regimes, incomes remained low, poverty high – and income inequality relatively low. To measure differences in regime characteristics across regions, I use an index scoring Russian regions at three points in time on a scale of democratic characteristics. These are similar to the scales applied to compare regimes ­cross-nationally with respect to their democratic or authoritarian characteristics, such as those of Freedom House and Polity. The scale used in this book was constructed as an additive index of ratings on ten particular aspects of the political regimes in the regions over a series of successive time periods (1991–2001, 1999–2003, 2000–2004, and 2001–2006). The ratings were drawn up by a group of experts at the Moscow Carnegie Center under the direction of Nikolai Petrov and Alexei Titkov.100 I drop one of the ten items (the scope of economic 100

The data are available at http://atlas.socpol.ru/indexes/index_democr.shtml. Each region was rated from 1 to 5 on each of the following items for each of three time periods (1991– 2001; 2000–2004; and 2001–2006): 1. regional political structure (balance of power, electoral versus appointment methods for filling offices, the independence of the judiciary and law enforcement, limits or violations of civil rights); 2. openness or closedness of political life (transparency, inclusion in national processes); 3. degree to which elections are free and fair; how competitive and honest they are; how much the authorities resort to administrative pressures and political interference; limits on rights of participation in elections; 4. political pluralism – the presence of stable parties, factions, and legislative assemblies, coalitions in elections; 5. the independence of the media; 6. civil society (nongovernmental organizations, referenda, forms of unsanctioned public activity, e.g., rallies, demonstrations, strikes); 7. elites: quality, reproduction, turnover (e.g., via elections); stability of procedures; diversity of elites, effectiveness of methods of coordinating their interests; 8. local self-government: presence of elected bodies of local self-government, their activeness and influence. 9. the degree to which the regime was free of corruption; 10.  the degree to which the regime had pursued economic liberalization.   In the analyses that follow, I drop the score for the last item, economic liberalization, from the aggregate democracy score. The reason is that in measuring the effect of democratization

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liberalization) on the grounds that it may be endogenous to the political characteristics of the regime. Thus for each period, the maximum score a region could receive was 45 (a maximum score of 5 for each of the 9 admissible items). The index combines several dimensions of political life. Some measure openness and competitiveness (items 1, 2 and 3), others the dispersion of political resources (items 4 and 6) and adherence to the rule of law (items 1 and  9). Others assess the potential for collective action outside the state (items 7 and 8). Overall, the index reflects something like Dahl’s concept of polyarchy: a measure of the degree to which the resources for exercising power are dispersed among multiple competing sources of potential influence, and the degree to which the diverse interests have the opportunity to participate meaningfully in decision making.101 For the 1991–2001 period, the highest score for any region was St. Petersburg, with 41, followed by Sverdlovsk oblast (39) and Karelia (37). The city of Moscow was in the middle of the pack, at 25. At the bottom was Kalmykia, at 12, followed by three North Caucasus regions and Bashkortostan.102 I find that regimes higher on the democracy score have higher average incomes, higher average wages, lower poverty, higher inequality, higher social spending, and lower social dependency in the 2000s, even controlling for levels in the 1990s. I also find that regimes with higher democracy scores have higher incomes and income inequality as a result of pre-tax (wage) income rather than postfisc income. Finally, I argue that these patterns are due to differences in the business-government environment in different kinds of political regime. In more open and competitive regional regimes, enterprises tend to pay higher wages (both at the lower end and, still more, at the top end), to invest more in production, and to support a higher level of social spending by government. It is important to remember that the democracy scores represent generalized summaries of the political climate in individual regions for time periods of different lengths. The first score is a broad index of the degree to which regional regimes in the 1990s met the criteria associated with democracy and pluralism, and the score for the 2001–2006 period reflects a somewhat shorter time period. These scores should not be interpreted to mean that regional on economic performance, it is undesirable for a measure of economic policy to be equated with the measure of democracy. The Cronbach’s alpha for the nine chosen indicators is .90 for the 1991–2001 period, .93 for the 2000–2004 time period, and .92 for the 2001–2006 period. Note that the data are not in the form of annual observations, but are averages for periods of time of varying length. Consequently, a cross-sectional time series design is not appropriate for the analyses presented here. Instead, cross-sectional models at particular points in the transition are estimated. 101 Robert A. Dahl, Who Governs? Democracy and Power in an American City (New Haven, CT: Yale University Press, 1961); Robert A. Dahl, Polyarchy: Participation and Opposition (New Haven, CT: Yale University Press, 1971). 102 Chechnia is not included in this scoring and is not among the regional units included in the analyses in this paper; there are very few official figures from Chechnia for nearly the entire period covered here.

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political features were unchanging (the governorship could change hands, regional elections might produce a different composition of deputies in the regional legislature, economic conditions might improve or worsen, and so on). Therefore, these scores should be read as averages over the given time period. Similarly, the case study literature cited in Chapter 3 about the different kinds of business-government arrangements found in particular regions are mostly drawn from the 1990s and early 2000s, and are thus time-specific. However, the coordination and cooperation dilemmas that they illuminate are not restricted to any particular point in time, but rather reflect the most lasting problem of a weak institutional infrastructure for a market ­economy and the continuing fact of the central role for post-Soviet enterprises in providing a much wider range of social goods and services than would be found in Western Europe. A case in point (discussed in later chapters) is the response on the part of firm managers, regional political leaders, and central government officials (and the weak role of the trade unions) in coping with the acute crisis of the automobile industry in 2008–2009. At the most general level, a study of variation in institutional arrangements in the 1990s and 2000s as they affect income formation sheds light on more universal patterns of democracy, pluralism, and inequality. Before turning to the empirical evidence about the way regional regime characteristics affected wages, incomes, social spending, poverty, and social dependency, we need to set the stage. Chapter 2 will survey the general trends in employment, earned incomes, and social welfare for Russia overall from the end of the Soviet era through Putin’s presidency. Chapter 3 will then present a series of case studies of particular regional regimes to show how they adapted to the impact of the transition. Then Chapters 4, 5, and 6 present the results of empirical evaluations of the arguments, using data from Russian official sources, a World Bank-sponsored survey of household incomes (NOBUS), and a World Bank/European Bank for Reconstruction and Development (EBRD) survey of enterprises (BEEPS). Chapter 7 seeks an explanation for these differences in regime characteristics across the regions, and Chapter 8 reviews the findings and relates them to Russia’s response to the current global recession.

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Cambridge Books Online http://ebooks.cambridge.org/

The Politics of Inequality in Russia Thomas F. Remington Book DOI: http://dx.doi.org/10.1017/CBO9780511973024 Online ISBN: 9780511973024 Hardback ISBN: 9781107096417 Paperback ISBN: 9781107422247

Chapter 2 - Employment, Earnings, and Welfare in the Russian Transition pp. 35 -76 Chapter DOI: http://dx.doi.org/10.1017/CBO9780511973024.003 Cambridge University Press

2 Employment, Earnings, and Welfare in the Russian Transition

To understand the effect that Russia’s transition had on incomes, we must appreciate how closely tied incomes and benefits were to employment in the Soviet system. It has often been observed that the Soviet “social contract” rested on a tacit bargain: The regime provided effectively full employment at modest and relatively equal wages and a comprehensive system of social benefits in return for worker quiescence. To the extent there was such an implicit social contract – as we will see from further discussion, this remains a matter of controversy – it rested on the fact that not only earnings but many kinds of social provision as well were embedded in the employment nexus. Moreover, much of the income that Soviet citizens earned through their place of employment was nonmonetary. Wages and pensions, and some other social benefits, were paid in cash, but cash could buy relatively few goods and services – at least legally.1 Nonmonetary, administratively allocated benefits replaced market transactions for producing and distributing many basic goods and ­services. Education and health care were universally available public services, funded through the state. Beyond them, the system of public welfare comprised extensive nonmonetary benefits including free or discounted access to goods and services such as housing, transportation, recreation, medications, and food. To a large extent, many of these goods and services were distributed through the workplace. The combination of nominal universalism in social 1

Although wages were paid in cash, enterprises were allocated a second form of money, called noncash rubles (beznalichnye rubli), which they used to settle accounts for supplies. The ease of obtaining noncash rubles from the state bank to handle contingencies was one reason enterprises operated with soft budget constraints. However, in an effort to inhibit inflation, the state prohibited the conversion of noncash rubles into cash rubles. One way in which unscrupulous entrepreneurs in the Gorbachev period made huge fortunes was to use their party and Komsomol connections to obtain scarce goods available only for noncash rubles and to sell them for cash rubles at high prices, not only arbitraging the gap between plan prices and ­market prices, but breaching the firewall between noncash and cash rubles. The prevalence of this practice was one reason prices rose and goods disappeared in the late 1980s – well before the Yeltsin era.

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entitlements, some provided in the form of cash benefits and others as subsidized goods and services, often distributed through workplaces, made the social welfare system mildly regressive. Even though earned incomes were relatively equal, the value of subsidized goods and services for privileged strata was much greater than that available to the general public. By far the largest cash transfer program was pension provision, which was only moderately redistributive. Very little in the system of cash transfers consisted of targeted assistance to the needy.2 Thus the universality of benefits, relatively low differentiation of cash incomes, widespread provision of in-kind benefits, and reliance on the employment relation to allocate wages and social benefits were the defining features of the Soviet system of work, wages, and welfare. The fact that the workplace was the source of most cash income and most in-kind benefits meant that economic liberalization of the 1990s had a devastating impact on both earnings and benefits. Soviet income and social welfare policies were centrally regulated, although there was substantial diversion of incomes and goods into the black market. Federal rules set a Soviet-wide minimum wage and a wage scale, which was supplemented by a complex system of wage coefficients for different regions and types of work. Likewise the rules for distributing cash social benefits, such as pensions and disability payments, and in-kind benefits, including rationed goods and services, were centrally set. However, in the late 1980s and early 1990s, the mechanisms for paying wages and providing social services became much less centrally regulated and more subject to informal arrangements varying by enterprise and region. In turn, increasing informalization brought about a sizable shift of employment, incomes, and social benefits into off-the-books cash payments or in-kind transactions. Only after the August 1998 crash, and particularly after Vladimir Putin came to power as president in 2000, was the system of employment, wages, and social welfare gradually brought back under some central regulation. This came about for a combination of political and economic reasons. Even before the recovery began in late 1999, companies and government authorities at all levels began reaching new agreements over wage, social, and tax policy. As the economy recovered, government regained the ability to meet its cash obligations. The new crisis of 2008–2009, however, has begun to upset these arrangements and threaten a return to many of the informal practices of the 1990s. The harsh effects of the economic reforms of the early 1990s on employment, wages, and social welfare have been described in detail elsewhere.3 Liliia Ovcharova, “Kak uiti ot sistemy vseobshchikh l’got?” April 28, 2001, Demoskop na Polit.ru. www.polit.ru/documents/413344.html 3 Anders Aslund, Russia’s Capitalist Revolution:  Why Market Reform Succeeded and Democracy Failed (Washington, DC: Peterson Institute for International Economics, 2007); Jeanine Braithwaite, “The Old and New Poor in Russia: Trends in Poverty,” ESP Discussion Paper Series, Education and Social Policy Department, Human Resources Development and Operations Policy, The World Bank (1995); Thane Gustafson, Capitalism Russian-Style (Cambridge: Cambridge University Press, 1999); Branko Milanovic, Income, Inequality, and 2

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37 100

Employment index

Poverty rate

Unemployment rate

0

50

60

70

GRP per capita (Mikheeva)

10

20

80

30

90

40

Employment, Earnings, and Welfare

1990

1995

2000

2005

Year

Figure 2.1.  Median regional employment, unemployment, poverty, and output rates, 1990–2008. Note:  Employment index (1990 = 100) and GRP per capita (1990 = 100) are scaled on right axis. Poverty and unemployment rates are on left axis.

Unemployment rose, employment fell, production fell, incomes fell, and poverty and inequality rose. Figure 2.1 displays four series of indicators showing the respective values for the median region for unemployment, employment, poverty, and output per capita.4 Unemployment and poverty are given as percentages and scaled on the left axis. On the right axis are shown employment and output per capita figures, indexed so that each region’s 1990 value is set equal to 100. As the figure shows, unemployment in the median region rose from more than 5% to more than 13% at its peak in 1999, the median region’s poverty rate rose from 24% to 40% in 2000, and output per capita fell to less than half its 1990 value by 1996.5 Total employment for almost all regions fell Poverty during the Transition from Planned to Market Economy (Washington, DC:  The World Bank, 1998). 4 Regional median figures are used in order to provide a more informative measure of countrywide trends than do national averages. Specifically, reporting regional medians eliminates the distorting effects of Moscow and St. Petersburg on national aggregates. These two cities, which hold the status of federal subjects and jointly account for about 10% of the population, are substantially more prosperous than all other regions. 5 Unemployment is from household survey data from the state statistical agency; poverty is the percentage of the population whose incomes fell below the regional subsistence threshold; output per capita is based on Nadezhda Mikheeva, “Differentiation of Social and Economic Situation in the Russian Regions and Problems of Regional Policy,” Moscow, Economic Education and Research Consortium: Russian Economic Research Program, Working paper series, Working paper no. 99/09, 1999 (http://econpapers.repec.org/paper/eerwpalle/99–09e.htm).

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The Politics of Inequality in Russia

about 15% and only slowly recovered in the 2000s (Moscow and a few regions in the south that absorbed large flows of refugees saw absolute increases in their total employment). Another effect of the transition, a shift of employment, earnings, and benefits out of formal channels and into informal ones, while harder to document, is equally important. The Soviet system had used nonmonetary benefits, often distributed through the workplace, as an alternative to monetary income for many goods and services. With the end of central planning, the sharp cuts in government spending, the devolution of responsibility for social policy to regional and local governments, high tax rates, and high inflation, a large share of income moved into unregistered, off-the-books forms. Likewise the social welfare system was not only decentralized, but also became increasingly informal, as more nonmonetary benefits were attached to the workplace. Illicit markets for public services sprang up as individuals had to pay informally for nominally free services such as medical care and education that had previously been funded through the state. Similarly, monetary earnings became even more dependent on the discretion of line managers who determined the allocation of bonuses, overtime, and other supplements to basic wages. The movement of income and welfare into off-the-books forms in the 1990s increased income inequality within and across regions. The recovery of the economy in the 2000s, by raising personal incomes and government revenues, enabled the state to bring a larger share of the flow of incomes and benefits into formal, cash forms that were subject to taxation. Although the recovery reduced some sources of inequality in the distribution of incomes and benefits, it increased others. Although poverty declined overall as earned and social incomes at the bottom end of the scale rose, the recovery also increased the differentiation of monetary earnings at the upper end of the distribution. The relatively nonredistributive nature of the tax and social spending system did little to mitigate this rising differentiation of earned incomes. The overall trends in average wages and incomes (as well as pensions, which will be discussed later in the chapter) are shown in Figure 2.2. On the left axis are plotted the median regional average wage, average income, and average pension as a multiple of the subsistence minimum for the given region in the given year; they show that for the most part, wages and incomes were closely related and that each followed a generally upward trend. (The decline from 2000–2001 seems to be an artifact of an upward recalculation in the value of the subsistence threshold.) The reported value of the median region’s subsistence minimum level is plotted on the right axis and indexed to 1994. Figure 2.3 shows the relation between poverty and inequality in the 1990s and 2000s, demonstrating that inequality rose with poverty in the 1990s, then rose still faster in the 2000s as poverty declined. Once again, the values shown are for the median region for each year. In this chapter, I explore the trends in employment, wage income, and social welfare since the end of the Soviet regime for Russia as a whole. The first section of the chapter summarizes the system linking employment,

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39

2 1

Pension

1000

1.5

2000

Income

4000

Wage

3000

2.5

Employment, Earnings, and Welfare

1990

0

.5

Subsistence minimum (1994 = 100) 1995

Year

2005

2000

30

40

Figure 2.2.  Median regional wage, pension, and income as multiples of subsistence minimum. Note:  Median regional real wages, pensions, and income (scaled on the left axis) are expressed as multiples of the given region’s subsistence minimum for a given year. An index representing the median region’s subsistence minimum is measured on the right axis. The spike in the median subsistence minimum level in 2001 causes the wage, pension, and income levels to drop in relation to it. Otherwise, all three show a steady rise from very low levels in the early 1990s.

20

Poverty

10

Decile ratio

1995

2000

Year

2005

Figure 2.3.  Median regional poverty and inequality rate.

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2010

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The Politics of Inequality in Russia

incomes, and social welfare under the Soviet regime. Then I trace the effect of the reforms of the late 1980s and early 1990s on work, wages, and welfare, showing that the relatively centralized formal institutions governing them broke down and became decentralized and subject to strong informal pressures. Starting in the late 1990s and continuing through the new economic crisis of 2008–2009, there was a reverse trend, toward greater centralization of wage setting and social policy, associated with Putin’s accession to power and the economic recovery of 1999–2008. Finally, I will present some preliminary indications of the effect of the new economic crisis of 2008–2009 on work and wages at the end of the 2000s. Chapters 4, 5, and 6 will analyze regional variation in these trends, arguing that regional differences in political institutions account for much of the variation in incomes and welfare observed across regions. 2.1.  The Soviet Social Contract The interlocking set of institutions governing work, wages, and welfare in the late Soviet era has been characterized by Linda Cook and other writers as an implicit “social contract.”6 This arrangement exchanged a regime’s commitment to employment security and a set of universal social benefits for workers’ political support.7 Some writers have challenged the social contract concept, arguing that when the state began defaulting on the former guarantees of employment and state-funded pensions, healthcare, education, and family allowances for all, workers did not respond with large-scale protest.8 Still, even though the term should not be taken literally to imply that the bargaining resources of organized labor and the state were equivalent or that the terms of the contract were enforceable, as a metaphor it fairly characterizes the complementary nature of popular and elite expectations about the regime’s commitment to provide universal social benefits, including effectively full employment, and extensive reliance on workplace-based, nonmarket social entitlements. The universalism of Soviet welfare policy is well documented. As many writers have shown, most benefits were not means-tested or redistributive. Pension provision, health care, education, and public services such as public transportation and public safety were supplied as state administrative Linda J. Cook, The Soviet “Social Contract” and Why It Failed: Welfare Policy and Workers’ Politics from Brezhnev to Yeltsin (Cambridge, MA: Harvard University Press, 1993); Stephan Haggard and Robert R. Kaufman, Development, Democracy and Welfare States:  Latin America, East Asia, and Eastern Europe (Princeton, NJ: Princeton University Press, 2008). 7 Cook, The Soviet “Social Contract,” p. 5. 8 e.g., Sarah Ashwin and Simon Clarke, Russian Trade Unions and Industrial Relations in Transition (New York and Houndsmills, Basingstoke, Hampshire:  Palgrave Macmillan, 2003), p. 19; Stephen Crowley, Hot Coal, Cold Steel: Russian and Ukrainian Workers from the End of the Soviet Union to the Post-Communist Transformations (Ann Arbor: University of Michigan Press, 1997), pp. 14–15. 6

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Employment, Earnings, and Welfare Table 2.1.  Incomes and Social Benefits by Source and Type Source

Monetary

Nonmonetary

Federal and regional government

Pensions, maternity benefits

Workplace

Basic wages, bonuses, supplements

Subsidized free or discounted rights to public transportation, medications, rent, utilities Housing, preschool care, clinics, recreation vouchers, some food and scarce consumer goods

obligations rather than through social insurance schemes or as private commodities.9 Trade unions administered some benefits through the workplace, but trade union membership was effectively universal (and all members of an enterprise belonged to the same union; there was no distinction between ­blue-collar and white-collar employees of a given branch). Soviet social benefits were ­“low-quality but comprehensive,” in Haggard and Kaufman’s terms.10 The Soviet welfare system also included extensive nonmonetary benefits for specified categories of the population. These included the right to free or discounted public services such as rent, utilities payments, ­medications, and public ­transportation for a number of groups, such as pensioners, World War II veterans, veterans of the home front during the war, veterans of labor, invalids, victims of the Chernobyl disaster, veterans of several uniform branches (military, police, special services, and so on), young children, and other groups. In the 1990s, the categories of the populace eligible for various federally sponsored exemptions and discounts grew still further, reaching 236 by 2001, and the number of specific services to which they were entitled for free or at a discount was 156.11 Table 2.1 enumerates some of the types of income and benefits by type of provider in the Soviet period. Particularly important to understanding the legacy of the Soviet social welfare system is the fact that a large share of social provision was distributed through places of employment. State enterprises built and owned much of the housing stock of the country, as well as many of the preschool and recreational facilities, and offered workers discounted vouchers for vacations (often at facilities owned by the enterprise). As much as half of the housing stock of the country was owned and managed by enterprises.12 Larger enterprises were Haggard and Kaufman, Development, Democracy and Welfare States. Ibid, p. 177. 11 Ovcharova, “Kak uiti?”; Susanne Wengle and Michael Rasell, “The Monetisation of L’goty: Changing Patterns of Welfare Politics and Provision in Russia,” Europe-Asia Studies 60:5 (2008): 739–756. 12 Linda J. Cook, Postcommunist Welfare States: Reform Politics in Russia and Eastern Europe (Ithaca, NY: Cornell University Press, 2007), p. 84. 9

10

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The Politics of Inequality in Russia

often responsible for providing heat, electric power, and water services to the districts where their workers lived. (Several hundred cities in Russia  – 600 or more – had been built around a single enterprise, and so were effectively “company towns.”) Large enterprises often ran the public transportation from their residential districts to the enterprise. They distributed consumer goods at low cost that were unavailable in the stores, such as cars, television sets, VCRs, high-quality clothing, and other goods. Many had their own farms in order to provide workers with scarce food items. Many bartered the output of the enterprise for food and consumer goods to distribute to their workers. Enterprises also allocated the small plots of land in the countryside where their employees could build dachas and maintain vegetable gardens. The same principle applied to managerial and professional strata. Party and government officials, professionals working in research institutes and universities, military officers, creative intellectuals, and others also had access to benefits provided by virtue of their employment, including vouchers for discounted prices on imported goods (for instance, through the system of closed-access stores), as well as exclusive rights to use particular hospitals and vacation facilities, and to live in better-quality housing complexes. Elements of this system remain in place today. Many state officials enjoy the free use of state apartments, use of a state-provided car and driver, a one-time payment to enable them to purchase an apartment, as well as exclusive access to state sanatoria, high-quality health facilities, day-care facilities, and schools; all these benefits supplement their high cash incomes and pensions. At the highest ranks, state officials still enjoy the use of state dachas.13 Soviet wage differentials were low compared with the United States or Latin America, but high relative to East Central Europe and even Great Britain. Atkinson and Micklewright estimate that the Gini coefficient for income distribution in the USSR in 1986 was 27.6. This was higher than most East Central European states, and even higher than Great Britain (26.7)14 (see Table 2.2). The Russian state statistical service estimates that as of 1980, the richest 20% of the population received about one-third of total income. One reason for the relatively high level of income inequality in the late Soviet period was the existence of wide differentials in wages within enterprises and between more and less prosperous enterprises. Both wages and in-kind benefits were distributed in ways intended to spur plan discipline. For example, in some enterprises, the distribution of goods from the social funds was explicitly designed to reward and retain skilled workers and workers with good labor records.15 Similarly, foremen used their autonomy in allocating bonuses and other supplementary Novye izvestiia, February 2, 2005. Anthony B. Atkinson and John Micklewright, Economic Transformation in Eastern Europe and the Distribution of Income (Cambridge: Cambridge University Press, 1992), 81. 15 Crowley, Hot Coal, pp. 62–63; Simon Clarke, ed., Management and Industry in Russia: Formal and Informal Relations in the Period of Transition (Brookfield, VT:  Edward Elgar, 1995); Claudio Morrison and Gregory Schwartz, “Managing the Labour Collective: Wage Systems in the Russian Industrial Enterprises,” Europe-Asia Studies 55:4 (2003): 553–574. 13

14

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Employment, Earnings, and Welfare Table 2.2.  Selected European Country Gini Indexes, Mid-1980s

Czechoslovakia Hungary Poland USSR Great Britain

Year

Gini

1987 1986 1986 1986 1986

19.7 22.1 24.2 27.6 26.7

Source:  Anthony B. Atkinson and John Micklewright, Economic Transformation in Eastern Europe and the Distribution of Income (Cambridge: Cambridge University Press, 1992), p. 81.

types of income to reward those deemed most valuable to the enterprise. Therefore, the major income differentials were not between white-collar and blue-collar workers, but across enterprises and among workers of the same enterprise. In practice, therefore, both the structure of wages and distribution of social benefits departed from the universalistic and ­egalitarian premises of state socialism, doing so in both the monetary and nonmonetary forms of income, and incorporated a significant element of informality. Also, to some extent, wages and social amenities substituted for one another. As Crowley shows, some steel workers earned relatively meager wages but enjoyed access to a wide array of scarce consumer goods (food, clothing, consumer ­electronics), whereas some coal miners earned very high wages but lived in freezing barracks. Crowley attributed the much greater willingness of miners to strike in 1989 to this difference.16 From the late 1970s, Soviet wages were based on piece rates according to a particular work team’s (brigade’s) success in fulfilling plant output targets.17 A statewide scale of wages (the setka) applied to all enterprises but was supplemented by significant differences based on several categories of coefficients such as the “coefficient of labor participation,” regional coefficients, and coefficients for the hazardousness of the job, the skill content of the work, the experience of the worker, the worker’s disciplinary record, and other criteria. Additional bonuses were paid for the fulfillment of plan targets. Over the course of the Brezhnev era, the wage at the bottom rung of the wage scale was raised several times, narrowing the wage differentials between the lowest- and highest-paid workers and reducing the gap in earnings between manual workers and those in engineering and managerial occupations.18 By the late 1980s, many skilled Crowley, Hot Coal. Production workers were organized into brigades and therefore enjoyed the bonuses, but auxiliary workers were not, leading to persistent intraenterprise divisions between “production” workers and auxiliary employees. Simon Clarke, “Labour Relations and Class Formation,” in Labour Relations in Transition: Wages, Employment and Industrial Conflict in Russia, ed. Simon Clarke (Cheltenham: Edward Elgar, 1996), p. 12. 18 Cook, The Soviet “Social Contract,” pp. 34–36. 16

17

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The Politics of Inequality in Russia

manual workers in fact earned more than engineering-technical personnel. The various wage supplements in the form of coefficients, bonuses, and so on were added to the base wage out of the shop’s wage fund, over which the shop manager had full discretion. Although enterprises were freed of the obligation to use the state scales in determining wages in 1991 (except for organizations in the budget sector), in practice many continued to do so.19 Likewise, the large share of earnings constituted by bonuses and supplements continued. Because the increases in wage incomes in the late Soviet era were not matched by commensurate increases in productivity or the supply of consumer goods, over time, workers grew more dependent on enterprises for scarce goods. This, in turn, gave further discretion to managers to differentiate among workers in the distribution of goods. Moreover, the narrowing of the gap between the base wage and the top wage rates was offset by the increased reliance on bonuses and supplements, which could often constitute close to half of total earnings and which went differentially to workers at higher skill levels.20 Foremen also had a good deal of discretion to reclassify workers into higher skill grades and offer them high-paying overtime jobs  – discretion that was delegated to them so that they could reward workers for good discipline and stem the departure of always-scarce skilled, experienced workers. The discretionary power of foremen in the distribution of supplements and bonuses, and the inequality in earnings it generated within the enterprise, led to chronic dissatisfaction. Two workers at the same enterprise doing the same job and with the same skill and experience level might receive monthly earnings differing by as much as 100%, depending on the foreman’s judgment as to the quality of their efforts.21 So complicated were the procedures by which line managers calculated the allocation of bonuses and supplements that, according to Donald Filtzer, by the time Gorbachev came to power, there was almost no relation between productivity and earnings, and many workers considered the system to be essentially random.22 Therefore, although the Soviet wage system was nominally rigid and egalitarian, in practice it incorporated a substantial amount of both inequality and informality.23 Wage rates differed substantially across enterprises, even for the same occupations. Workers at firms whose products were in high demand by the state, as was the case at many defense plants, tended to enjoy higher wages and better social benefits than workers at less favored enterprises. The pattern was self-perpetuating. High-performing enterprises paid higher wages and bonuses, offered better working conditions, enjoyed higher levels of Simon Clarke, “Market and Institutional Determinants of Wage Differentiation in Russia,” Industrial and Labor Relations 55:4 (2002): 628–648, esp. p. 629. 20 Morrison and Schwartz, “Managing the Labour Collective,” p. 557. 21 Morrison and Schwartz, “Managing the Labour Collective”; Donald Filtzer, Soviet Workers and the Collapse of Perestroika:  The Soviet Labour Process and Gorbachev’s Reforms, 1985–1991 (Cambridge: Cambridge University Press, 1994). 22 Filtzer, Soviet Workers, p. 58. 23 Clarke, “Labour Relations and Class Formation.” 19

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Employment, Earnings, and Welfare

45

discipline, and could choose their workers more selectively. There were fewer disruptions of supply and fewer breakdowns of production due to drunkenness. Enterprises in branches such as light industry, particularly textiles and other consumer goods, were in the opposite condition: Earnings were lower, disruptions more common, and it was harder for management to recruit and retain good workers.24 However, the norm that the enterprise was responsible for providing comprehensive social services for its workforce, often termed “enterprise paternalism,” was embedded into the economy and social fabric of all regions.25 Enterprise paternalism reflected the fact that the state held enterprises responsible both for meeting production targets and providing social welfare services. Enterprises paid wages in cash, which workers could use to purchase a limited array of consumer goods. Many goods and services (housing, recreation, child-care, even many subsistence goods) could not be obtained legally on the consumer market due to shortages or administrative controls. Therefore, workers depended on the enterprise for their provision. (Of course, all goods and services were available on the black market, for cash or in-kind exchange, but the black market simply redistributed administratively controlled items.) Pressed to meet plan production targets, enterprise managers tended to hoard labor, particularly skilled and dependable workers, and used their power to allocate goods in kind to help preserve their control over the workforce. In turn, the political authorities at the center, and in towns and regions, depended on the managers to provide infrastructure, social services, and employment to the area. Within the enterprise, the enterprise director played, and was expected to play, a paternalistic role in solving the personal problems of his workforce. The dependence of local authorities on the enterprises in their ­territories reinforced enterprise paternalism. (Even if a regional leader wanted to build, say, a new high school or sports stadium out of regional resources, the labor and ­materials to do so would have had to be included in the regional development plan; they were not available for purchase with budget income.) Enteprise directors tended to welcome these responsibilities, if only because they gave them ­additional leverage over government officials and their own workforces. It helped them retain workers despite the low wage scales if they could tie the workers to the enterprise through dependence on it for the most basic social needs.26 It was this interdependence among governments, workers, and enterprises, whereby a series of social obligations run through the workplace offset the Filtzer, Soviet Workers; Clarke, “Labour Relations and Class Formation”; Morrison and Schwartz, “Managing the Labour Collective.” 25 Samara Research Group, “Paternalism in Russian Enterprises:  Our Understanding,” in Management and Industry in Russia:  Formal and Informal Relations in the Period of Transition, ed. Simon Clarke (Brookfield, VT:  Edward Elgar, 1995) pp. 128–138; Alla E. Chirikova, “Russian Directors: Management Strategies and Behavioral Models,” Sociological Research 42:3 (2003):  6–52; Simon Clarke, The Development of Capitalism in Russia (London: Routledge, 2007). 26 Crowley, Hot Coal. 24

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strict limits on cash-based commerce in goods and services, that made it impossible to shift from a planned economy to a market economy simply by issuing a series of decrees freeing markets and privatizing assets: There was no way to liberalize economic production without devising alternative institutions for supplying social welfare services to the population. Much as Karl Polanyi argued that the spread of market relations in England required some means to guarantee the survival of society, so the liberalization of the Soviet economy made it essential to find mechanisms of social protection for the Russian workforce. In the short run, the only available institution that could do so was the enterprise. In the longer run, of course, a more efficient system of social protection was needed that would combine state provision with the marketplace. The state would supply some universal social services such as education, basic health care, and pension insurance, while providing targeted income transfers to the needy. Then market incentives could be expected to ensure a sufficient supply of goods and services to meet actual demand. But to switch from the Soviet system, with its heavy reliance on workplace-based benefits, to a fully liberalized and targeted system would require an enormous shift in the control of scarce resources. If the reformers had hoped that enterprise managers might be willing to shed their social responsibilities by transferring them to local and regional governments, they miscalculated in several respects:  Managers often preferred to maintain the old paternalism to enforce labor discipline, as a hedge against the uncertainty of the labor market and as a source of leverage in their relations with governments; regional and municipal governments lacked the resources to assume responsibility for financing housing, utilities, clinics, preschool facilities, public transportation, and the supply of scarce goods; legal title to much of the housing stock and social services facilities was held by the enterprises – a relevant point once privatization began; and many workers far preferred the security of employment at low wages at state enterpises to the uncertainty of jobs that offered no social benefits. It fell to political leaders, particularly regional governors, to find ways to maintain production at the enterprises in order to preserve social stability while preparing for a shift to a competitive market economy. As the next chapter will show, some governors adopted a market-facilitating governance regime, whereas others actively resisted liberalization. In all the regions, the character of the political regime shaped the region’s response to the imperatives of the transition. 2.2.  The 1990s: Informalization and Decentralization of Wages and Welfare The financial crisis of the late 1980s and reforms of the early 1990s reinforced households’ reliance on enterprise-based in-kind benefits. In the late 1980s, this was due to the severe price inflation fueled by large wage increases without corresponding productivity gains or price increases, which severely eroded the real value of wages and resulted in shortages in ever more categories of

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consumer goods – not just basic foodstuffs (oils, pasta, sugar) but also soap and matches.27 Then the liberalization of prices in 1992, for all but some basic subsistence goods, led to an even steeper drop in the real value of wage income, although goods reappeared in the stores. Overall, the real value of wages fell on the order of 40% in the first half of the 1990s.28 Some two-thirds of workers earned less than double the subsistence minimum by 1998.29 Poverty soared. An analysis by the World Bank of household incomes and expenditures in late 1993–early 1994 estimated that 36.1% of households had expenditure levels below the official poverty threshold (then about $32 per month), and 57.3% of households fell below the threshold in income.30 As a result, workers depended on their enterprises to pay a growing share of wages in off-the-books, untaxed form, or to leave them nominally employed at their former place of work while they pursued employment in the informal sector. Either way, employment at the state and privatized enterprises was essential to their security. The government was understandably concerned that enterprises would respond to the sharp increases in prices by raising wages, so it instituted an excess wage tax (and repealed it in 1996). Enterprises were required to pay a steep tax on any wages in excess of a given multiple of the minimum wage ­(initially four times, then six times after January 1994). Enterprises endeavored to evade the tax by maintaining large numbers of workers at the lowest pay levels (or reporting that there were more workers at this level than was in fact the case) and by paying larger shares of unreported wages. Again, the shift of wages into off-the-books, informal channels meant both a decline in tax revenues and greater inequality in wages than was officially reported.31 As contributions to the state social funds fell, levels of pensions and other social benefits lagged. As a share of GDP, cash transfers rose from around 6.5% in 1990 to around 10% in the mid-1990s, but the increase was overwhelmed by the rise in prices and the sharp decrease in government spending.32 By the end of 1992, about 40% of pensioners received monthly payments that were less than half the declared subsistence level.33 Moreover, arrears mounted as federal and regional authorities were unable to pay pensions and other cash Many have pointed out the oppressive effect on the morale of coal miners, many of whom worked in hazardous and filthy conditions and lived in unheated barracks, of the shortage of soap in the shops; this degradation was a precipitating factor in the wave of miners’ strikes in summer 1989. Cf Crowley, Hot Coal. 28 Cook, Postcommunist Welfare States, p. 92. 29 Clarke, The Development of Capitalism in Russia, p. 58. 30 Branko Milanovic, “The Role of Social Assistance in Addressing Poverty,” in Poverty and Social Assistance in Transition Countries, eds. Christiaan Grootaert Jeanine Braithwaite and Branko Milanovic (London: Macmillan Press, 2000), p. 125. 31 Brainerd, “Winners and Losers,” p. 1101. 32 Simon Commander, Andrei Tolstopiatenko, and Ruslan Yemtsov, “Channels of Redistribution: Inequality and Poverty in the Russian Transition,” Economics of Transition 7:2 (1999): 411– 447, esp. p. 417. 33 Chris Doyle, “The Distributional Consequences during the Early Stages of Russia’s Transition,” Review of Income and Wealth 42:4 (1996): 494. 27

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transfers (disability, unemployment, maternity, and other payments, as well as payments to specific categories of the population eligible to receive cash supplements, such as victims of the Chernobyl’ accident and members of nationalities that had been repressed under Stalin). The World Bank team found that fewer than 13% of the poor received some form of social assistance in the early 1990s, and that only about 1% of their expenditures were financed by social assistance funds.34 The federal and regional governments responded to the severe shortfalls in cash transfers by expanding eligibility for nonmonetary benefits (l’goty), such as discounts on public transportation, medical care, and medications. Both the federal and regional governments created new categories of beneficiaries and new categories of benefits. By the early 2000s, no one knew exactly how many people were eligible for such benefits, which level of government was responsible for providing them, or how much they cost. Only vague estimates were available. One survey in 2001 found that 49% of the population was receiving one or more type of benefit.35 The Ministry of Labor estimated that 100 million people, or two-thirds of the population, received social benefits.36 The World Bank’s NOBUS survey of households in 2003 (Chapter 5 will discuss this study in more detail) asked some 117, 209 individuals about their incomes, spending, and benefits. I analyzed the data and found that overall, about 24% of the respondents received one or more types of free or discounted goods and services. Table 2.3 lists twenty-four such benefits and the number of people who reported that they received them. The figure of 24% receiving in-kind benefits is consistent with the government’s estimate that the conversion of in-kind benefits to cash in 2005 would affect 32 million people (about 22% of the population). The total cost of benefits as of 2004 was on the order of 165.5 billion rubles (about $5.7 billion), but price distortions and a history of underfunding public services made it impossible to estimate the real cost of in-kind benefits with any precision. Certainly during the period of expansion of benefits in the 1990s, the federal and regional governments starved the public-services sector of resources.37 In the mid-2000s, the Putin regime faced the issue of rising unfunded social benefits directly and enacted a new policy intended to put them on a cash footing.38 I will describe this effort in more detail later in the chapter. Although the reform team installed under President Yeltsin intended to restructure the social welfare system comprehensively, this was not their top priority, nor did they have enough political capital to carry out the mammoth Milanovic, “The Role of Social Assistance,” pp. 125–130. RL Newsline, November 5, 2001. 36 Ovcharova, “Kak uiti.” 37 Natalia Zubarevich, “Social Welfare Reforms in Russia: Regionalization without Federalism,” Conference on “Challenges, Dynamics and Implications of Welfare Regime Change in a Comparative Perspective: A Dialogue between Post-Soviet and East Asian Scholars.” University of Toronto, Toronto, Canada, February 6–7, 2009. 38 Wengle and Rasell, “The Monetisation of L’goty.” 34 35

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Employment, Earnings, and Welfare Table 2.3.  Nonmonetary Social Benefits, NOBUS Survey, 2003 Benefit

Number of Recipients

Exemption from apartment rent payment Exemption from utilities payment Discounts on utilities and fuel payments Exemption from payment for telephone service Discounts on payments for telephone service Telephone installation free of charge Free or discounted medicines Free medical appliances Free health insurance policy with a special program Free or discounted manufacture and repair of dentures Free manufacture and repair of artificial limbs Free provision of motorized or standard wheelchairs Free or discounted provision of vehicles Compensation of the cost of fuel, repair of vehicles Free ride on all urban passenger transport Free or discounted ride on commuter transport Free or discounted ride on long-distance transport Half-price discount on long-distance transport fares Free or discounted vouchers to sanatorium and spa treatment (or compensations) Free or discounted vouchers to child care facilities, health camps, or sanatoria Construction or overhaul of housing Construction of a small garden-house, provision of a plot of land Discounted tax rates for real estate Free ride on all urban transport Total number of recipients receiving at least one benefit Total respondents

613 607 21,745 288 10,623 129 6,444 396 1,496 1,368 220 46 138 52 17,580 10,181 3,035 2,207 801 138 28 27 2,029 12,181 28,300 (24.14%) 117,209 (100%)

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transformation they envisioned.39 Their long-term goal was to replace the universalism of Soviet social policy with redistributive cash assistance targeted at the neediest groups, and to put the rest of the social welfare state on an insurance-based, self-financing footing. As much as possible, they intended to privatize those social services that could be allocated more efficiently through the marketplace, and to provide households with cash income that would free individuals of their dependence on workplace-mediated benefits and allow them greater choice over the goods and services they consumed. The reformers did launch a privatization of housing, although since housing privatization was largely the responsibility of municipal and enterprise authorities, the central government could not carry out a national privatization program for housing as they did with state enterprises. Likewise, they desired to put utilities services such as electricity and heating on a market footing, so that the producers could be compensated for their costs rather than being forced to provide service at below cost (which starved utilities providers of working capital and left the state with too few resources to subsidize the consumption of these services by the poor). But the political resistance – not only from the left, but also from sections of the state bureaucracy – to bringing prices for essential public services up to the level where they would cover production costs was simply too fierce to overcome. Similarly, many of the attempted reforms of the social welfare system, such as moving a part of pension policy to targeted income support for the needy, were blocked by a coalition of bureaucratic interests and leftist parties.40 The reformers did succeed in shifting social spending out of the general budget by administering it through four extrabudgetary funds:  the Pension Fund, the Mandatory Medical Insurance Fund, the Social Insurance Fund (to finance payments for temporary disability, childbirth, and childcare), and the Unemployment Fund.41 These were to be self-funded and financed through a payroll tax totaling 38%, of which only 1% was paid by workers. This was in addition to income, profits, and other taxes. The high tax rates resulted in massive tax evasion. Employers routinely understated the wages they were paying, paying some or all of the wages in unreported cash (“v konverte” – “in an envelope”) and in noncash forms.42 For example, employers might pay wages not as taxable wages, but as high interest on bogus bank savings, or as life insurance payments.43 A substantial number of workers – as many as a Cook, Postcommunist Welfare States. Ibid. 41 Ibid., p. 90. 42 Cook, Postcommunist Welfare States, p. 90; Mikhail Dmitriev and Tatyana Maleva, “Russian Labor Markets in Transition: Trends, Specific Features, and State Policy,” Social Research 64:4 (1997): 1517. 43 Pauline Jones Luong and Erika Weinthal, “Contra Coercion: Russian Tax Reform, Exogenous Shocks, and Negotiated Institutional Change,” American Political Science Review 98:1 (2004): 139–152. 39

40

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third to a half – were not contributing to the social funds.44 One estimate of the share of unreported income in the median region was 25% in 1995, but this is almost certainly a substantial underestimate.45 The World Bank team in 1993 found that household incomes and expenditures in Russia were correlated only at .48, one of the lowest levels of correlation between incomes and spending of any transition country, suggesting the enormous amount of unreported income households received.46 My calculation from the NOBUS survey of 2003 also found that household monthly income and monthly spending were only correlated at .48. Even by the mid-2000s, after the recovery had pushed much of the economy back into the channels of formal accounting, it is likely that between one-half and two-thirds of earned income was unreported.47 Lacking the political resources to undertake a large-scale national ­overhaul of the welfare system, the government’s de facto policy in the 1990s was to push responsibility for most social programs to the regional governments.48 This left overall spending on social benefits relatively low and exacerbated the differences in levels of such spending within and across regions.49 By the mid1990s, some 85% of all social spending came from regional and local budgets.50 Consequently, richer regions were in a far better position to maintain basic social provision, health care, and education spending than poorer ones. Federal transfers were grossly inadequate for equalizing spending levels on a per capita basis. In education, for example, a few of the richer regions were able to raise their spending, whereas poor regions saw sharp per pupil ­decreases.51 As a result, the disparities in per capita social spending across regions rose substantially. Moreover, although federal transfers had a ­modestly redistributive impact, many of the programs that they were ­subsidizing (pension, health care, education, and so on) were not, for the most part, redistributive. Education and health care comprised a vastly larger share of regional social spending than did programs targeting the needy, such as disability, maternal and ­child-care benefits, and unemployment compensation.52 The median region spent 15–16% of its total budget (the consolidated budget, which includes budget spending Cook, Postcommunist Welfare States, pp. 90–92. Calculated from data in Sergei Nikolayenko, Yaroslav Lissovolik, and Rory MacFarquhar, “The Shadow Economy in Russia’s Regions,” Russian Economic Trends 4 (1997): 108–117. They took the difference between reported incomes and reported expenditures, correcting for hard currency income. Other estimates of the size of the shadow economy were far higher. 46 Milanovic, “The Role of Social Assistance,” p. 125. 47 Nevskoe vremia, Oct. 12, 2005, http://dlib.eastview.com.ezp-prod1.hul.harvard.edu/sources/ article.jsp?id=8421086 48 Cook, Postcommunist Welfare States; Zubarevich, “Social Welfare Reforms”; Kitty Stewart, Fiscal Federalism in Russia:  Intergovernmental Transfers and the Financing of Education (Northampton, MA: Edward Elgar, 2000). 49 Zubarevich, “Social Welfare Reforms.” 50 Stewart, Fiscal Federalism, p. 13. 51 Stewart, Fiscal Federalism, p. 60. 52 Zubarevich, “Social Welfare Reforms.” 44 45

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of lower levels of government in the region as well as the regional budget itself) on education, about 11–12% on health care, and about 6% on social assistance.53 Only the latter is redistributive. The substantially larger share of spending on health care and education in regional budgets continued in the 2000s, when it rose to about 20% for education, 15% for health care, and 10% for social welfare.54 Pensions, meantime, remained a federal responsibility, although pension income lagged far behind prices and was subject to mounting arrears. Therefore, due to the lack of indexing at a time of high inflation, devolution of many spending obligations to the regions, and the preservation of the universalism of the old Soviet system, social spending did little to stem the substantial differentiation of incomes occurring within and across regions. Indeed, the equality of pensions at a time of sharply rising inequality and poverty meant that the pension system exacerbated income inequality rather than mitigate it.55 The shift of welfare and income provision into in-kind and informal channels exacerbated inequality as well. Faced with devastating shortfalls in their budgets, regional and local ­governments became still more dependent on enterprises to supply social services. Funding for unemployment benefits from the federal budget was negligible: The program itself was severely underfunded; it reached only a small percentage of the unemployed, and did not come close to the subsistence income minimum.56 The state’s capacity to collect taxes was weak even in the case of large state enterprises and vanished when it came to smaller retail and service establishments. Dependent on the enterprises, therefore, to maintain employment even in the face of plummeting production, and to maintain basic services to the region such as housing, child care, and public transportation, the regional governments often allowed enterprises to substitute in-kind contributions to the region for taxes and winked at the fact that tax arrears to the federal government and federal social funds mounted. The growing illiquidity in the economy reinforced traditional enterprise paternalism.57 Many managers continued to regard their role in supplying a wide range of social services, starting with high nominal employment levels, less as a costly, nonproductive expense and more as a necessary and even welcome way to maintain their control over the workforce.58 Enterprise paternalism enabled managers to recruit and retain good workers, but it also gave them additional bargaining leverage vis-à-vis local and regional government. Figures calculated from data on regional budget spending provided by Ekaterina Zhuravskaia, October 2007. 54 Zubarevich, “Social Welfare Reforms.” 55 Commander, Tolstopiatenko, and Yemtsov, “Channels of Redistribution,” p. 427. 56 Cook, Postcommunist Welfare States, p. 92. 57 Alla E. Chirikova, “Russian Directors:  Management Strategies and Behavioral Models,” Sociological Research 42:3 (2003): 6–52; Simon Clarke, ed., Management and Industry in Russia: Formal and Informal Relations in the Period of Transition (Brookfield, VT: Edward Elgar, 1995). 58 Chirikova, “Russian Directors.” 53

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2.3.  Labor and Social Partnership The prevalence of under-the-table wage payments not only wrecked state ­budget discipline and social policy; it also undermined workers’ collective bargaining power. Dependence on the enterprise deterred workers from pressing for adherence to the protections guaranteed under the old 1971 Soviet labor code (still nominally in force but widely ignored), for example, against unjustified layoffs. Workers could not demand that employers follow legal procedures in the event of a dispute because they depended on employers for the unregistered portion of their wages; in the event of a worker action, employers could stop paying the off-the-books part of their wages.59 Both labor unions and government, therefore, wanted to replace the old labor code with a new one that would push more of the system of wage payment out of the shadows. But the government and unions differed over a number of issues, among them how much flexibility employers should have to dismiss workers without the consent of the union, and how workers were to be represented: The successor to the old Soviet labor union federation (Federation of Independent Trade Unions of Russia, or FNPR, for its Russian name) wanted exclusive representational rights in collective bargaining, whereas the smaller independent unions demanded a voice. As a result of these divisions, the new labor code was only adopted at the end of 2001, after two years of negotiation among the federal government, trade unions, and employers’ groups. Organized labor’s bargaining power vis-à-vis employers and government was constrained by several factors. The system of enterprise paternalism undermined labor cohesion across occupational or class lines through the highly personalized relations between managers and workers and the wide earnings differentials across workers within the enterprise. Labor’s weakness also stemmed from the reluctance of the largest trade union organization to adopt an adversarial posture vis-à-vis the state or private employers. The principal trade union federation, the FNPR claimed to represent the majority of workers (around 60 million members of 73 million in the labor force as of 1992).60 Organizationally the successor to the official Soviet trade union federation, its monopoly on representation was challenged by several new, independent unions that formed in the late 1980s as workers mobilized against the effects of Gorbachev’s reforms.61 The FNPR depended on the government to give it preferential bargaining rights on behalf of workers. For example, the FNPR inherited the substantial and profitable properties that the Soviet official unions had disposed of – sanatoria, hotels, office buildings, vacation resorts, and other assets  – and its enterprise-level committees continued to collect contributions to the Social Insurance Fund (although not the Pension and Medical Insurance funds). They also distributed holiday vouchers, access Segodnia, November 15, 2000. Cook, Postcommunist Welfare States, p. 103. 61 Ibid.; Ashwin and Clarke, Russian Trade Unions; Sue Davis, Trade Unions in Russia and Ukraine, 1985–1995 (New York: Palgrave, 2001). 59

60

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to sanatoria, sick pay, and other in-kind benefits. Politically, possession of these money-making properties and the continuing right to distribute social benefits gave the FNPR and its branches substantial patronage opportunities. As a result, they were reluctant to mobilize directly against the Yeltsin government lest these rights be taken over by the government or distributed equally among all the unions. The FNPR was forcibly reminded of its subaltern status in autumn of 1993, when its then-head made the mistake of supporting Yeltsin’s enemies in the stand-off between Yeltsin and the parliament. Once Yeltsin suppressed the radical opposition (after it had attempted to mount a coup), that chairman was forced out and replaced by the head of the Moscow trade union federation. Yeltsin’s government threatened to deprive the FNPR’s local branches of their right to collect social insurance contributions and distribute benefits to workers. Thereafter, the union federation was at pains to demonstrate its loyalty to the Yeltsin administration. Rather than taking a confrontational stance vis-à-vis the reforms, it embraced the ideology of “social partnership.” This principle refers to the unions’ desire to work on an equal footing with employers and government to satisfy its demands through the institutions of tripartite bargaining. As Ashwin and Clarke note, of the three sides of the tripartite institutions, it is the trade unions that embrace tripartitism and social partnership most eagerly.62 The FNPR’s embrace of the social partnership idea reflects organized labor’s dependence on government and enterprises for the satisfaction of demands concerning wages, employment security, and social benefits. The doctrine of social partnership is consistent with a strategy of cooperation, rather than confrontation, with employers and government to advance labor’s interests. However, in contrast to the analogous concept in postwar Germany or the corporatist models of Nordic countries, Russia’s labor movement is distinctly inferior in bargaining power because of its decentralization and dependence on employers. Organized labor sits at the table with government and employers in discussions of income, employment, and social policy, but has far fewer bargaining chips than the other two sides. The Yeltsin team accepted the social partnership ideology, although the term itself was not incorporated into legislation until the new Labor Code of 2001. Recognizing the potential for social turmoil that the radical restructuring of the economy could unleash, Yeltsin’s team moved even before the onset of the reforms to establish a corporatist framework for bargaining over the structure of wages and social benefits. In November 1991, Yeltsin decreed the creation of a “Russian Tripartite Commission” where government, employers, and trade unions would bargain over wages, employment, and social benefits. Yeltsin’s decree called for the establishment of equivalent commissions at the regional and branch level as well. The institution quickly spread and tripartite commissions were created in many regions and some branches. 62

Ashwin and Clarke, Russian Trade Unions, pp. 5–7.

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A federal law on the tripartite commission was enacted in 1999. Tripartite agreements became routine at the federal level and in many regions. By the late 1990s, tripartite agreements among government, employers, and unions were signed each year in 77 of the 89 regions, along with 800 agreements in towns and districts, more than 2,000 branchwide agreements on wages, and 6,000 collective bargains between management and workers at individual enterprises.63 Likewise, bilateral collective bargains between the management and main union of a particular enterprise (which, under the Labor Code, can negotiate on behalf of the entire workforce) have spread to a growing number of enterprises, but such agreements typically concern minimum wage levels rather than wages at higher grades. Often they also include a provision that the employer is obligated to pay wages regularly.64 Many collective bargains include provisions committing the enterprise to providing social benefits, such as subsidized housing, vacation travel, and subsidies to cover funeral expenses, public transportation, and food. Of course, these are benefits that enterprises traditionally provided and presumably are included in the agreements because the management is willing to maintain existing benefits rather than to add new ones. Provisions that concern issues such as the prohibition on wage arrears or the indexation of unpaid wages are routinely ignored.65 Moreover, actual wage setting continues to occur through individual formal labor contracts, resulting in wide differentiation across enterprises and within enterprises across workers of the same occupations.66 The discretion of line managers to determine bonuses and other supplements continues to be high, and the difference between wage setting in privatized state enterprises and the old Soviet enterprises is that the basic wages in privatized firms constitute an even lower share of total individual earnings. Both tripartite agreements and bilateral enterprise-level collective bargains lack enforcement mechanisms. The government and employers regularly ignore them. Such agreements are primarily statements of intention rather than binding commitments. Ashwin and Clarke show that many of the points in ­tripartite agreements are pledges by government to “consider” a question, or to draft a proposal, or to “take steps” to improve a situation. The talks themselves are “a ritual manifestation of a commitment of government and trade unions to social dialogue.”67 Tripartite commissions are not the site for policy making in the sphere of wages and social policy.68 A trade union chairman of one enterprise said of the commission in his region, “it looks beautiful, but in Ibid., p. 144. Ashwin and Clarke, Russian Trade Unions, pp. 228–232. 65 Ibid., pp. 233–235. 66 Morrison and Schwartz, “Managing the Labour Collective,” p. 570. 67 Ashwin and Clarke, Russian Trade Unions, p. 147. 68 Walter D. Connor, Tattered Banners: Labor, Conflict, and Corporatism in Postcommunist Russia (Boulder, CO: Westview, 1996); Ashwin and Clarke, Russian Trade Unions; Clarke, The Development of Capitalism. 63

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reality the agreement does not work.”69 “Decisions taken by the commission are usually ignored by the employers and therefore have a limited impact if any on employment and wages,” according to Dmitriev and Maleva70 – a judgment shared by all who have studied the tripartite mechanism.71 The unions have little capacity to ensure that the agreements are upheld and instead have lobbied in parliament for legislative action on issues ostensibly covered under the agreements, particularly on the demand to bring the minimum wage up to the level of the subsistence minimum. Only after Putin came to power, and economic recovery restored liquidity to the economy, did the federal authorities agree to the principle that the minimum wage should be brought up to the level of the subsistence minimum. This principle was incorporated into the 2001 Labor Code.72 It was understood, however, that this norm would be realized only gradually. In short, tripartite bargaining among government, labor, and employers has relatively little influence over employment, wages, and social welfare. Issues such as employment security, wage levels, social protection, social benefits, and training are more frequently handled at the enterprise level and between enterprises and regional governments than through tripartite agreements reached at the federal or regional levels, or branchwide or enterprisewide bilateral agreements between labor and employers. Branchwide agreements covering wage scales are subject to the informal mechanisms of enterprise-level bargaining between individual workers and management. Regional agreements covering issues such as employment, minimum wage levels, and social benefits reflect the relative bargaining power of enterprises and regional governments, as well as their common interest in shaping economic and social development in the region, rather than the relative bargaining power of organized labor and employers. The decentralization of political authority in the 1990s brought increased differentiation of labor markets across regions.73 Unemployment by the late 1990s varied extremely widely, from less than 10% (according to household surveys) in regions such as Nizhnii Novgorod and Samara (and less than 5% in Moscow) to rates of 20%, 30%, and higher in the south Siberian rim – Tuva, Chita, Buryatia – and still higher in the North Caucasus. High as unemployment was, however, it was far lower than it would have been had enterprises, with the active agreement of regional governments, not maintained high employment levels by putting workers on unpaid furloughs or short hours, keeping wage levels low, and not paying wages for months. Many workers maintained formal employment and their access to social benefits Ashwin and Clarke, Russian Trade Unions, p. 176. Dmitriev and Maleva, “Russian Labor Markets,” p. 1516. 71 Aswhin and Clarke, Russian Trade Unions; Lewis H. Siegelbaum, “The Condition of Labor in Post-Soviet Russia:  A Ten-Year Retrospective,” Social Science History 28:4 (2004):  637–665; Connor, Tattered Banners. 72 Trudovoi kodeks:  From Konsul’tant-Plius, http://www.consultant.ru/online/base/?req=doc; base=LAW;n=53330;p=6#p1344 73 Dmitriev and Maleva, “Russian Labour Markets,” p. 1503. 69 70

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at their main place of work while taking on off-the-books employment elsewhere. Similarly, a large proportion of the unemployed also found jobs in the shadow economy (one estimate put the number at 24%).74 The rise in official and hidden employment thus brought a massive shift of income out of the formal, cash economy and into the informal, off-the-books economy, with the consequent devastating loss of revenues for government. The shortfall in contributions to the state budget and social insurance funds led to chronic budget crises and the use of tax offsets and promissory notes (vekselia) in lieu of cash tax payments.75 The government’s effort to fight inflation by financing government operations through bonds rather than ­seignorage led to a severe liquidity crisis felt throughout the economy. By 1998, tax arrears to the state budgets at all levels amounted to almost 10% of GDP, with the largest share of these being owed to the federal government.76 As a result, governmental obligations that required cash, such as pension and other social transfer payments, unemployment benefits, labor placement offices and retraining efforts, as well as wages of budget-sector employees (such as teachers) ran up huge arrears. The shortfalls in finances of the social insurance funds meant that the social insurance system worked poorly. For example, patients often had to make private payments to health care providers who were either not adequately reimbursed by the state medical insurance system or demanded additional payment for service.77 Regional governments were particularly concerned about income and profits taxes: A third of income tax revenues went to local government and the rest went to the regional governments, and they were used to fund the social obligations of the regions and localities (which covered housing and transportation in particular). Thus the combination of high tax rates and low tax compliance threatened fiscal policy at all levels of government. The liquidity crisis brought about a severe accumulation of arrears in wages, pension benefits, and taxes throughout the economy. On a per capita basis, by November 1997, the median region had a total accumulated volume of wage arrears equal to almost half a month’s wage.78 In January 2000, Richard Ibid., p. 1510. Clifford G. Gaddy and Barry W. Ickes, “Russia’s Virtual Economy,” Foreign Affairs 77 (September–October 1998): 53–67; David Woodruff, Money Unmade: Barter and the Fate of Russian Capitalism (Ithaca, NY and London: Cornell University Press, 1999). 76 Maria Ponomareva and Ekaterina Zhuravskaya, “Federal Tax Arrears in Russia: Liquidity Problems, Federal Redistribution or Regional Resistance,” Economics of Transition 12:3 (2004): 373–398, esp. p. 373. 77 One survey of Internet users in fifteen cities of Russia in 2008 found that more than half of the respondents had made informal cash payments directly to health care providers, usually in addition to (but sometimes instead of) formal payments to the cashier. S. Shishkin and L. Popovich, “Analiz perspektiv razvitiia chastnogo finansirovaniia zdravookhraneniia,” Institut ekonomiki perekhodnogo perioda, Nauchnye trudy no. 125P (Moscow: IEPP, 2009), pp. 38–39. 78 The median region’s nominal wage in 1997 was 776 rubles, or about $131. The median region’s total accumulated wage arrears as of November 1, 1997, was 317 rubles, or about 74

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Rose’s New Russia Barometer survey found that more than half of Russians had received their wages late or not at all in the previous year.79 The Russian Longitudinal Monitoring Survey (RLMS) found that some 60% of employees were owed back wages from their principal place of employment as of the fall of 1996.80 The main formal labor market policy offsetting the rise in insecurity was the tacit acceptance of high nominal employment rates at the state enterprises, often at low wages (or no wages), accompanied by widespread participation in the shadow economy. This explains the fact that unemployment rates were low relative to the decline in production; many enterprises maintained policies of nominal employment, even if workers were commonly placed on forced leaves and short hours or simply were not paid for months at a time. 2.4.  Reform and Recovery, 1998–2008 The shift of economic activity out of formal and cash-based channels into the shadows in the 1990s was unsustainable. The government fell into a debt trap, borrowing at ever higher short-term interest rates on the money markets to pay its operating expenses. Banks and enterprises speculated on the money markets rather than investing in production or paying workers. The immediate trigger of the financial crisis of August 1998, when the government let the ruble’s value fall and declared a moratorium on its foreign debt service, was the Asian financial crisis of 1997–1998. The underlying cause, however, was the widening gap between government revenues and spending obligations. Whatever the combination of short-term and longer-term factors, the crash sharply altered the behavior of both enterprises and government. Worldwide, the crisis led to a sharp drop in world oil prices, making it impossible for some borrowers who had borrowed in foreign currency to repay their debts. The crisis brought down some major Russian banks and sharply reduced incomes. The crash made it unavoidably clear to both the political authorities and the heads of state and private firms that the vicious cycle of confiscatory tax rates and massive tax evasion had to be ended.81 Beginning with Prime Minister Primakov (appointed by Yeltsin immediately after the crash) and continuing through Vladimir Putin’s accession to the presidency, the federal government and heads of major firms looked for an understanding on tax, investment, and social policy that would be in the interests of both sides to accept. The result was a series of agreements that resulted in a lower and flat individual income tax, the replacement of the high rates of contribution to the social funds with $53.70. These figures adjust ruble values for the 1998 redenomination of the ruble, which lopped 1,000 off the value of each banknote. Thus 10,000 rubles became 10 rubles. 79 Richard Rose, “Is Russia Becoming a Normal Society?” Demokratizatsiya 15:4 (2007): 78 80 Kasper Richter, “Wage Arrears and Economic Voting in Russia,” American Political Science Review 100:1 (2006): 133–145. 81 Jones Luong and Weinthal, “Contra Coercion.”

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a “single social tax” set at a much lower rate, and other tax reforms intended to reduce and rationalize the tax system so as to reward productive investment by firms and reduce tax evasion. The new agreement between business and government went some distance toward resolving the dilemmas that beset interenterprise and ­enterprise-government relations. Just as no one firm wanted to bear a disproportionate share of the burden of financing government’s social policies, so government was unwilling to lower profits, income, and social tax rates without some credible assurance that enterprises would pay them.82 As Jones Luong and Weinthal argue, the shock of 1998 provided the impetus that made both enterprises and government willing to find a new basis for a tax and social policy with which both would comply. A second contributing factor was the steady rise in world oil prices beginning in January 1999. Another was the greater cohesion among large enterprises, including the big oil firms, as they began working more through the Russian Union of Industrialists and Entrepreneurs, the major association of big business, and regional and sectoral associations. A fourth factor was the concerted effort by Vladimir Putin’s team, first when Putin became prime minister and then more ­forcefully when he stepped into the presidency on New Year’s Day, 2000, to construct an efficient system for developing policy and winning its enactment by the government and the parliament. Finally, the elections of December 1999 gave Putin a working majority in parliament. This development, together with Putin’s decisive leadership style, meant that nearly all of the ambitious agenda for economic liberalization that he proposed in his messages to parliament in 2000, 2001, and 2002 moved promptly through the policy development stage and into adoption and implementation. It is also likely that Putin and Primakov were aware of the successful models of business-government coordination that had been developed in such regions as Samara, Yaroslavl’, Ekaterinburg, and Perm’. In these regions, as Chapter 3 will show, governors had intervened into economic management by establishing informal regional pacts with business governing the obligations of enterprises and government concerning tax, investment, production, employment, and social welfare. These understandings were based on consultation among the directors of major enterprises and the governors (with relatively little involvement of labor) and state-initiated consultative bodies through which regional enterprises could formulate common positions in their relations with government. Yeltsin’s postcrash prime minister, Evgenii Primakov, 82

A little more than ten years later, President Medvedev cited exactly the same problem. In a meeting with business representatives devoted to discussing tax policy, Medvedev argued against lowering the value-added tax on the grounds that no one could be sure that doing so would increase tax collections. “We all come out in favor of lowering the VAT. But as soon as conversations begin about what will happen with taxes if we lower them by even 1%, not a single person can give us an intelligent analysis. Can we touch the tax system in the midst of a crisis? I think that any businessman would say, we can. But any financial person would say, don’t do it, because we can’t give any guarantees.” Polit.ru, May 26, 2009.

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also seems to have brought into government an ideological preference for corporatist consultation over shock therapy. In any case, soon after the August 1998 crash, the major enterprises and the federal government began groping toward an agreement on lower tax rates, higher tax compliance, and higher investment. As president, Putin built on this understanding to go much further toward enactment of a market-oriented program of liberalization of product and labor markets, including efforts to overhaul the social welfare system. The Polanyi-esque “double movement” reconciling economic liberalization with a market-compatible social welfare system required overcoming two sets of collective dilemmas. First was the coordination problem enterprises faced in entering cooperative relations with government: No one enterprise or sector desired to bear a disproportionate burden of financing the government’s social obligations. No enterprise was willing to pay its taxes in full if no other enterprise was doing so, but collectively, business shared a stake in maintaining social stability and ensuring the provision of public services. The other was a commitment dilemma arising from the effects of the mistrust between enterprises and government:  In response to the confiscatory rates of taxation on business, there was nearly universal evasion by business of its obligations. Both sides would be better off if tax rates were lower, tax administration less arbitrary, the tax burden more evenly shared, and tax compliance higher. However, each side needed assurances that cooperation would not be exploited. What occurred at the federal level in 1999–2000 (and had begun occurring at the regional level even earlier) was movement toward resolution of both sets of dilemmas. First, institutional solutions began to help enterprises cooperate in reaching common positions on issues of shared interest rather than compete for preferential advantage. In this, the Primakov and Putin governments followed the example of some of the governors, who had taken the initiative in forming “directors’ councils” that would aggregate the voice of large enterprises. For example, in the spring of 1999, Primakov’s government singled out the oil industry  – which comprised a relatively small number of large ­companies that had been providing a disproportionate share of government tax revenues (in 1998, they provided about a quarter of all government tax revenues83) but that were severely hurt by the fall in world oil prices in 1998 – to strike a collective understanding with them over tax policy. Likewise, the following year, Putin pushed the oligarchs (the heads of the major financial-industrial groups) in the fall of 2000 to join the main Russian association of big business, the Russian Union of Industrialists and Entrepreneurs (RUIE), where they would be forced to harmonize their policy demands with other big firms. As Arkadii Vol’skii, the diplomatic chair of the RUIE, put it, “the interests of the oligarchs are too heterogeneous to create their own public association, and the RUIE can help them conduct civilized lobbying.”84 Jones Luong and Weinthal, “Contra Coercion,” p. 141. Segodnia, October 7, 2000.

83

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The centerpiece of the government-business commitment dilemma was the unworkable tax code that included the unrealistically high rate of payroll taxes (technically, contributions to the off-budget social funds) supporting federal and regional social services. The extremely high tax rates drove firms to avoid paying by resorting to a number of quasilegal schemes, such as using offshore subsidiaries and transfer pricing. Through 1999, the government negotiated with big business over tax policy. Pressed by the IMF to improve tax collections (Primakov met with IMF officials in Washington in March 1999, who pushed him to increase tax collections as a condition for receiving a new tranche of credit), the Primakov government initially proposed raising taxes on gasoline and highpowered automobiles. It soon recognized, however, that a more comprehensive solution to the revenue problem was needed, requiring the replacement of the confrontational strategy toward business with a cooperative one. In April and May, the tax ministry signed a series of agreements with all fourteen oil companies under which they committed themselves to paying their taxes by the end of the year – and in cash rather than through tax offsets and in-kind products obtained through barter.85 In all likelihood, the government committed itself at the same time to lowering the tax rates and easing harsh enforcement tactics. In early May 1999, the federal government reported that in April, tax and customs collections had risen 40% over the March level; this was the first time in a long while that the government had met its revenue goals.86 A few days later (jealous, perhaps, of Primakov’s effectiveness in managing the government, which was fueling speculation that Primakov might succeed Yeltsin as president), Yeltsin dismissed Primakov as prime minister. In August, he fired Primakov’s successor, Sergei Stepashin, replacing him with Vladimir Putin. Yet despite the carousel of prime ministers, the consensus in the government for finding an accommodation with big business whereby business would pay its taxes and investment in new production in return for an easing of the tax burden survived. As Jones Luong and Weinthal show, by the end of 1999, the oil companies began significantly expanding investment in the modernization of existing and new fields, and adopting new accounting and corporate governance practices.87 When Putin took over as president in January 2000, he immediately set his policy development staff to work on a new set of proposals on tax legislation, including the replacement of the former social insurance contributions with a single social tax at a lower rate. He remained committed to the cooperative rather than confrontational approach toward enterprises, accepting that to increase tax compliance, the overall tax burden on business had to be reduced significantly.88

Igor’ Semenenko, “State Wins Tax Pledge from Oil Companies,” Moscow Times, June 23, 2009. 86 RFE/RL, May 7, 1999. 87 Jones Luong and Weinthal, “Contra Coercion,” pp. 147–148. 88 The general view among the Putin team that tax and social policy should be favorable to business investment should be distinguished from their antipathy to individual oligarchs whose 85

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In several other areas, the Putin team returned to the liberalization agenda of the early 1990s. They adopted a series of tax reforms encouraging productive investment, complemented by a national system of social welfare made up of a state-funded minimum threshold for pension income, a mandatory social insurance system funded through defined contributions, and a new private retirement savings system. Putin’s government attempted to liberalize markets in land, labor, and capital; reduce or eliminate formerly subsidized prices on public goods and services; raise incomes in the state and private sectors; and subsidize incomes for the needy through cash transfers. In these ambitions the Putin leadership had only partial success. Through replacement of the unrealistically high social insurance contributions with a lower, single social tax in 2000, they improved tax compliance and collections, enabling the government to eliminate most arrears in wages to budget-sector employees and to pensioners. They also passed a new Labor Code in 2001 that loosened restrictions on layoffs and made a formal declaration of intent to bring the minimum wage up to the subsistence threshold. Gradually they succeeded in raising the minimum level of earned income for both private and state sector ­employees. Wages and incomes increased relative to prices. Pension income in real terms kept pace with wages. However, the ambitious effort in 2005 to replace the system of subsidized nonmonetary benefits with cash subsidies succeeded only partially, and the government backed away from its more comprehensive ambitions of liberalizing the social welfare system. The Single Social Tax The reformers in Putin’s government faced opposition from the trade unions and from elements of the government to a unified social tax. The trade unions were threatened by the loss of their exclusive rights to collect and distribute the social insurance funds. They also opposed the provision that the new tax would be regressive. Nevertheless, the Federal Assembly enacted the single social tax within six months of Putin’s accession to the presidency. The tax combined contributions to the pension, medical insurance, and social insurance funds, collecting all revenues in the state treasury before transferring them to the individual funds. The rate was lowered to 35.6% for incomes below 100,000 rubles (or about $3,500) per year, with lower rates for employees earning higher incomes. At the same time, the Federal Assembly also passed Putin’s proposal for a flat income tax (with a 13% rate), replacing a graduated income tax (whose highest bracket, 150,000 rubles per year, had a nominal marginal rate of 30%). These changes, together with other changes to the tax code concerning the value-added tax, minerals extraction tax, profits, and excise taxes, represented a significant easing of the tax burden on business. The aim of the single social tax was to increase contributions to the social welfare system by improving tax compliance. The reform succeeded. The tax authorities took pains to familiarize employers with the new rules by holding political ambitions appeared threatening, and from their moves to put particularly lucrative or strategically important sectors of the economy under direct state control.

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seminars in a number of regions. Initially employers complained that under the new rules, they had to submit documents both to the tax authorities and the social insurance funds, and they were often unsure of details.89 By the summer, however, the government was reporting higher tax collections.90 The minister for economic development and trade claimed that over the first five months of 2001, the collections from the new single social tax, the valueadded tax, excises, and income tax had risen 30%.91 Pleased with its success, the Putin government proceeded to lower tax rates for small businesses. In early 2002, the deputy chairman of the Duma budget committee declared that whereas in 1998, the nominal tax take was 55% of GDP but that only around 35% was realized, now the nominal tax burden had been cut by 6–7% and was less than 50% of GDP, while collections had risen to 40%. As a result, the gap between the nominal and actual tax yield had dropped from 20% to less than 10%.92 In 2005, the government lowered the marginal rate of the single social tax still further, to 26%.93 Of course, not all of the improvement in tax compliance was due to the agreement between enterprises and government over tax policy. The early 2000s was a time of rapid economic recovery. Energy prices rose, and Russian exports became competitive in many markets owing to the sharp devaluation of the ruble. Nevertheless, it is clear that some portion of wages shifted back into the formal channels of reporting and taxation, with the result that the finances of the pension and other social funds improved. The Labor Code of 2001 Adoption of a new legislative basis for employment relations to replace the 1971 Soviet labor code took far longer than did tax reform. Work began in early 2000, at the same time as the revisions of the tax code, but the new code was not signed into law until December 30, 2001. Labor unions’ resistance was one reason for the slow movement of the legislation. Divisions within the parliament and government also took time to be worked out. Polit.ru, February 23, 2001. Polit.ru, June 13, 2001; RFE/RL Newsline, October 22, 2001. 91 Careful study of the effect of adopting the flat 13% tax suggests that revenues from income tax rose in the first year by around 25%, and that households whose marginal rate was reduced due to the reform reported 10–11% more of their income to the authorities. Yuriy Gorodnichenko, Jorge Martinez-Vazquez, and Klara Sabirianova Peter, “Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia,” Journal of Political Economy 117:3 (2009): 504–554. 92 A. Nikol’skii, “Pensionnaia i nalogovaia reformy: novye zakony vstupaiut v deistvie,” Polit.ru, January 30, 2002. 93 Under legislation passed at the end of parliament’s spring 2009 term, the single social tax was to be replaced with a set of payments made by employers into a set of insurance funds (the Pension Fund, the Social Insurance Fund, and the Mandatory Medical Insurance fund). As of January 1, 2011, the total rate was to go up to 34% and was to be paid by employers. Some employers are to be exempted from the higher rate until 2015. This is a substantial increase in the payroll tax and reflects the rapid increase in the anticipated cost of pensions and health care as the population ages. 89

90

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The final version of the new labor code made some concessions to the unions, especially the FNPR, but generally moved to liberalize labor markets. It formally embodied the principle of social partnership as the ideology of relations among labor, employers, and the state, and it gave FNPR an advantage in bargaining on behalf of workers at any given enterprise by recognizing the right of that union organization that had a majority of the workers of the enterprise as its members to bargain on behalf of all the workers. It called for the use of collective agreements between the union and the management at enterprises to govern employment relations. It provided that employers would be penalized for delays in paying wages and limited the use of temporary labor, overtime, and the length of the workweek. It increased the number of paid vacation days from twenty-four to twenty-eight calendar days per year. It also recognized the general principle that the minimum wage could not be lower than the subsistence minimum for a working person and that a worker’s monthly earnings could not be lower than the minimum wage.94 On one of the major points, however, the employers won and the unions lost: The employer was now entitled to lay off workers without obtaining the consent of the union except under specified conditions. Management was also entitled to grant or withhold permission for a worker to hold a second job.95 As in business-government relations, one factor enabling the government, employers, and unions to reach agreement on the new labor code was their common interest in regularizing wages. By increasing the pressure on employers to bring more of the earnings out of the shadows, workers would in turn have more bargaining leverage vis-à-vis employers. This was one of Putin’s themes when he addressed workers about the reason the new code was needed.96 Monetization of In-Kind Social Benefits The government faced much greater difficulty in enacting and implementing the ambitious effort to put nonmonetary social benefits on a monetary basis. As previously noted, a wave of generous but unfinanced policy gestures granting an ever-wider range of social groups an ever-wider array of free or discounted rights to public services had left the government with a fiscally untenable burden of obligations. Many of the benefits were simply not being funded, leading to the deterioration of much of the public infrastructure, including housing, energy, communications, public transportation, and medications. Individuals had little incentive to economize on their use of public resources, and local governments lacked the resources to maintain and improve them. Companies that were nominally private in the energy, communications, and pharmaceuticals sectors, and those that were still state monopolies, such as the railways, municipal transport, electric power, and gas companies, were not being fully The text of the law is taken from Konsul’tant-Plius: http://www.consultant.ru/online/base/?r eq=doc;base=LAW;n=53330;p=6#p1344 95 Izvestiia, June 27, 2001; izvestiia.ru, February 1, 2002. 96 E.g., Polit.ru, April 28, 2001. 94

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paid for the services they provided. But the universality of the nonmonetary benefits system made it politically difficult to put it onto a monetary footing. Putin’s government recognized that the reform could not be postponed indefinitely because the financial burden of subsidizing social services was unsustainable. The total value of nonmonetary benefits was estimated to be on the order of 20% of GDP, 2.7 trillion rubles (about $92 billion), equivalent to the size of the federal budget.97 The government hoped that converting at least some of these entitlements to cash, giving beneficiaries cash supplements with which to pay for the benefits they actually used, would give incentives to the providers to supply services more efficiently and ultimately realize savings (for instance, rural residents did not need to be given the right to use urban public transportation). The government also argued that, properly implemented, the reform would make the distribution of social benefits more equitable. The reform aimed at narrowing differences in the provision of benefits both across regions (rich regions were able to provide a much better bundle of services than poor) and across income strata. As the prime minister reminded the Duma in May 2004, the existing benefits system did not target the needy and allowed wide differentials across regions.98 Anticipating public resistance to the reform, the government restricted its application to those benefits that were financed directly out of the federal budget: free public transportation and subsidized medications. This meant that housing and utilities subsidies, which were the responsibility of subnational budgets (with federal government budget transfers going to those regions that could not finance these subsidies out of regional revenues) were not immediately affected. Of course, in the longer run, the government’s plans to put housing and utilities sectors on a market footing would have changed this. But the government also wanted to redistribute responsibility for benefits to particular categories of recipients. The idea was to reduce the total number of people whose benefits were to be paid directly from the federal budget and increase the number that were to receive their cash supplements from the regional governments. This too was controversial. “Veterans of labor” (retired workers with good records), “laborers of the rear” (i.e., people who had worked on the home front during World War II), and victims of the Stalin-era political repressions and their families were all to be assigned to the regional governments. These were sizable groups. Some two-thirds of all those eligible for benefits would now be the responsibility of the regional budgets.99 The federal government promised to provide subsidies to the regional budgets to subsidize the benefits to these groups, but beneficiaries understandably feared that the promised cash would not be forthcoming. The law provided a set of fixed payments to particular categories of beneficiaries in place of the right Polit.ru, June 16, 2004. Tatiana Stanovaia, “Pravitel’stvo spotknulos’ o l’goty,” Politcom.ru, May 17, 2004. 99 Wengle and Rasell, “Monetisation of L’goty,” p. 744. 97 98

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to unlimited free public transportation and medicine. Beneficiaries would also receive a “social package” worth 450 rubles that they could use either to purchase discounted public transportation tickets and medications or keep as cash. Regional governments in turn were free to increase or expand benefits and eligibility. The law passed both chambers of the Federal Assembly in August 2004 amid widespread public opposition and was scheduled to come into effect as of January 1, 2005. As the January 1 implementation date neared, specialists warned that the federal and regional governments were failing to prepare for the implementation of the new legislation. Some 13 million people would be subject to the replacement of in-kind benefits with cash compensation, but the lists of those eligible under the respective federal and regional beneficiary classes still had not been drawn up as of the end of October.100 In any event, the reform’s implementation was wretchedly handled. Beneficiaries lost their access to free transportation, housing and utilities subsidies, and medications as of January 1 (just as government offices were closing for the long New Year’s holidays) but did not receive their cash compensation until the end of the month. Those individuals, generally the elderly, who received the “social package” entitling them to discounted medications had to stand in line for hours or days at the small number of pharmacies that were authorized to provide them while the pharmacists checked the lists of eligible individuals (often checking long printed lists since many lacked a computer) and filled out the forms in duplicate required by the Health Minister.101 In some regions, pharmacies ran out of essential medications or sold them at inflated prices. In city after city, pensioners demonstrated by the hundreds and thousands to protest the loss of their benefits. In some cases, the police were reluctant to maintain order because they too had lost their right to free transportation. There were reports of pensioners and policemen forcing their way onto buses and trams, and of beatings of conductors by outraged pensioners.102 Protest demonstrations were held in eighty of the eighty-nine regions. This wave was the largest-scale outburst of social unrest since the miners’ strikes of 1989.103 Surveys showed that 81% of the population believed the authorities had bungled the implementation of the reform.104 On the other hand, public opinion was not overwhelmingly opposed to the reform itself. Many people preferred receiving cash to in-kind benefits that they did not need. The same Levada Center poll that found that 81% of the public thought the reform’s execution had been botched found that only 57% opposed the reform in principle, whereas 33% said they supported it.105 As time passed, opposition to the reform waned and support grew. By the end of Polit.ru, October 26, 2004. Polit.ru, January 17, 2005; RFE/RL Newsline, February 10, 2005. 102 Izvestiia, January 11, 2005. 103 RFE/RL Newsline, January 20, 2005. 104 From a Levada Center survey cited in RFE/EL Newsline, January 27, 2005. 105 Ibid. 100 101

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February, 42% said they supported the law.106 By September, the government found that 38% of beneficiaries had chosen to keep the cash in the “social package” rather than to exchange it for transportation and other benefits.107 The government raised pensions and subsidies to the regions. Protest subsided. But the government slowed the pace of its push to liberalize the system of ­in-kind and workplace-provided benefits. Pension Reform Putin also reformed the pension system. The government’s plan was to supplement the existing state-guaranteed defined-benefit system, paid out of current revenues, with a defined-contribution mandatory insurance portion (also funded out of current revenues), and a third, funded pillar consisting of ­individual retirement savings. New private pension funds were to be allowed to manage the third pillar. Understandably, the proposal was controversial. In developing the plan, the government consulted closely with the Russian Union of Industrialists and Entrepreneurs, which sought to lower the social insurance tax and to expand the private pension savings component. Officials in the Pension Fund and other parts of the government opposed moving funds out of the Pension Fund and into private pension funds. Over 2000 and 2001, a compromise gradually emerged. Individual pension insurance contributions to the Pension Fund, paid by the employer, would accumulate in individual accounts in the state-managed Pension Fund. As of January 1, 2002, for all men younger than fifty and women younger than forty-five, another 2% would be directed by the employee either into a state management company or, as of 2004, into a private investment fund. Workers under thirty would contribute 4% of their earnings to the pension savings accounts. The first set of bills on the reform passed and was signed into law in late December 2001; more bills followed in 2002 and 2003. In the fall of 2003, the government approved fifty-five private pension funds to manage the pension savings. The version of the law that passed initially gave control of private pension savings to a state-owned bank, Vneshekonombank. Gradually, however, the private pension funds attracted more contributions. By October 2008, 6.3 million people – somewhat less than 10% of the workforce – had signed with private pension funds, which together held about 42 billion rubles.108 The government declared that it would encourage people to move more of their pension contributions to the private pension accounts by offering matching contributions up to 12,000 rubles. In the 2000s, pensions lagged behind inflation, as Figure 2.4 indicates. The figure shows the median region’s nominal average monthly wage and pension, as well as the median region’s calculated subsistence level, also expressed in Polit.ru, March 1, 2005. Polit.ru, March 31, 2005; Polit.ru, September 23, 2005. 108 Polit.ru, October 8, 2008; Mariia Shipel’ and Boris Grozovskii, “K podarku gotovy,” Vedomosti.ru, November 1, 2008. 106

107

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4000

Nominal wage

2000

Subsistence minimum

Nominal pension

0 1995

2000

2005

Year

Figure 2.4.  Median regional nominal wage, pension, and subsistence minimum, 1995–2006 (rubles per month).

current rubles. As prices continued to rise, and with them the calculated subsistence threshold, pensions for the most part kept pace, but the average pension remained below the subsistence level, whereas wages began outstripping inflation substantially. Figure 2.5 displays a box plot showing the ratio of the nominal wage to the nominal pension by region for 2000–2006. It indicates that the median region’s nominal average pension in 2000 was about half the nominal wage, whereas by the mid-2000s, it was less than one-third that of the nominal wage. Therefore, the rise in pension levels did not offset the growing inequality in earned incomes. The government continued to hold out the goal of bringing pensions up to at least the minimum subsistence threshold by increasing pensions.109 A major reform of the pension system proposed by the Putin government and enacted by parliament in July 2009 substantially increased pension benefit levels (for example, by increasing the value assigned to the years of employment in the Soviet era), resulting in an average increase in pension levels of about 14% from 2009 to 2010. The government intended to raise pensions sufficiently to bring the replacement level (pension income as a percentage of average earnings) from 27.6% in 2010 to 37.8% in 2011 – a significant increase but still far lower than in Western Europe.110 Enacting this reform at a time of severe fiscal Polit.ru, November 14, 2008. Anastasiia Bashkatova, “Veterany truda nedovol’ny nespravedlivym pereraschetom pensii,” Nezavisimaia gazeta, March 2, 2010; Anastasiia Bashkatova, “Povyshenie pensionnogo vozrasta neizbezhno, no bessmyslenno,” Nezavisimaia gazeta, June 18, 2010.

109 110

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2

4

6

8

10

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2000 2004

2002 2006

Figure 2.5.  Ratio of wage to pension income by region.

strain meant imposing a considerable additional burden on a budget that was already running into deficit, but was to be partially offset by the accompanying increase in the payroll tax to take effect in 2011. Still, given the high and rapidly rising dependency ratio  – Rosstat estimates that by 2020, there will be around 800 nonworking individuals for every 1,000 of working-age individuals111  – and the increasing shortfall in the Pension Fund, it was not at all clear that the government would be able to fund the increased pension obligations, even if it carried through on the plan to raise the social tax from 26% to 34% in 2011. The Finance Ministry has flatly declared that it is necessary to raise the retirement age from fifty-five for women and sixty for men, although Putin assured the country several times in 2007 (an election year) that no such change was contemplated.112 Minimum Wage The 2001 Labor Code provided that the minimum wage throughout Russia must be no lower than the rate calculated as the minimum amount of income required for the subsistence of a working adult. This provision, however, was regarded by government and employers as an aspiration rather than an obligation. The government provided no enforcement mechanism, and the norm was generally ignored. Through most of the decade, the minimum wage in every region remained well below the subsistence minimum. The median region’s average wage was scarcely higher than the subsistence minimum in 111

Figure 2.6 in the Appendix on the website displays the projected trend out to 2035. Anastasia Bashkatova, “V Minfine otmeniaiut obeshchaniia Vladimira Putina,” Nezavisimaia gazeta, January 12, 2010.

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the ­mid-1990s, and by the mid-2000s exceeded it by only two or three times until the downward recalculation of the subsistence threshold in 2007 (see Table A.2.4 in the Appendix on the website). In most regions, the minimum wage remained well below the subsistence minimum until 2007 and 2008. However, the trade unions continued to press to raise the minimum wage to at least the subsistence threshold. The goal was restated in each new version of the Labor Code and incorporated into tripartite agreements at the federal and regional levels. Several regional trade union federations demanded that the regional legislature enact it into regional law. During the heated debate over the law on the monetization of cash benefits, the trade unions and their allies insisted that the principle that the minimum wage throughout Russia must be no lower than the subsistence minimum be incorporated in the law, along with a provision that the wages of budget-sector employees (including teachers and health care workers) must be no lower than their levels as of December 31, 2004.113 The government acceded to the demand. On September 1, 2007, an amended version of the labor code came into force, restating the principle and adding the point that the regions were free to raise the minimum wage. Only at this point, judging from the available evidence, did the norm begin to be implemented through legislation and tripartite agreements in the regions. As everyone well knew, the real import of the principle had to do with the fact that many enterprises that were ostensibly paying below-subsistence wages were actually paying higher wages but doing so under the table (“in the envelope”). The point of insisting that the minimum level be raised was to demand that enterprises report the full portion of their wages to the tax authorities. This explains why it took so long for the rule to be honored. Workers were reluctant to press too hard for the formalization of wages if employers could use their discretion to raise reported wages by lowering the unreported additional wages – bonuses and supplements – that were part of the discretionary portion of the wage package. It was the old problem that the more that wages are paid informally, the greater the inequality and the lower the capacity for collective action by workers. Not only did informal, unreported earnings give employers leverage over workers, but workers may often have preferred to receive their earnings in cash and with no taxes deducted. In any case, raising the reported level of wages required the conscious assent of managers and was possible only once the overall fiscal condition of the enterprise had improved sufficiently. Some specific examples will help illustrate the point. A regional tripartite agreement in Kaliningrad in 2004 called for raising the minimum wage in order to bring wages out of the shadows, improve tax collections, and fund health care and education.114 The next tripartite agreement three years later called for raising the minimum wage to a rate higher than that of the federal 113

Polit.ru, August 3, 2004. Kaliningradskaia pravda, March 24, 2004. http://dlib.eastview.com.ezp-prod1.hul.harvard. edu/sources/article.jsp?id=6072083

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minimum (i.e., 6,000 rubles per month compared with the federal standard of 4,330) and cited the same rationale. Implementing the principle, according to a local newspaper article, improved tax collections by 35.7%.115 A newspaper article published in Taimyr in 2007 expressed shock at learning that some fifty heads of local enterprises were facing fines for paying wages lower than the subsistence minimum; the explanation, it revealed, was that the wages were in fact being paid under the table.116 A newspaper article in St. Petersburg in 2005 reported that about 40% of the workers in the city were receiving pay that was lower than the subsistence minimum, although the number was falling and wage arrears were disappearing. It noted, however, that experts estimated that the real level of incomes in the city exceeded the reported level by two to three times, and that 90% of those receiving wages lower than the subsistence minimum were receiving some portion of their earnings “in the envelope.” This, it said, was particularly prevalent in retail and wholesale ­commerce, real estate, and the housing and utilities sectors. However, the practice turned out to be common in major enterprises as well. City ­authorities were dismayed to learn that “in the list of employers who were forming their relations with employees dishonestly were leaders of the growth of the ­economy of Petersburg.” Many, in fact, were defense plants. Consequently, the offenders’ names were not being publicized. The city authorities’ response was to enact legislation that would raise the minimum level of pay in all enterprises to the level of the subsistence minimum (3,600 rubles for St. Petersburg), with the goal of shifting a large share of earnings into reported form. The city was also planning to instruct the procuracy to investigate enterprises where the reported wage levels were too low.117 The higher minimum wage levels set by regional laws and tripartite agreements were possible owing to the general economic recovery over the decade between 1999 and 2008. During this period, the real income, wage, and pension income of the median region more than doubled. Refer back to Figure 2.4, showing the rise in real wages, pensions, and total income (the figures are nominal monthly ruble totals divided by the official calculated monthly subsistence minimum for the region). The graph displays the values for the median region. The fall in incomes from 2000 to 2001 reflects a significant upward calculation in the value of the subsistence minimum, but the overall trend is clear: Pensions lagged whereas wages and incomes rose significantly. The evidence cited here suggests that although cash incomes from wages and pensions did rise significantly, much of the reported gains in cash incomes was due to the higher flow of cash through reported channels; reported wages Kaliningradskaia pravda, No. 191, October 14, 2008 http://dlib.eastview.com.ezp-prod1. hul.harvard.edu/sources/article.jsp?id=19070330 116 Taimyr, February 14, 2007, http://dlib.eastview.com.ezp-prod1.hul.harvard.edu/sources/ article.jsp?id=11794844 117 Nevskoe vremia, October 12, 2005, http://dlib.eastview.com.ezp-prod1.hul.harvard.edu/ sources/article.jsp?id=8421086 115

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grew, and with them contributions to and payments from the pension and other social insurance funds. It is likely that the share of unreported income in total income fell from more than half to less than half between the late 1990s and late 2000s.118 However, although all regions saw gains in wage and pension incomes in this period, the gap across regions widened. Regions that were faster to recover from the 1998 crash saw their gains cumulate. This is reflected in the widening dispersion in the wage, income, and pension levels across regions. (See the boxplots in Figures 2.7, 2.8, and 2.9 in the Appendix on the web site, which index each series to 1998.) Over the decade from 1998 to 2007, the interquartile range widened steadily, most of all for wages, which depend on local conditions, and least of all for pensions, which are largely set by the federal government. The figures suggest that the gap across the regions is growing, as those regions paying higher wages are seeing faster growth in wages. This is consistent with the argument that the specific regime characteristics of individual regions, along with their endowments of human and physical resources, influence the trajectory of income growth. As we will see in Chapters 4, 5, and 6, these pathways also shape the distribution of income within regions, with higher-income regions seeing higher dispersion of wages and incomes. Economic Crisis, 2008–2009 It is still early to judge the effect of the 2008–2009 economic crash on employment, wages, and welfare except in the most preliminary way. Russia was hit particularly hard by the worldwide drop in demand for oil and other commodity resources, which triggered a massive outflow of capital from its financial markets and a severe drop in demand for both energy and manufacturing output. Manufacturing and metallurgy were affected most. Automobile output fell in 2009 by more than 60%.119 In response, enterprises, particularly in the machine-building, metallurgy, automotive, construction, and other industrial branches, sharply reduced their labor forces. By fall 2009, regular full-time employment fell to 95% of the fall 2008 level, whereas contract labor rose.120 Consistent with the pattern of the Soviet and post-Soviet periods, employers used alternatives to layoffs as much as possible, fearing that they would be unable to replace skilled workers once the crisis passed. Therefore, many put workers on forced leave or short hours rather than permanent layoffs. The government’s figures showed that as of mid-January 2009, 96,500 workers had been dismissed since October 1. Another 236,400 had been put on short hours, 58,800 had been placed on forced unpaid leave, and 154,200 were in A standard estimate of the average share of untaxed earned income as of the end of the 2000s is 40%. If so, then it is plausible to say that the Putin-era reforms and recovery succeeded in reducing the share of unreported, untaxed earned income from considerably more than half of total income to less than half. 119 Polit.ru, December 30, 2009. 120 State Statisical Service, http://www.gks.ru/bgd/regl/b09_01/IssWWW.exe/Stg/d10/3–2.htm 118

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unpaid suspended status (v prostoe).121 As the crisis continued, layoffs grew. By May 2009, unemployment had risen to 10.2%, or 7.7 million persons, although only 2.3 million were registered with the labor service. This was the level reached after the August 1998 crash, and analysts feared that the rate could rise to the peak of nearly 14%, reached in 1999, before it began to subside.122 Of these, 3.5 million had lost their jobs since August 2008. Another 1.2 million were on forced leave or short hours.123 At the giant AvtoVAZ automobile plant in Samara, employees were given a choice between coming to work at full pay or staying at home and collecting two-thirds of their wage.124 The enterprise planned to move to a twenty-hour workweek in September, effectively cutting wages by half.125 Enterprises also delayed paying wages; total wage arrears reached more than 8 billion rubles by April and affected around half a million workers.126 Many employers cut bonuses. Some portion of wages probably returned to the shadows as employers cut back on the amount of wages they reported and paid taxes on, and as workers placed on short hours or forced leave found off-the-books employment.127 Putin met with the trade union leadership to denounce the practice of paying unreported wages and urged trade unions, labor inspectors, and the procuracy to cooperate in fighting the practice. Real earnings fell as a result of the devaluation of the ruble, the elimination of bonuses, and the freezing of wage levels.128 A VTsIOM survey reported that 56% of respondents said their incomes had fallen in the last six months. Half the population was reducing expenditures on food and almost a quarter were cutting back on medications.129 The proportion of the population living below the subsistence level rose from 13.1% in 2008 to 17.4% in the first quarter of 2009.130 The social safety net was not immediately affected, as it had been in the 1990s, owing to the accumulated hard currency reserves and the stabilization fund that enabled the Putin government to raise pensions and unemployment benefits in the midst of the crisis. As we saw, the government enacted legislation substantially increasing pensions, both by increasing the base rate of the labor pension and the insurance portion of pensions, with the goal of ensuring Dar’ia Nikolaeva, “Rabotodateli predpochitaiut sokrashchat’ rabochee vremia vmesto kadrov,” Kommersant, January 19, 2009. 122 Mikhail Sergeev, “Vykhod iz krizisa otlozhili na neopredelennoe vremia,” Nezavisimaia gazeta, May 26, 2009. 123 Anatoly Medetsky, “Jobless Rate Climbs to 10%,” Moscow Times, April 28, 2009. 124 Nadia Popova, “AvtoVAZ Woes Cast Cloud Over City,” Moscow Times, February 27, 2009. 125 Polit.ru, July 16, 2009. 126 Sergei Kulikov, “V riade regionov dolgi po zarplatam vyrosli na 40–70%,” Nezavisimaia gazeta, May 19, 2009. 127 Nezavisimia gazeta, March 26, 2009. 128 Dar’ia Nikolaeva, “Dokhody padaiut na fone zarplat,” Kommersant, May 6, 2009. 129 Igor’ Naumov, “Rossiiane zatiagivaiut poiasa potuzhe,” Nezavisimaia gazeta, March 25, 2009. 130 State Statistical Service, http://www.gks.ru/bgd/free/B04_03/IssWWW.exe/Stg/d03/235.htm 121

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that the minimum pension level would not be less than the subsistence minimum and raising the average pension to about twice the subsistence minimum.131 Putin’s government made it a priority to increase rather than to cut spending on social programs. In February 2009, the government announced that it would infuse an additional 388 billion rubles (about $10 billion after the ruble’s devaluation) into the state pension, medical insurance, and social insurance funds.132 Another 290 billion was to go to regional governments in the form of transfers and credits. The government also allocated 43.7 billion rubles (about $1.3 billion) to create temporary jobs, retrain workers, and help workers who wanted to start new businesses or obtain retraining.133 Putin added another 34 billion rubles to the unemployment effort in April.134 The government also announced increases in the size of some specific social income benefits, such as for child care.135 Overall, the government’s response to the crisis was to maintain demand by increasing social spending and to prevent as much as possible the movement of incomes back into informal, untaxed channels. However, the growing budget deficit and resistance by businesses to tax increases made the sustainability of this commitment uncertain. As in the United States, where some industrial and financial firms have been “too big to fail,” some sectors in Russia – among them the automobile industry – are too integral to social stability to be liquidated.136 (Chapter 8 will discuss the auto industry in the current crisis in more detail.) Moreover, there was growing evidence that much of the economy was slipping back into informal channels. Barter trade among enterprises was rising.137 With it came a return to the practices of the 1990s: mounting wage arrears, mandatory unpaid leaves and short hours; arrears in payments and taxes. Many people – workers and employers alike – presumably were reverting to the familiar practices of informal employment and untaxed wages that had been widespread in the 1990s.138 Senior government officials agreed that Polit.ru, November 14, 2008. Anatoly Medetsky, “Kudrin Says State Spending to Grow,” Moscow Times, February 26, 2009. 133 Petr Netreba, Dmitrii Butrin, and Vadim Visloguzov, “Biudzhet vybilsia iz silovikov,” Kommersant, March 18, 2009; Anatoly Medetsky, “Unions Urge Putin to Raise Wages,” Moscow Times, March 26, 2009. 134 Maria Antonova, “Medvedev Frets over High Unemployment,” Moscow Times, April 15, 2009. 135 Polit.ru, April 2, 2009. 136 An editorial in Vedomosti in July 2009 noted that almost no government officials thought it was wise to continue to keep the giant, inefficient AvtoVAZ firm on life support any longer. But since it employs more than 100,000 people, and is a linchpin of the economy of the town of Togliatti where it was built, allowing it to go through bankruptcy is politically impossible. Gorod “AvtoVAZ,” Vedomosti, July 17, 2009. 137 Nadia Popova, “Barter Making a Major Revival,” Moscow Times, April 13, 2009. 138 The head of the Center for Social Policy of the Institute of Economics of the Academy of Sciences Evgenii Gontmakher predicted that he expected a “further primitivization of the economy” as people took jobs in the informal sector. In August 2009, the deputy chair of the state statistical service estimated that between 20% and 25% of the economy of the regions 131

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the government needed to allow the ruble exchange value to fall further, to raise taxes on property, and to raise the retirement age, as the Organization of Economic Cooperation and Development (OECD) urged in a sober assessment of the economy published in July 2009.139 Overall, the crisis halted the increase in income inequality (for example, the decile ratio fell from 16.9 for 2008 to 15.8 for the first half of 2009) as high-end incomes slipped more than incomes at the bottom.140 But the return of informal practices in the labor market undermined some of the government’s response to the social effects of the crisis. 2.5.  Conclusion The Soviet planned economy harnessed income and social welfare to employment. A full liberalization of markets for products, services, and labor would have severed those bonds and enabled real demand, backed by disposable monetary income, to govern the distribution of goods and services. An effective social policy would have combined government provision of basic public services such as health care and education with a targeted income support policy for the needy. Although basic economic theory made the case for such a reform abundantly clear, there was no realistic alternative in the short run to allowing enterprises to continue to provide basic guarantees of social survival. Consequently, elements of the old enterprise-based social welfare system survived well into the 1990s and 2000s, even as the old central planning system broke down and money earnings in the labor market grew sharply differentiated. The collapse of liquidity in the economy prompted a turn to nonmonetary forms of exchange among enterprises and between enterprises and government. The population continued to depend on nonmonetary forms of social support, such as subsidized housing and in-kind benefits, while the role of informal sources of monetary income increased. Informality in the labor market and nonmonetary forms of social provision by enterprises left the treasuries of national and regional governments starved for revenues. Much in the way that Polanyi argued that England’s movement to the harsh laws of a market economy necessitated a countermovement of social provision to was “in the shadow zone,” and that the economic crisis was making matters worse: “Before the crisis we had a tendency for the economy of Russia to move out of the shadows, for instance the alcohol business became almost entirely transparent. Now, unfortunately, the situation is worsening.” Polit.ru, August 12, 2009. 139 The response of senior government officials is discussed in Mikhail Sergeev, “Rubl’ opustit’, nalogi i pensionnyi vozrast podniat’,” Nezavisimaia gazeta, July 15, 2009; the OECD report is OECD Economic Surveys, Russian Federation, Volume 2009/6, July 2009. 140 In the financial industry, where there had been a sharp run-up in earnings, earnings fell as much as 25–40%. For example, the average salary of the director of a financial ­institution fell from 285,000 rubles per month (or about $10,000) to 230,000 per month. Polit.ru, March 6, 2009.

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ensure a sufficient supply of able-bodied labor, so in Russia a full liberalization of markets for labor, goods, and services was only possible once tax revenues began flowing again and the government could rebuild the social welfare system. That in turn required a more cooperative relationship between economic enterprises and government. At the national level, some movement in this direction began to occur under Primakov in 1999 and subsequently under Putin. Putin’s presidency, which engineered both institutional changes in the ­business-government relationship and enjoyed a decade of rising world oil prices, achieved much of this agenda of economic liberalization and carried out a substantial reform of social services. Still, much of the Putin’s agenda remained incomplete at the point that the worldwide economic crisis of 2008 struck. As in other oil-rich economies, easy access to natural resource rents derailed serious impulses for economic reform – a point that Putin and Medvedev themselves made repeatedly.141 The importance of the enterprise for providing not just employment and wages, but also essential public services meant that the relationship between enterprises and government at the federal level and at regional and local levels was the critical factor in determining whether the market transition succeeded or not. Labor has been a much weaker partner. Success in overcoming mistrust and antagonism in the enterprise-government relationship required mechanisms enabling firms to coordinate their positions and for government and firms to cooperate in establishing rules governing employment, taxes, wages, and social spending. This occurred at the federal level only after the 1998 crash had made both sides vividly aware of the impossibility of continuing along their previous path. The shift in business-government relations owed to Putin’s effective leadership, his strong base of support in parliament, better coordination among enterprises, and the economic recovery. Putin’s willingness to use coercion selectively against particularly independent-minded entrepreneurs, such as Berezovskii, Gusinskii, and Khodorkovskii, also reinforced the new terms of business-government relations.142 In some regions, however, those with more far-sighted governors, coordinating mechanisms such as those traced here had already been developed and had shaped the regional transition. Regional variation in business-government relations helps explain the diversity of regional economic trajectories in the 1990s and 2000s. The next chapter examines the variation in such arrangements at the regional level.

President Medvedev described the dilemma starkly in an article he published in September 2009 called “Go, Russia!” Dmitrii Medvedev, “Rossiia, vpered! [Go, Russia!],” as published on the presidential website, http://www.kremlin.ru, on September 10, 2009. On the implications of resource revenue dependence, see William Tompson, “The Political Implications of Russia’s Resource-Based Economy,” Post-Soviet Affairs 21:4 (2005): 335–359; idem, “A Frozen Venezuela? The ‘Resource Curse’ and Russian Politics,” in Russia’s Oil and Natural Gas: Bonanza or Curse?, ed. Michael Ellman (London: Anthem Press, 2006), pp. 189–212. 142 Richard Sakwa, The Quality of Freedom (New York: Oxford University Press, 2009). 141

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Cambridge Books Online http://ebooks.cambridge.org/

The Politics of Inequality in Russia Thomas F. Remington Book DOI: http://dx.doi.org/10.1017/CBO9780511973024 Online ISBN: 9780511973024 Hardback ISBN: 9781107096417 Paperback ISBN: 9781107422247

Chapter 3 - Regime Diversity in the Russian Regions pp. 77-109 Chapter DOI: http://dx.doi.org/10.1017/CBO9780511973024.004 Cambridge University Press

3 Regime Diversity in the Russian Regions

The formal organization of state power in the Russian regions  – officially called the “subjects of the federation”  – bears a strong family resemblance throughout the country. This fact, combined with the tendency toward the centralization of power in the country under Vladimir Putin in the 2000s, might suggest that regional differences in formal and informal regime characteristics are insignificant. Certainly it is the case that chief executives, often called governors even in the ethnic republics headed by presidents,1 dominate decision making everywhere, echoing the strongly presidential tilt at the federal level. Legislative assemblies, courts, mass media, and civic groups tend to be weak constraints at most on the governors.2 The actual distribution of power among political and social actors, however, can vary substantially. Even neighboring regions can feature significantly different political regimes. In some regions, governors are handmaidens of a dominant firm, such as an energy or ­minerals-extracting company. In others, power is more broadly dispersed. In many, the governor rules as a kind of chief executive officer of a state corporation that owns and controls much of the local economy. These patterns vary both over space and over time as particular governors establish their own regimes and as the power of major economic interests waxes and wanes. Systematic measurement of such elusive arrangements has stymied researchers seeking to understand the sources and consequences of this variation. All who have studied political Until new legislation passed in 2011, in most ethnic republics the chief executive was the president. In Mordovia, the same office was called “head of the republic.” 2 Vladimir Ya. Gel’man, “Regional’naia vlast’ v sovremennoi Rossii:  Instituty, rezhimy, i ­praktiki,” Polis 1 (1998): 87–105; Robert W. Orttung, ed., The Republics and Regions of the Russian Federation: A Guide to Politics, Policies, and Leaders (Armonk, NY: M. E. Sharpe, 2000); Cameron Ross, Federalism and Democratisation in Russia (Manchester and New York: Manchester University Press, 2002); Kathryn Stoner-Weiss, Resisting the State: Reform and Retrenchment in Post-Soviet Russia (Cambridge:  Cambridge University Press, 2006); Nikolai Petrov and Darrell Slider, “The Regions under Putin and After,” in After Putin’s Russia:  Past Imperfect, Future Uncertain, eds. Stephen K. Wegren and Dale R. Herspring (Lanham, MD: Rowman & Littlefield, 2010), pp. 59–82. 1

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power at the regional level have argued that regional regimes have significant influence over economic and social policy in their regions, even since the centralizing moves under Putin, and that the patterns of power vary widely.3 Yet it has been hard to capture these features of the political system in any ­systematic way. Methodologically, the dilemma is the same as that faced by comparativists working with cross-national data, who must choose between using standardized but crude measures of attributes of national governments for large-N statistical analysis and conducting in-depth, multidimensional case studies of particular regimes with limited value for generalization. Fortunately, high-quality case studies of Russian regional regimes are plentiful. Significantly more than a third of the regions have been the object of detailed investigations by Russian or Western scholars; some, such as Samara and Yaroslavl’, have been studied by three or more different teams. (See Appendix on the website for a list of this literature.) A few scholars have ­proposed ­classification schemes of regime types on the basis of case studies. For example, Vladimir Gel’man and his colleagues described four patterns of regime ­emergence following the breakdown of the old Soviet system.4 In one, competition and fragmentation of authority continued (“war of all against all”); in the second, a single elite figure won full power, subordinating or ­eliminating all rivals (“winner take all”); in a third, a dominant player negotiated the terms of the distribution of power with the other actors (“elite settlement”); in the fourth, no one figure gained supremacy, and the contending forces agree to compete under a more or less institutionalized set of rules (“struggle according to rules”). The authors ­examine six regions according to these categories. As the authors noted, ­however, regime types could continue to evolve; the described patterns were not necessarily final outcomes of the political contests of the region. Kathryn Stoner-Weiss compared four regional regimes in the mid-1990s according to the ability of their political and economic leaders to coordinate decision making in the face of the chaos and uncertainty they faced in the early 1990s.5 She found that variation in government performance could be traced directly to the level of trust and cooperation achieved among political and economic elites, which in turn depended on the concentration of Cf. Tomila Lankina, “Historical Influences on Regional Democracy Variations in Russia: The Forgotten Legacies of Western Engagement,” Paper presented at APSA annual conference, Washington, DC, September 2–5, 2010; Tomila V. Lankina and Lullit Getachew, “A Geographic Incremental Theory of Democratization:  Territory, Aid, and Democracy in Postcommunist Regions,” World Politics 58:4 (2006):  536–582; Kelly M. McMann and Nikolai V. Petrov, “A Survey of Democracy in Russia’s Regions,” Post-Soviet Geography and Economics 41:3 (2000): 155–182; Nikolai Petrov, “Regional Models of Democratic Development,” in Between Dictatorship and Democracy:  Russian Post-Communist Political Reform, eds. Michael McFaul, Nikolai Petrov, and Andrei Ryabov (Washington, DC:  Carnegie Endowment for International Peace, 2004), pp. 239–267. 4 Vladimir Gel’man, Sergei Ryzhenkov, and Michael Brie, eds. Making and Breaking Democratic Transitions (Lanham, MD: Rowman & Littlefield, 2003). 5 Kathryn Stoner-Weiss, Local Heroes: The Political Economy of Russian Regional Governance (Princeton, NJ: Princeton University Press, 1997). 3

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economic resources in the region. Greater “elite social capital” promoted ­government capacity and enabled elites to agree on policies that benefited the regional economy and society. Case studies of Yaroslavl’ and Udmurtia by Beth Mitchneck applied the concept of urban governance regime developed in the American context by scholars such as Clarence Stone.6 She contrasted the “preservation regime” in Yaroslavl’, where elites cooperated for the purpose of maintaining regional economic stability, with the “financier” regime in Udmurtia, where the elites competed with one another to broker deals for foreign and domestic investors, from which they themselves frequently benefited personally.7 Kimitaka Matsuzato characterized the authoritarian, personalistic regime of Mintimir Shaimiev of Tatarstan as “centralized caciquismo.” In this arrangement, an authoritarian governor pursues a pragmatic strategy of providing social stability and the redistribution of rents from the oil industry to the rural sector, and controlling local elections.8 A particularly useful series of case studies has been published by two Russian social scientists. Alla Chirikova of the Institute of Sociology of the Russian Academy of Sciences and Natalia Lapina of the Russian Institute for Social Science Information have analyzed regional regimes in terms of a distinction between “polyarchic” (or “pluralist”) and “monocentric” types of rule.9 They define polyarchic regimes as those with several sources of political initiative in the region, with the governor a central figure in coordinating their diverse interests. In monocentric regions, the governor monopolizes political power and allows firms little autonomy to develop economically or gain political influence. Polycentric or pluralistic regimes also tend to promote market-based economic development of the region, whereas monocentric regimes are oriented toward Beth Mitchneck, “Regional Governance Regimes in Russia:  Comparing Yaroslavl’ with Udmurtia,” in Regional Russia in Transition: Studies from Yaroslavl’, ed. Jeffrey W. Hahn (Washington, DC: Woodrow Wilson Center Press, 2001), pp. 169–193; Beth Mitchneck, “The Regional Governance Context in Russia:  A General Framework,” Urban Geography 22:4 (2001): 360–382; Beth Mitchneck, “Geography Matters: Discerning the Importance of Local Context,” Slavic Review 64:3 (2005):  491–516; Beth Mitchneck, “Governance and Land Use: Decision-Making in Russian Cities and Regions,” Europe-Asia Studies 59:5 (2007): 735– 760; Clarence N. Stone, Regime Politics: Governing Atlanta, 1946–1988 (Lawrence: University Press of Kansas, 1989). 7 Mitchneck, “Regional Governance Regimes.” 8 Kimitaka Matsuzato, “From Ethno-Bonapartism to Centralized Caciquismo: Characteristics and Origins of the Tatarstan Political Regime, 1990–2000,” Journal of Communist Studies and Transition Politics 17:4 (2001): 43–77. 9 N. Iu. Lapina and A. Chirikova, Regional’nye elity v RF: Modeli povedeniia i politicheskie orientatsii (Moscow:  Institut nauchnoi informatsii po obshchestvennym naukam, 1999); N. Iu. Lapina and A. Chirikova, Strategii regional’nykh elit:  ekonomika, modeli vlasti, ­politicheskii vybor (Moscow:  Institut nauchnoi informatsii po obshchestvennym naukam, 2000); N. Iu. Lapina and A. E. Chirikova, Regiony-Lidery:  Ekonomika i politicheskaia dinamika (Moscow:  Izdatel’stvo Instituta sotsiologii RAN, 2002); N. V. Zubarevich, “Rol’ ekonomicheskogo razvitiia v formirovanii regional’nykh elit,” in Transformatsiia rossiiskikh regional’nykh elit v sravnitel’noi perspektive, ed. A. Mel’vil’ (Moscow: Moskovskii obshchestvennyi nauchnyi fond, 1999), pp. 128–139. 6

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the redistribution of rents rather than investment in productive potential. I shall discuss some of their findings in more detail further in the chapter. Such classification schemes offer suggestive insights into the origins and effects of regional regime differences. However, like the case studies they rest on, they suffer from some deficiencies. They tend to be interpretive, impressionistic, and applicable only to the regions on which they are based. The validity of the judgments depends on information from the local media and from assessments by local elites and experts whose reports may be inaccurate or biased. Moreover, even when there is substantial agreement on the institutional arrangements they describe, the patterns are subject to change as the balance of power in a given region shifts. Above all, there has been very little systematic testing of broader hypotheses about the sources or consequences of these patterns. As a result, theory about regime formation and regime effects has been slow to cumulate. There are also many more case studies of political relations in particular regions that provide invaluable evidence on the ways in which governors, firms, political movements, federal officials, and other players interacted at key moments. Their contests for power, the strategies they pursued, and the outcomes that resulted give us a wealth of evidence that allow us to begin to develop generalizations valid across the regions more generally. Why, for example, did the democratic electoral movements and parties that were so prominent in 1989, 1990, and 1991 tend to fade into insignificance? Why did governors, and not legislatures or parties, become the dominant centers of power in virtually all regions? Why did some regions make a more or less successful transition to a market economy whereas others lagged far behind; is the difference merely a matter of inherited economic assets and structures, or did regional regime strategies make a difference? And why, despite the ostensible drive for centralization and standardization of political institutions under Putin, have regimes continued to be so diverse? The case studies of political relations from dozens of regions can suggest answers to these questions. Complementing this rich body of case literature are several efforts at devising quantitative measures of particular dimensions of regime characteristics across all regions. Several scholars have attempted to scale regional regimes according to the degree to which they meet democratic criteria. Most of these employ expert assessments, scoring regimes at particular points in time on scales such as “democracy,” “media freedom,” or “transparency” of legislative, executive, and judicial bodies, although one or two have attempted to use objective criteria such as election turnout and competitiveness as the basis for scoring regions. Probably the most widely employed of these scales was devised by Nikolai Petrov and his colleagues at the Carnegie Moscow Center and published by the Independent Institute of Social Policy.10 Chapter 1 described Petrov, “Regional Models of Democratic Development”; Lankina and Getachew, “A ­G eo­graphic Incremental Theory.” See Chapter 1 for an explanation of the data and the method by which they were constructed.

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these scores and argued that they could be used to assess the degree to which a given region’s regime approximated a polyarchy – that is, a condition where political life is open and competitive and at the same time inclusive of major organized interests. Chapters 4, 5, and 6 employ the Petrov scores in statistical models to evaluate hypotheses about the effect of cross-regional variation in regime characteristics on economic performance and social welfare. Before turning to those analyses, however, let me lay out my rationale for arguing that the variation in regional-level informal institutions governing the relations between the executive branch and the main centers of power, particularly business firms, should be expected to affect the growth and distribution of income and social well-being in the regions. Based on the case literature, I proceed from two assumptions: (1) that the crucial dimension of variation in the political regimes has to do with the executive’s strategy for dealing with major economic interests in the regions; and (2) that the key to success in both economic performance and social welfare is the degree to which enterprises and governments at the regional level overcame the coordination and commitment dilemmas outlined in Chapter 2. These problems  – a coordination dilemma among enterprises and a commitment dilemma between business and government regarding how the burden of providing for regional public services is to be shared – arise from the legacy of the Soviet system. Chapter 2 showed that under the old regime, social welfare depended on:  (1) workplace-based provision of monetary and nonmonetary benefits to employees and their households; and (2) universalistic monetary and nonmonetary entitlements requiring a flow of tax revenues that could only be ­generated by maintaining economic activity in the region. Economic and political elites had a common interest in preserving as much of the stability of employment and social services as possible, but it was by no means evident that they could find appropriate institutional means to decide how to allocate the responsibility for maintaining and increasing production and for maintaining and redistributing the responsibility for social services. Thus both sides faced collective dilemmas: Firms wanted to benefit from the preservation of basic stability in the region but without assuming a disproportionate share of the burden of paying for it, and political elites wanted to guarantee continued employment stability and production on the part of local firms but without losing their ability to collect taxes from them or to induce them to provide social services. Successful regimes were those that devised institutional arrangements for sharing these responsibilities, facilitating successful economic adaptation and the maintenance of social stability. Some regional regimes thus pursued a strategy of promoting investment and engagement in the market economy by local firms while supporting them so that they could maintain production and employment, enabling them to pay their taxes and meet their traditional responsibilities in the social sphere. Others instead fostered a defensive, protectionist, and paternalist strategy, resulting in a much slower adaptation to market conditions and continued low living standards. A strategy of collusion

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between government and business against the federal center was widespread, at least until Putin reasserted the center’s power over the regions.11 All who have studied the regional regimes agree that it is their governors who are the critical players shaping the economic climate of the region, ­determining the character of productive relations and the distribution of responsibility for social welfare. Particularly in the chaotic initial years of the transition, some governors intervened early and actively to push local firms to adapt to the market economy and encourage the creation of new businesses. Other governors played a more passive role, and a few actively blocked the establishment of market relations and sought to recreate the familiar Soviet-style patrimonial system. In general, regimes that are more polyarchic tend to be more marketoriented, more accountable to firms and other political actors, and more successful economically. More monocentric regimes tend to feature more closed political arrangements, higher levels of social dependency, lower incomes, and more poverty. In this chapter, I argue that no general model of relations between government and economic actors (such as “collusion,” “state capture,” or “elite exchange”) can capture the diversity of relations in regime patterns among the regions, and that this variation in regime characteristics matters a great deal for the distribution of income and social well-being. Although I emphasize the political nature of the choice of governing arrangements on the part of ruling executives, it is important to recognize that they do not have an entirely free hand.12 Some regions were favored with a far more advantageous economic and social legacy than others. The diversity and export potential of their resources affect the range of choices available to regional leaders. Some regions, such as Krasnoyarsk, Tatarstan, and Tiumen’, inherited tradable natural resources that could generate volumes of hard currency and rubles even despite (and, in some cases, owing to) the breakdown of the Soviet administrative controls over the economy. Some regions had diverse industrial bases that cushioned the collapse of state orders in the defense and other sectors. Perm’, Samara, and Ekaterinburg are cases in point. A few, such as Moscow and St. Petersburg, were commercial and financial hubs or had port and infrastructure facilities that enabled them to maintain basic levels of economic activity and social services.13 Others were dominated by industries that could not survive the transition without massive restructuring and infusions of capital, such as regions dominated by defense plants (Bryansk, for example) or by light industry, especially textiles and clothing (such as Ivanovo oblast).14 Regions with more fertile agricultural land, such as those Stoner-Weiss, Resisting the State. Gelman, Ryzhenkov, and Brie, Making and Breaking, pp. 62–63. 13 Philip Hanson, “Regional Income Differences,” in Russia’s Post-Communist Economy, ed. Brigitte Granville and Peter Oppenheimer (New York:  Oxford University Press, 2001), pp. 419–444; Philip Hanson and Michael Bradshaw, eds., Regional Economic Change in Russia (Northampton, MA: Edward Elgar Publishing, 2000). 14 Vladimir Mau and Vadim Stupin, “The Political Economy of Russian Regionalism,” Communist Economies and Economic Transformation 9:1 (1997): 5–25. 11

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in the Black Earth zone, eventually benefited from the growth of the domestic food industry after the 1998 financial crisis (which precipitated a crash in the ruble’s value and made domestic food and light industrial products far more competitive on domestic and foreign markets). Agrarian regions with relatively unfavorable climate and soil conditions remained depressed even when many other regions began to prosper in the 2000s. The impoverished regions of the Northern Caucasus and the south Siberian rim (such as Chita, Buryatia, and Tuva), with their low levels of human capital and absence of industrial and natural resources, have remained depressed as well. The inherited legacy of human capital (urbanization, education levels, social infrastructure) explains a large portion of the variation in both living standards and regime types across regions, as the next chapter demonstrates. But the political strategies adopted by regional executives also play a large part in explaining the economic and social well-being of their regions. For example, some regional regimes were well positioned to take advantage of the 1998 financial crisis that simultaneously decimated import-dependent sectors and opened up wide new opportunities to potential exporters. Even before the oil price boom of the 2000s, therefore, and before Putin came to power, a number of regions began to register positive trends in growth, owing in part to effective political institutions and regime strategies adopted by the governors.15 The case study literature is unanimous on one point: The paramount goal for regional political and economic leaders following the adoption of the economic reforms was simple survival. The liberalization of prices on most products, the cancellation of state procurement orders for many industrial and military products, and the drastic tightening of fiscal and monetary ­policy placed regional political leaders in a desperate position. Even before state firms began to be reorganized as state corporations and then to be auctioned off to private owners, regional rulers lost their main instruments of control over the sources of revenue for government and social needs. Yet they were held responsible for ensuring the social and political stability of the region. From their standpoint, the immediate effect of the reforms was to wipe out the bulk of productive enterprise and to threaten the population with the loss of livelihoods and the sources of government revenue. It is no exaggeration to say, as Mikhail Afanas’ev does, that for regional leaders, the reforms were the equivalent of a “natural disaster” (stikhiinoe bedstvie).16 Vladimir Mau, a national policy maker working closely with acting premier Egor Gaidar, wrote that “survival became the top priority task of the local authorities.”17 Because the collapse of enterprises spelled not just the loss of livelihoods for workers, but Lapina and Chirikova, Regiony-Lidery, pp. 36–37. Mikhail N. Afanas’ev, Klientelizm i Rossiiskaia Gosudarstvennost’, 2nd ed (Moscow: Moskovskii Obshchestvennyi Nauchnyi Fond, 2000), p. 211. 17 Vladimir Mau, The Political History of Economic Reform in Russia, 1985–1994 (London: Centre for Research into Communist Economies, 1996), p. 93. 15

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the end of the social benefits provided through state firms, regional leaders fought to maintain production at the state firms. Tax revenues from the enterprises were needed so that the regional budgets could pay for electric power and heat for the region, pay the salaries of health care workers, teachers, and government employees, and provide social assistance to households. At the same time that regional leaders were struggling to keep production at the state enterprises going, the central government was shifting more of the fiscal responsibility for paying for social services to the regions. For ­example, it fell to the regional governments to find ways to subsidize the prices of basic food goods at a time when the liberalization of prices meant that prices were skyrocketing. Regions had to find a way to pay to maintain the housing stock and subsidize utilities prices.18 In these circumstances, regional governments improvised, finding ways to cope by creating new informal institutions, such as off-budget funds fed by commercial and licensing activity and state-controlled holding companies owning controlling stakes in regional enterprises. They lobbied Moscow for subsidies, credits, and orders for local firms. It was in this early period following the adoption of the radical reform program at the federal level that the new informal institutional arrangements based on new modes of interaction between executive authorities and major firms began to develop. Simultaneous with the economic shocks brought by radical economic reform, the democratization of political institutions imposed another set of constraints and opportunities on chief executives in the regions. The shift to contested elections, party competition, and local self-government created new arenas for political mobilization.19 On the one hand, democratization brought decentralization of power, so that regional governments gained wide policymaking autonomy, although they had only limited taxation authority. Their greater independence was also offset by the fact that contested elections to local soviets gave new political challengers opportunities to contest the administration’s power. Moreover, regional leaders needed to maintain a cooperative relationship with Moscow. This was tricky because of the series of power struggles at the center over the 1991–1993 period. At first these concerned the fight between the Russian Republic and the Soviet Union (embodied in the struggle between Yeltsin and Gorbachev), which was resolved at the end of 1991 when the union broke up. Then the power struggles centered on Yeltsin’s contest with the parliamentary opposition led by a coalition of radical nationalists and communists and centering on the leadership of the Russian Supreme Soviet. Consider the sequence of events affecting center-regional relations and formal institutions in the regions during this tumultuous period20: Peter Kirkow, Russia’s Provinces: Authoritarian Transformation versus Local Autonomy? (New York: St. Martin’s Press, 1998); Gelman, Ryzhenkov, and Brie, Making and Breaking. 19 Gelman, Ryzhenkov, and Brie, Making and Breaking; Stoner-Weiss, Local Heroes, p. 88. 20 Much of this chronology is based on the invaluable article by Vladimir Gel’man, “Regional’naia vlast’ v sovremennoi Rossii: Instituty, rezhimy, i praktiki,” Polis 1 (1998): 87–105. 18

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1. October 1989: The RSFSR Supreme Soviet adopted a new law on local self-government applicable to regional and local soviets. The law abolished the position of “chairman of the soviet” and expanded the formal powers of soviets vis-à-vis those of their executive committees (ispolkomy); the aim was to create something closer to a “parliamentary” arrangement at the regional and local level. 2. March 18, 1990:  Elections to the RSFSR, regional, and local soviets. The election campaign saw active quasipartisan movements mobilized around the alternatives of “democracy” and “communism.” A sizable contingent of democrats (committed to both liberal democracy and market economic principles) won seats in the Russian Congress of People’s Deputies and in a number of city and regional soviets in big cities. In a few, they gained majorities. 3. June 12, 1991:  Elections for president of Russia, but also for executive posts in three regions: new mayoralties in Moscow and Leningrad (renamed St. Petersburg shortly afterward) and a presidency in Tatarstan, which had the status of an autonomous ethnic republic within Russia. Diffusion of the shift from “parliamentary” to “executive-dominant” political regimes in the regions followed quickly from this point. 4. August 19–21, 1991: The attempted coup or “putsch” by Gorbachev’s closest associates, which failed; Gorbachev’s power was fatally weakened and Yeltsin’s power reinforced. Yeltsin judged regional leaders according to their support for the putsch or for him. 5. August 22, 1991:  Immediately following the collapse of the coup, Yeltsin issued a decree creating the post of “presidential representative” in the regions; another decree dismissed nine chairs of regional executive committees for supporting the coup; yet another decree reinforced the chain-of-command principle (“vertical of executive authority”) for executive power in the regions and established the post of “chief of ­administration” in each region to exercise executive power. This position replaced the old soviet executive committee structure. Yeltsin decreed that executive agencies in the regions were accountable to the chief of administration, not to the soviet. This ended the ­“parliamentary” phase and made chief executives responsible for all policy. 6. Fall 1991: Yeltsin clashed with the leadership of the Russian Supreme Soviet and Congress of People’s Deputies, in part over his insistence on direct control of state authority in the regions; the parliamentary leadership insisted on restoring separation of powers, legislative control over executive branch, and popular election of governors. Unsure of his political base in many regions, Yeltsin refused and insisted on maintaining for the time being his right to appoint chief executives. 7. November 1, 1991: The Russian Congress of People’s Deputies granted Yeltsin emergency decree powers to cope with the economic crisis and allowed him to declare a moratorium on holding elections of chief

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The Politics of Inequality in Russia  executives in the regions until December 1, 1992. Yeltsin appointed chief executives in the regions. Many were the incumbent chairs of the soviets or soviet executive committees; a few had been party first secretaries under communist rule. 8. December 1991: Yeltsin decreed that soviets were to create inner “small soviets” from among their membership; small soviets were to be ­permanent, with one-fifth of the members of the regional soviets, and to have limited powers. This reform reinforced the powers of regional executives. 9. December 1992: Yeltsin agreed to allow eight regions to hold elections of chief executives. All of Yeltsin’s appointees lost their seats. Yeltsin refused to allow any more regional elections of chief executives. This exacerbated his conflict with the Russian parliament and contributed to its attempt to remove him by impeachment and his threat to dissolve it. 10. September–October 1993: Yeltsin’s fight with the parliament reached a climax as Yeltsin dissolved it, and the parliamentary leadership resisted, barricading itself in the parliament building (“White House”); after a ten-day standoff and the failure of negotiations, militants allied with the parliamentary opposition tried to storm the Moscow mayor’s office and the Moscow television tower, and called on followers to “storm the Kremlin.” Yeltsin ordered the army to use force to suppress the uprising; the army shelled the White House and arrested the opposition. The violent suppression of the opposition marked a decisive shift in the balance of power to Yeltsin, to the executive branch more generally, and to the center vis-a-vis the regions. Yeltsin took note of which regional leaders supported him and which supported the opposition. 11. October 1993: Yeltsin issued a series of decrees reorganizing state institutions at federal and regional levels. He abolished the institution of “soviet” altogether and demanded the establishment of new legislative bodies to replace soviets. These bodies were to have no more than 40% full-time deputies (i.e., allowing executive officials to hold seats as deputies). The decree specified that to override a chief executive’s veto of legislative acts required a two-thirds majority. Yeltsin called for elections of the new legislative bodies between December 1993 and March 1994. He decreed that a valid election only required a 25% turnout and a simple plurality to win. Between December 1993 and April 1994, sixty-seven regions held legislative elections. Yeltsin also decreed that the country was to vote on a new constitution on December 12, 1993 and to elect members of the new Federal Assembly on the same day. 12. October 3, 1994: Yeltsin issued a decree extending the moratorium on elections of chief executives in the regions. (The Constitutional Court ruled that the decree was constitutional.) The decree was drafted by the Union of Governors and included several sweeteners for governors

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(such as state-funded life insurance, higher salaries, and rights of veto over presidential appointments of heads of federal bodies in regions, e.g., police and procuracy).21 13. September 17, 1995:  Yeltsin decreed an extension of the moratorium on elections of chief executives in regions until the end of 1996. As an exception, however, he permitted elections of governors in sixteen regions in the period between December 1995 and June 1996. 14. December 1996–summer 1997: A wave of gubernatorial elections was held in the regions; twenty-seven of fifty-two incumbent governors were defeated. As this capsule history of the period suggests, Yeltsin’s struggle with the Soviet authorities and then with his parliamentary opposition significantly affected executive-legislative relations in the regions. Yeltsin’s parliamentary opposition, particularly his successor as chair of the RSFSR Supreme Soviet, Ruslan Khasbulatov, cultivated alliances with regional legislatures. Yeltsin, in turn, allied himself with regional governors, granting them rights and exemptions in his search for political support against his opposition. This accounts for the steady succession of decrees making regional chief executives autonomous of legislative accountability, weakening legislatures, and insulating governors from electoral accountability. So long as the governors gave Yeltsin political support in his fight with the communists and nationalists in parliament, he was willing to countenance wide discretion on their part. Likewise, the provisions he decreed concerning the structure, election, and powers of local ­soviets reflected his goal of ensuring that they were in no position to challenge his appointed governors for primacy in the regions. Prohibiting regional assemblies from allowing more than 40% of the deputies to serve on a fulltime basis ensured that the majority of their members would be either officials from the regional and local executive branches or full-time managers of firms tied to the executive branch. Similarly, by lowering the threshold for election of deputies, he weakened their claim to represent the populace. Just as the federal constitution displayed a strongly presidential tilt, so his decrees ensured that state power at the regional level would be dominated by the executive. Yeltsin’s use of decree power itself reflects the absence of agreement between the president and parliament over the permissible limits of formal institutional variation at the regional level. The 1993 constitution provided that the organization of state power at the regional level was a matter in the joint jurisdiction of the federal authorities and the regions. That meant that the federal authorities’ consent would be required before a region could specify how power was to be distributed among executive, legislative, and judicial branches. However, Yeltsin and the Federal Assembly could not agree on a law setting out general principles to guide such matters as the powers of governors and legislatures, the rules of elections, and the scope of authority of regional Kirkow, Russia’s Provinces, pp. 54–55.

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bodies over economic and other issues. A law on the organization of state power in the regions did not pass until 1999. Before then, intercameral and interbranch differences blocked it.22 As a result, according to a Constitutional Court ruling in April 1996, Yeltsin’s use of decree power to regulate when and how elections of regional executives were to be held was valid, on the grounds that given the constitutional requirement that federal law is required, and the fact that no federal law was in force, Yeltsin’s decrees “filled the gap” of necessary legislative guidance in this area. Yeltsin’s series of moves to strengthen executive power in the regions at the expense of the legislative assemblies expanded their responsibilities but not their control over resources or revenues. As we noted in the previous chapter, at a time when federal spending on social policy fell sharply in real terms, regional governments assumed a larger share of responsibility for ­providing pensions, medical insurance coverage, social insurance (such as disability and childbirth payments), and other entitlements. Unable to cope, most regions expanded nonmonetary benefits (l’goty) in the form of exemptions from payment for an ever wider range of goods and services such as public transportation and pharmaceuticals. At the same time, these widening in-kind entitlements  – noncash formal benefits  – imposed a growing strain on the infrastructure of social services, because neither federal nor regional budgets had the cash flow necessary to pay for them. Under these circumstances, faced with the crisis of diminished revenues and increased social responsibilities at a time of acute social distress, governors resorted to an array of new types of relationships with regional firms. Yeltsin and the Federal Assembly were unable to agree on a new law on the organization of state power in the regions from 1994 almost through the end of Yeltsin’s tenure in office. A bill on this issue passed the Duma in March 1995 but was rejected by the Federation Council; the Duma overrode its veto in April 1995 and sent it to Yeltsin. But Yeltsin refused either to veto or to sign it. Eventually (facing Constitutional Court pressure), Yeltsin vetoed it in December 1995. By then, however, the new law on the formation of the Federation Council was passed, providing that chief executives and chairs of regional legislatures were automatically to be the members of the Federation Council. This meant that the Federation Council would block most attempts by the federal authorities to specify how state power in regions was to be organized. It was not until October 1999 that the law on general principles for the organization of state power in the regions finally passed. It provided that governors were to serve no more than two consecutive five-year terms. But in February 2001 – under Putin! – the law was amended to provide that the term limit only applied after the law’s passage. This meant that deeply entrenched governors such as Shaimiev in Tatarstan and Luzhkov in Moscow, who had served throughout the 1990s, could go on for another two terms. Some governors held power for more than twenty years, if they had been party first secretaries of their regions before the end of Soviet rule. The durable president of Tatarstan, Minitimir Shaimiev, served as head of the republic for more than twenty years before he retired in 2010. He became head of the republic’s communist party organization in 1989 and chairman of its Supreme Soviet (and thus effectively head of state) in 1990. He was elected president of the republic in 1991 and reelected in 1996 and 2001. In 2005, after direct elections of regional chief executives were abolished, President Putin reconfirmed him in his post by appointment. No other regional leader has had such a remarkable tenure in office.

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Political and economic leaders shared an interest in maintaining production in order to preserve employment, social infrastructure, and revenue streams. The responses of firms varied, however. Many firms looked to the regional government for tax breaks, help in obtaining orders, subsidies, and credits, and protection from outside competitors. Some enterprise directors exploited the regional government’s dependence on them to resist restructuring. Others looked to the regional government for assistance in taking advantage of new market opportunities. Still others sought to maintain as much independence of regional governments as possible, fearing that they would be called on to contribute excessively to the regional budget and social infrastructure. And of course the largest firms were outside the influence of the regional government in any case, being directly subordinate to federal ministries. The nature of the new patterns of government-business relations thus varied within and across regions, depending on the resources and preferences of actors on both sides. The conventional explanations for the choice of strategy adopted by regional leaders under these circumstances emphasize one or both of two factors: the nature of the economic endowments of the region and the level of support for political and economic liberalization among the public and leadership of the region. Attributes of economic potential including natural resources, human capital, and industrial diversification as opposed to dependence on defense production are often used to help explain the level of successful performance of the regional economy over the following years.23 Measures of the political orientation of the region are often used to indicate whether the executive branch had a favorable or unfavorable attitude toward market liberalization.24 These approaches need to be supplemented by one assuming that the adaptation to the market required a regionwide strategy for maintaining social stability. The burden of investment for restructuring imposed a coordination problem on both firms and government: No firm wanted to bear an excessive share of the cost of providing for regionwide social and physical infrastructure needed for market adaptation. Restructuring involved more than the firm’s Rudiger Ahrend, “Speed of Reform, Initial Conditions or Political Orientation? Explaining Russian Regions’ Economic Performance,” Post-Communist Economies 17:3 (2005): ­289–317; Daniel Berkowitz and David N. DeJong, “Accounting for Growth in Post-Soviet Russia,” Wiliam Davidson Institute, Working Paper no. 127 (1999); Philip Hanson, “Regional Income Differences,” in Russia’s Post-Communist Economy, ed. Brigitte Granville and Peter Oppenheimer (New York: Oxford University Press, 2001), pp. 419–444; Philip Hanson and Michael Bradshaw, eds. Regional Economic Change in Russia (Northampton, MA: Edward Elgar Publishing, 2000); Nadezhda Mikheeva, “Differentiation of Social and Economic Situation in the Russian Regions and Problems of Regional Policy,” Moscow, Economic Education and Research Consortium: Russian Economic Research Program, Working paper series, Working paper no. 99/09 (1999) (http://econpapers.repec.org/paper/eerwpalle/99–09e. htm); Vladimir Popov, “Reform Strategies and Economic Performance of Russia’s Regions,” World Development 29:5 (2001): 865–886; Constantin Sonin, “Inequality, Property Rights, and Economic Growth in Transition Economies: Theory and Russian Evidence,” Economics Education and Research Consortium Working Paper No. 2K/02 (2000). 24 Berkowitz and DeJong, “Accounting for Growth”; Popov, “Reform Strategies.” 23

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role as a market actor; it also required, at a minimum, that the municipal or regional government take over the financing of its social assets, such as ­housing, kindergartens, and recreation facilities. Thus market restructuring required solving a set of collective dilemmas for firms and government that only active intervention by the regional government could overcome. There were no inherited institutional mechanisms for pooling the interests of business and government in developing the regional economy and maintaining its social infrastructure; there were no business associations or chambers of commerce through which firm managers could harmonize their interests and communicate them to the political leadership. For this reason, it is misleading to conclude that the chief obstacle to market reform was the stultifying role of the state in the economy, because without active state intervention to solve the coordination problems of the economic actors, the individual actors could not cooperate on a regionwide strategy of economic and social development. Governors faced their own dilemma. Firms had every reason to mistrust the political authorities, who could easily use their powers to expropriate surpluses from all but the largest, most independent firms through demands for bribes, forced contributions to regional social programs, interference with management, and harassment through the tax, fire, safety, labor, health, and other inspections.25 Governments could withhold licenses or refuse to place orders with firms. They could use their administrative leverage in the court system to ensure that court rulings went against obstreperous firms. They could passively allow firms to fail for want of support, then oversee (or initiate) bankruptcy proceedings to place the firm under new ownership. They could collude in the takeover of the firm by outside oligarchic capital. And regional governments exercised primary control over the privatization process, again for all but the largest firms, which were under direct federal supervision. Through privatization, the regional governors could ensure that firms remained under the control of the same managers, or could see that new ownership took over. Firms, therefore, had every reason to be wary of the intentions of governors and to avoid making productive investments that could attract the unwanted attention on the part of the authorities. Even predatory governors, and still more governors interested in raising the productive capacity of the region, needed to restrain themselves from taking advantage of firms if they wanted to expand productive activity on the part of these firms. In the language of institutional economics, regional governments needed to commit themselves credibly to resist the temptation to profiteer through rent extraction.26 Timothy Frye, “Credible Commitment and Property Rights: Evidence from Russia,” American Political Science Review 98:3 (2004): 453–466; Andrei Shleifer and Robert W. Vishny, The Grabbing Hand:  Government Pathologies and Their Cures (Cambridge, MA:  Harvard University Press, 1998). 26 Douglass C. North and Barry R. Weingast, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” Journal of Economic History 49:4 (1989): 803–832; Frye, “Credible Commitment and Property Rights.” 25

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In many regions, these collective dilemmas faced by firms and government were not surmounted or were surmounted late and to a limited degree. In regions that were more successful, however, governors constructed new institutional mechanisms that enabled firms to work together for their own economic benefit and the social benefit of the region, and at the same time limited the capacity of governors to prey on firms. Governors who allowed a higher level of media openness and electoral competition were credibly constrained from exploiting their power vis-à-vis business. Creating business-government consultative bodies gave enterprise directors more information about regional government policy and more opportunity to influence it. We have case literature on these institutional arrangements for a number of regions, and owing to the Petrov democracy scores, we have a rough gauge to their relative strength or weakness for all regions. Admittedly, neither the case literature nor the democracy scores is a fully satisfactory measure of the concepts proposed here – the collective capacity of firms to coordinate their strategies in the social and political sphere and the degree of regime commitment to share power with other interests. Still, the institutional argument made here is consistent with the case literature and the Petrov scores, and supported by the empirical evidence about the different behavior of enterprises in different regions. Chapters 4, 5, and 6 will review the evidence about the relationship between variation in institutional features of regional regimes and quantitative indicators of trends in income, social welfare, and enterprise behavior. In the remainder of the chapter, I will illustrate the general argument by drawing on the case literature to describe six particular regional regimes. These capsule summaries are intended to highlight the wide range of institutional strategies available to governors and enterprises in shaping a region’s response to the transition. First we will consider three cases where governors established regimes antithetical to a competitive market economy, then three where governors fostered market reform while preserving basic social commitments. 3.1.  Antireform Regimes: Neopatrimonialism and Autarky Primorsk For much of the 1990s, the government of Primorsk27 (Maritime or Far East) krai was headed by a governor named Evgenii Nazdratenko. Nazdratenko had been director of a local mining company before Yeltsin appointed him governor of the region in May 1993, replacing an ineffectual liberal reformer from academic circles. Nazdratenko was supported by a state holding company called PAKT (the Primorsk stock corporation of commodity manufacturers) that he 27

The account is based on Kirkow, Russia’s Provinces, pp. 114 ff, and Jeffrey W. Hahn, “The Development of Political Institutions in Three Regions of the Russian Far East,” in Regional Politics in Russia, ed. Cameron Ross (Manchester and New York:  Manchester University Press, 2002), pp. 98–104.

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helped form the previous year.28 He also reportedly enjoyed the ­backing of the crime bosses of this heavily criminalized region.29 PAKT was a conglomerate that owned controlling stakes in a number of the major industrial and fishing firms in the region. Altogether its member firms employed about 9% of the workforce of the region.30 Nazdratenko made some of the directors of the holding company’s member firms deputy governors. Owing to Governor Nazdratenko’s active patronage, PAKT’s executives took interest-free loans from the regional budget and cheap credits from local banks. When voucher privatization began, PAKT took control of privatization in the region over acting prime minister Gaidar’s resistance and acquired more firms. PAKT operated as a state monopoly in the spheres in which it held controlling interests. In the fishing industry – a crucial part of the region’s economy – it controlled the distribution of fishing quotas to firms, preventing new firms from entering the market. It formed a holding company for fuel and electric power distribution, holding prices low, obtaining subsidies from the federal government to maintain the cheap energy prices. As governor, Nazdratenko created a state securities commission to control the financial markets and keep out rivals from the market. The strategy ensured a substantial flow of rents to the governor and his associates, low energy prices to the populace, and a protected market for local firms; neither Moscow-based nor foreign capital could enter the region except by agreement with Nazdratenko. Nazdratenko dissolved the regional soviet after the August 1993 coup attempt, and for a year there was no legislative body to check him. In 1995, Nazdratenko cut his ties to PAKT, which he regarded as a constraint on his own power, shortly after which it dissolved. Nazdratenko’s neopatrimonial rule continued. The weak economic performance of regional firms, reinforced by the lack of competition from Moscow and foreign firms or other incentives to raise productivity, led to chronic social unrest. Nazdratenko used worker protests to strengthen his control over the region. When miners struck in 1995, Nazdratenko used the threat of disruption to critical fuel and transportation supplies – the miners were threatening to blockade the port and railway – to pressure the central government to rush resources to the region.31 In 1997, Nazdratenko even provided buses to striking workers at the submarine repair yard so that they could Hahn, “The Development,” p. 98; Kirkow, Russia’s Provinces, p. 114. Robert W. Orttung, “Business and Politics in the Russian Regions,” Problems of PostCommunism (2004), p. 48. Note that even by the standards of Russian regions, the level of control by organized crime over business and government in Primorsk krai is high. One of the main criminal syndicates in the region hired senior officers of the Pacific Fleet to provide protection services to businesses. It came to control much of the law enforcement system throughout the region. When Nazdratenko was eventually forced out in 2001, his replacement as governor was a ­figure believed to be from organized crime. Cf Kirkow, Russia’s Provinces, pp. 116–117. 30 Kirkow, Russia’s Provinces, 115. 31 Kirkow, Russia’s Provinces, 122. 28 29

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blockade the Transsiberian railroad, and barred police from suppressing the illegal strike.32 Nazdratenko even reportedly hired protesters to increase numbers and paid Moscow television news reporters to cover the protests.33 Meantime, business in the region was weak and divided. There were two major associations of business firms in the region under Nazdratenko, one comprising firms friendly to him, the other firms opposed, but neither had much influence.34 Nazdratenko employed authoritarian methods to monopolize power. He suppressed independent media (critical journalists were the victims of beatings and at least one assassination attempt) and he cut off water and power service to the city of Vladivostok in an attempt to discredit his perennial rival, the city’s mayor, who enjoyed substantial support in Vladivostok; the mayor was also evicted from his office, beaten, and charged with bribery.35 Nazdratenko won gubernatorial elections twice, in 1995 and 1999, but used heavy-handed methods to manipulate the election process, particularly in 1999.36 Likewise, Nazdratenko kept the krai legislature subordinate; an associate of his from PAKT became the chair of the Duma elected in January 1995.37 He also appealed to the rural northern population with price subsidies and to regional businesses with a protectionist economic policy. He also took strongly populist and nationalist positions, for example, regularly denouncing the government in Moscow for its policies of economic reform, decried the influx of migrant workers from China, and warned against any compromise with Japan over the Kurile Islands. Through patronage, populism, and coercion, he prevented any coalition of forces from mobilizing against him. He even succeeded in insulating himself from pressure from Moscow. President Yeltsin tried but failed to remove Nazdratenko from office. Putin succeeded in February 2001, during a particularly harsh winter when there were widespread shortages of heat and power in the region. Although Nazdratenko blamed these on administrative incompetence of district heads and the refusal by Moscow to send money in time to pay the regional utilities companies, his political position was weakened. Putin finally induced him to resign, but only after offering him the lucrative post of head of the federal agency overseeing the fishing industry.38 The difficulty the center faced in removing an entrenched governor such as Nazdratenko suggests how ­successful the strategy of holding a regime’s social stability hostage can be for a governor. Graeme B. Robertson, “Strikes and Labor Organizations in Hybrid Regimes,” American Political Science Review 101:4 (2007): 787. 33 Ibid., p. 787. 34 Robert Orttung, “Trip Report,” Russian Regional Report (EastWest Institute 6:29 [2001]). 35 Kirkow, Russia’s Provinces, pp. 133–138. 36 Hahn, “The Development,” p. 99. 37 Ibid., p. 100 38 Orttung, “Business and Politics,” p. 59. 32

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Ulyanovsk Ulyanovsk presents a different case of a neopatrimonial regime.39 Ulyanovsk had been a predominantly agrarian region until relatively late in the Soviet period, when major automotive and aviation plants were built there. Ulyanovsk’s governor in the 1990s, Yurii Goryachev, had become head of the soviet executive committee in the region under Gorbachev and was the region’s last CPSU first secretary. He survived an effort by Yeltsin to appoint a reformer from the industrialist camp as governor in 1991, and had the tactical sense to support Yeltsin in the 1993 confrontation with parliament, but his base of support was in the agrarian sector rather than the urban and industrial interests. From the start of his tenure he pursued what came to be known as the “Ulyanovsk model” of development, which was effectively a rear-guard action to prevent market reform from taking hold in the region. Ulyanovsk was famous for preserving Soviet-era institutions such as ration coupons for basic commodities, price controls, and state ownership of firms. As a consequence, firms were starved of capital and the region’s infrastructure deteriorated. As the use of noncash social benefits such as rationing and subsidized prices on public services continued, firms and government lacked cash to pay wages, and wage arrears accumulated both in firms and in the budget sector (government employees, health care workers, and teachers). The region ran a high budget deficit. Meantime, the governor and his family members and associates owned important food-distribution and food-processing firms. Initially the governor was able to pressure banks to provide loans and credits to regional business, but this stream dwindled.40 Small businesses outside the governor’s clientele were effectively blocked from operating.41 The lack of resources for investment in industry and agriculture led to ­declining production. Goryachev attempted to use “commodity credits” as alternatives to investment capital for farms, but this failed to improve ­productivity. Likewise, the lack of liquidity left energy companies starved of working capital. Wages in the region stagnated. In the second half of the 1990s, opposition grew but could not rally behind a single figure or party. Goryachev suppressed independent media (McMann reports that four of the five independent media outlets operating in the late 1990s were repeatedly subjected to political harassment and prosecution),42 but the opposition also suffered from political divisions. The main opposition force was the local communist party, but industrial circles in the capital city were cool to it. Goryachev was skillful Account based on Andrew Konitzer, Voting for Russia’s Governors: Regional Elections and Accountability under Yeltsin and Putin (Washington, DC and Baltimore: Woodrow Wilson Center Press/The Johns Hopkins University Press, 2005), pp. 105 ff.; Gelman, Ryzhenkov, and Brie, Making and Breaking, p. 187; Kelly M. McMann, Economic Autonomy and Democracy: Hybrid Regimes in Russia and Kyrgyzstan (Cambridge: Cambridge University Press, 2006). 40 Konitzer, Voting, pp. 107–117. 41 McMann, Economic Autonomy, p. 155. 42 McMann, Economic Autonomy, p. 71. 39

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at maintaining clientelistic relations with the heads of local districts and the rural sector. Officials close to him enjoyed material privileges. In effect, as Gel’man, Ryzhenkov, and Brie write, the governor’s strategy was to redistribute resources, both cash and in-kind, from more productive to less productive sectors, in the interests of preserving social stability and his own continued hold on power.43 Like Nazdratenko, Goryachev pursued an autarkic economic policy. Not only did he keep outside capital from entering the region, he even maintained controls over the sale of products outside it. He used a part of the price differential between goods sold outside the region and goods sold within it to finance regional extrabudgetary funds that he used to subsidize the sectors giving him political support.44 The economic boom that began shortly after the 1998 financial crisis in many regions of Russia, including several of Ulyanovsk’s neighbors, failed to lift the region’s economy. Opinion surveys indicated high levels of popular dissatisfaction with Goryachev by the time a new round of gubernatorial elections was held in 2000. Goryachev’s opponents rallied around a prominent army general named Vladimir Shamanov who had won a reputation as a forceful commander in the Chechen war. Shamanov was able to attract support from both communists and industrialists, though he was vague about his economic program. In the election, he defeated Goryachev decisively. The coda to Shamanov’s victory is telling. By 2004, Shamanov was widely regarded as having been an even more inept economic manager than Goryachev. The outsiders he brought in to run the regional government failed to work well with local business leaders; he implemented arbitrary administrative reforms (for example, dividing agricultural administration into ­“production” and “processing” divisions); and he squandered the region’s budget. Shortages of electricity, heat, and water spread. Calling his administration incompetent, he dismissed his entire team in June, only to reappoint them soon afterward. By the end of his term, his approval rating stood at 3%.45 He had become an embarrassment to the United Russia party, which advised him in October to withdraw from the December 2004 gubernatorial race in favor of the mayor of one of the cities. The case of Ulyanovsk illustrates three points that recur throughout the case literature on Russian regional regimes. First, a governor has wide latitude to choose an economic and political strategy. A neopatrimonial strategy combines direct political control over economic enterprise in the region with the suppression of independent centers of power. Economic control is used to redistribute resources from more successful sectors to the governor’s clients and to subsidize prices and benefits for the dependent population, the poor, rural, and elderly, without encouraging competition or productive investment. Gelman, Ryzhenkov, and Brie, Making and Breaking, p. 198. Ibid., p. 200. 45 Russian Regional Report, 9:21 (November 5, 2004); 10:15 (September 12, 1995). 43

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Second, regardless of his political strategy, a governor must form a coalition with a set of interests sharing his goals. Nazdratenko and Goryachev both deliberately favored rural interests and cronies in favored industries, and, for a time, their opponents were divided. Their own staff were closely intertwined with the firms enjoying favored relations with the governor. One of the major reasons Goryachev’s successor, General Shamanov, failed so dismally (apart from the fact that he must have been a particularly incompetent manager) was, according to local sources, that he and his team failed to build cooperative working relations with members of the local economic elite. This theme – the need to overcome hurdles to the coordination of effort  – emphasized in studies by Stoner-Weiss as well as Lapina and Chirikova – appears frequently in case studies of Russian governance. Forming and maintaining a cohesive administrative team that can cooperate with important local elites is a key to the success of any strategy pursued by Russian regional leaders. Third, the electoral success or failure of a governor (in that decade from the mid-1990s to the mid-2000s when governors were directly elected) is less a determinant of a governor’s strategy than a result of it. In the absence of a viable party system, the economic elite served to aggregate popular support or opposition to a governor. Successful governors won elections because they enjoyed a solid base of elite and popular support, so that elites rallied behind them in elections, and opponents were weak and divided. Unsuccessful governors who lost office in an election did so because the elite united against them and mobilized the electorate around a challenger. Therefore, even before Yeltsin began allowing gubernatorial elections in 1995 and after Putin ended them ten years later, the consensus of regional economic and political elites about the effectiveness of a governor was the key to his continuation in power. For this reason, causal arguments centered in electoral strategies of parties and candidates play a marginal role at best in explaining the variation in business-government relations examined in this book. Generally the case literature suggests that elite consensus and conflict determine the outcome of election competition more than they are determined by it. Kaliningrad Kaliningrad – the Russian exclave located on the Baltic Sea between Lithuania and Poland – is a third case of a neopatrimonial regime. Its governor in the second half of the 1990s was Leonid Gorbenko, who served as governor from 1996 until he was defeated in an election in 2000.46 Governor Gorbenko antagonized both the federal authorities and the regional economic elite with an economic policy that was incompetent, corrupt, and neopatrimonial. He Joel C. Moses, “Political-Economic Elites and Russian Regional Elections 1999–2000: Democratic Tendencies in Kaliningrad, Perm and Volgograd,” Europe-Asia Studies 54:6 (2002):  905–931; Robert W. Orttung, ed., The Republics and Regions of the Russian Federation: A Guide to Politics, Policies, and Leaders (Armonk, NY: M. E. Sharpe, 2000), pp. 166–173.

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replaced his predecessor’s team with associates of his own and fought continually with the main economic and political elites of the region – the regional legislature, the heads of local towns and districts, and the business leaders. He made arbitrary decisions, as when he unilaterally reorganized the territorial administration of the region and appointed his own associates to head the new units, and when he signed a secret deal with an Israeli diamond merchant granting the latter the right to export oil from the Baltic Sea and to market jewelry made with local amber. Gorbenko’s response to the 1998 financial crisis was characteristic: Rather than treating it as an opportunity to develop the region’s economy now that ruble-denominated goods were far more competitive abroad, he declared a state of emergency and assumed “complete responsibility for political and economic decisions.”47 Gorbenko’s erratic and incompetent rule antagonized important economic and political interests in the region. One important constituency he alienated was the leadership of the Baltic Fleet, based at Kaliningrad.48 The economic and military elite worried that Gorbenko’s protectionism and mismanagement would jeopardize the status the region enjoyed as a special economic zone. Gorbenko’s case again suggests the importance of elite consensus around an incumbent or a challenger in determining an election outcome. The ­previous governor, Yurii Matochkin, whom Gorbenko defeated in 1996, won a seat in the regional legislature. There he headed the economic policy committee and forged a coalition opposed to Gorbenko organized around regional business interests and the leadership of the local branch of Unity (the national party of power associated with President Putin). This coalition drafted the ­commander of the Baltic Fleet, Admiral Vladimir Egorov, to challenge Gorbenko for the governorship in 2000.49 Egorov won despite Gorbenko’s substantial ­administrative resources, and moved immediately to reverse many of his p ­ redecessor’s policies. 3.2.  Market-Adaptive Regimes: Pluralism and Coordination The cases of Perm’, Yaroslavl’, and Samara illustrate pluralistic regimes fostering economic growth through gradual but consistent adaptation of local firms to market conditions. Perm’ The Perm’ region largely avoided the polarizing conflict between “democrats” and “communists” in the 1989–1991 period.50 Patterns of consensus seeking and mutual accommodation are characteristic of regional elite behavior. For Orttung, The Republics and Regions, p. 170. Moses, “Political-Economic Elites,” pp. 916–918. 49 Ibid. 50 Mary McAuley, Russia’s Politics of Uncertainty (Cambridge:  Cambridge University Press, 1997), pp. 160–161. 47

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example, during the August 1991 coup, when many regions experienced deep rifts between Yeltsin’s supporters and opponents, Perm’s communist party secretary avoided taking sides by going out mushroom picking. Later, after he was eased out of office, he took a job with the Russian Union of Industrialists and Entrepreneurs in Moscow. Other communist party leaders similarly took management jobs in regional state firms and farms. The first governor recruited as his deputies figures from the old government and party elite, and adopted a consensual style of decision making as did his successor, appointed in 1996.51 Much of the regional economy was concentrated in defense plants that were outside the immediate administrative control of the regional authorities but on which the region depended for the provision of a large share of employment and social services. The decline of defense manufacturing affected the region’s economy severely in the early 1990s. The penetration of market relations was slow as a result.52 Still, the pragmatic political leadership in the region pursued a policy favorable to market reform, controlling the privatization process but not blocking it. It formed a number of joint ventures with private entities and ensured that some of the managers of state firms acquired large stakes in the privatized firms. Perm’ has significant natural resources, including deposits of oil, potassium, and ores. These offered the possibility of taking advantage of the opening to the market. The regional administration moved quickly to take advantage of these opportunities by welcoming the oil giant, Lukoil, into the region and granting it a monopoly on oil extraction, refining, and distribution. The regional government also facilitated the creation of a major potassium-processing firm. The government adopted a number of measures to encourage investment in regional enterprises, for instance, granting tax breaks to firms for investing in new equipment. The government also forgave taxes to firms that paid their wages on time. The government worked with the defense plants to find markets for new products and facilitate conversion to civilian production. Many of the skilled workers from the defense and metallurgical sectors entered new start-up private firms.53 The regional government subsidized bank credits for investment and offered guarantees of repayment. In effect, the regional government played the role of financial intermediary, selecting which firms would benefit from regional state aid, directing investment resources, and sanctioning firms that were in arrears in their wages and tax payments.54 Generally, the regional authorities worked to foster the adaptation of regional industries to the new conditions of the market economy while intervening to prevent their wholesale failure. One result was that Perm’ was relatively successful in maintaining the flow of tax revenues to the regional budget. Another was that Perm’ benefited from the financial crash of 1998, when the ruble devaluation McAuley, Russia’s Politics, pp. 178–181. Ibid., pp. 189–191. 53 Lapina and Chirikova, Strategii, pp. 31–41. 54 Ibid., pp. 62–63. 51 52

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made many of the region’s products competitive. In contrast to regions such as Ulyanovsk, Primorsk, and Kaliningrad, where the governors created state companies to siphon off revenues, Perm’s leaders chose instead to encourage privatization and an open economy but to oversee the choice and behavior of the new owners of privatized firms. This strategy has enjoyed broad support among the economic elite. The interviews conducted by Lapina and Chirikova in Perm’ in 1999 found that on the whole, the business community viewed the regional political leadership favorably. They considered the relations between business and government to consist of, as one put it, “civilized mutual pressure” where “each side has its own resources.” Both sides recognize that it is in their mutual interest to preserve economic growth, employment, and social services, and work to reach agreement as issues arise.55 The consequence is an exchange of benefits: The regional government supplies services useful for business development, and business pays its taxes, discharges its accepted role in social support, and backs the leadership at election time. The regional government established several institutional channels to foster coordination among business firms and consultation between the business community and the political leadership. One was the Alliance of Entrepreneurs that united eighty firms in a business association. Another was the Council of Directors consisting of the heads of the leading firms of the region, where it also was represented. The region also had an association of defense plants originally created to fight the regional administration but which gradually developed cooperative working relations with it. The integration of the region’s business elite with the political elite is aided further by the substantial presence of firm directors in the regional legislature. Lukoil-Perm’ sponsored a social club where economic and political elites mingled socially. After the 1997 elections, twenty-eight of the forty deputies in the regional assembly were the heads of state and private firms. Some observers speak of the movement of the big Moscow-based companies (such as Gazprom, Lukoil, Yukos, and others) into positions of influence in the regions in the late 1990s and early 2000s as equivalent to a takeover.56 Certainly many executives of regional and national firms took seats in regional legislative assemblies and entered the executive branch as governors and ­deputy governors, reflecting the shift in the overall balance between the power of economic and administrative interests in the country in favor of big business and helping crowd out parties from the political marketplace, as Henry Hale shows.57 Kathryn Stoner-Weiss quotes the long-time governor of Novgorod oblast’ – where at one point all the members of the regional legislature were registered as independents – as saying: “Parties cause problems. Lapina and Chirikova, Strategii, pp. 130–131. Cf. Orttung, “Business and Politics.” 57 Henry Hale, Why Not Parties in Russia? Democracy, Federalism, and the State (Cambridge: Cambridge University Press, 2006). 55

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Instead, I call our legislature the party of business.”58 But the strong representation of firm managers in regional legislatures is not necessarily evidence of the capture of regional government by business. Rather, as Lapina and Chirikova argue, although one side or the other may be stronger in particular cases, the overall pattern beginning in the late 1990s was more one of the equalization of resources between business and government than of colonization of regional governments by the oligarchs.59 Regional administrations retained a number of levers in their dealings with firms, including control of utilities rates; the threat of tax, health and safety, fire, and labor inspections; and access to public opinion. Regional governments had the power to restrict outside competition and to control the outcome of legal proceedings in the arbitration courts.60 Regional governments have at least some leverage over even the most powerful firms. In Perm’, for example, the governor developed a working relationship with the regional branch of the oil giant Lukoil, giving it privileged access to local markets and tax breaks in return for assistance with the region’s social programs and contributions to the governor’s reelection campaigns.61 In Samara, the governor used his personal influence to persuade the auto giant AvtoVAZ to take part in working out a general strategy for the industrial development of the region. This was vital, because to a large degree the plan rested on AvtoVAZ’s willingness to contract with local suppliers for its inputs.62 As our other case studies have suggested, so too in Perm’, electoral politics has played a far less important role in determining the distribution of power than have elite agreements between firms and executives. The odd case of Perm’ governor Gennadii Igumnov’s run for reelection in 2000 illustrates the point. Generally the region had little open party contestation in the 1990s. No party was especially strong and there was no organized political opposition to the governor. The major dividing line in Perm’, as in many Russian regions, was between the administration of the region and that of the capital city (also called Perm’). The mayor of the city of Perm’, Yurii Trutnev, was regarded as an especially talented and ambitious figure (in 2004, he became Minister of Natural Resources of the federal government under Putin). But Igumnov and

Quoted in Stoner-Weiss, Resisting the State, p. 143. cf Timothy Frye, “Capture or Exchange? Business Lobbying in Russia,” Europe-Asia Studies 54:7 (2002): 1017–1036. 60 Harry G. Broadman, Mark Dutz, and Maria Vagliasindi, “Competition in the ‘Old’ and ‘New’ Economy in Russia’s Regions,” in Unleashing Russia’s Business Potential: Lessons from the Regions for Building Market Institutions, ed. Harry G. Broadman (Washington, DC: The World Bank. World Bank Discussion Paper no. 434, 2002), pp. 17–41; Stoner-Weiss, Resisting the State. 61 A. E. Chirikova, “Vzaimodeistvie vlasti i biznesa v realizatsii sotsial’noi politiki: na poroge peremen,” Spero 9 (2008):  53–66; S. P. Peregudov, Korporatsii, obshchestvo, gosudarstvo: evoliutsiia otnoshenii (Moscow: Nauka, 2003); Lapina and Chirikova, Strategii, pp. 120, 164; Frye, “Capture or Exchange?” 62 Lapina and Chirikova, Regiony-Lidery, p. 49. 58

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Trutnev took pains to avoid open conflict. As the 2000 election approached, battles among Moscow oligarchs over access to Perm’s oil resources ­apparently led to a press campaign against Governor Igumnov, focusing on a ­corruption scandal involving the governor’s daughter. Igumnov announced his withdrawal from the race and threw his support to the Perm’ city mayor, Yurii Trutnev. Five days later, however, he reconsidered his decision to withdraw and reentered the race. Unfortunately for him, Trutnev chose to stay in the race. Forced to choose, most of the political and economic elite decided to back Trutnev, and Trutnev won in the first round. Upon his victory, regime politics in Perm’ settled back into the previous course, focused on moderately pro-market policies, a consensus-based style of rule, and a relatively open political arena. Igumnov’s fall from power was eased by the fact that he was made secretary of the board of directors of Lukoil-Perm’. His successor, Yurii Trutnev, immediately signaled that there would be continuity of policies and personnel in the new administration.63 Yaroslavl’ Yaroslavl’ offers another example of a region with a politically pluralistic and generally pro-market orientation. As in Perm’, regional leaders like to emphasize to outsiders (both Russian and western) their preference for a pragmatic, cautious, consensual style of leadership, averse to confrontation and open to compromise to reach decisions.64 Whether much credence should be placed in such self-characterizations by regional leaders in their conversations with outsiders, it is the case that the pragmatic policies followed by Yaroslavl’s political and business elites since the early 1990s have fostered reasonably successful economic development and a comparatively open political regime, avoided destructive intraelite conflict, and provided modestly effective government to the region. 63

Moses, “Political-Economic Elites,” pp. 921–923. On the local elite culture in Perm’, see Lapina and Chirikova, Strategii, pp. 43–45; on Yaroslavl’, see Blair A. Ruble, Money Sings:  The Changing Politics of Urban Space in ­Post-Soviet Yaroslavl (Washington, DC and Cambridge:  Woodrow Wilson Center Press/ Cambridge University Press, 1995), pp. 135–136. Ruble’s interviews with regional leaders revealed pride in a local tradition of mutual accommodation and compromise; likewise, Lapina and Chirikova, Regiony-Lidery, cite the local elite’s self-ascribed attitude of “healthy conservatism”; however, Stoner-Weiss (Local Heroes, pp. 182–184, 191) found the political and economic elites to be fragmented (divided among industrial, agricultural, and democratic factions, and oriented toward realizing particularistic benefits from policy making; while Mitchneck (“Regional Governance Regimes,” pp. 175–177) found that Yaroslavl’ lacked overt intraelite conflict, but there was also little agreement on regional policy priorities. These divergent images of the degree and nature of the elite consensus in a given region, even at roughly the same point in time (mid-1990s), confirm that case studies are subject to the same potential for impressionism and interpretive bias as are large-N quantitative assessments using expert scale scores. Clearly only the careful cross-checking between multiple qualitative and quantitative ­evidence can offer even the most minimal assurances of accuracy in characterizing so broad a concept as a political regime.

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From the start of the reforms, Yaroslavl’s government was cautiously favorable to market reform but took care to control the transition. As in Perm’, its leaders were intent on preserving a stable environment by intervening to maintain employment and social services. At the same time, they sought to encourage the diversification and expansion of production in the region. They offered credits for investment liberally and subsidies to maintain production, as well as tax exemptions for firms seeking to invest in the region (Yaroslavl’, located only three hours from Moscow by train, hoped to attract Moscow talent to relocate there). Beyond this, the leaders also sought to guide the region’s longer-term economic development with efforts at strategic planning. The administration also invested in public infrastructure, including a second bridge across the Volga and a new airport.65 Yaroslavl’s long-time governor, Anatolii Lisitsyn (who led the region from 1991 to 2007), actively intervened in restructuring the region’s economic ­environment but did not seek direct control over firms. Skillful at resolving conflicts, he emphasized consultation, inclusiveness, and problem solving (as when wage arrears accumulated at large enterprises in 1999). The elite ­respondents whom Lapina and Chirikova interviewed in the early 2000s ­emphasized Lisitsyn’s skill in preserving a balance among the various interests in the region, but worried that so much of the region’s success rested on him personally.66 Like Igumnov in Perm’, Lisitsyn also devised consultative institutions to facilitate coordination among business interests and between business and government. He engineered the formation of financial-industrial groups67 when mergers between manufacturing and financial structures were starting to develop. He created an Economic Council, made up of the heads of the major firms of the region, which became the major site for economic decisionmaking in the region. The governor vetted his policy proposals there before they were taken up by the regional legislature. The governor attended nearly all its meetings. The prominence of this structure explains the absence of a regional branch of the RUIE, although there was a Trades Chamber representing smaller firms. Lisitsyn also created a Public Chamber, another consultative body, to represent the major political and civic associations of the region.68 Governor Lisitsyn’s tendency to build consensus was also manifest in his political activity. He joined whichever national party of power was emerging; in the region, he kept tabs on the activity of all political parties without taking sides himself. Emphasizing the importance of preserving the region’s famous stability, he advised party leaders about their choices for leaders and candidates for office. His informal and personal ties to all major interests also allowed him to ensure control over the regional legislature, judicial bodies, Lapina and Chirikova, Regiony-Lidery, pp. 44–46. Lapina and Chirikova, Regiony-Lidery, p. 57. 67 Ibid., p. 110. 68 Ibid., pp. 227–230. 65

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law enforcement, and the regional branches of federal bodies.69 The regime was not democratic, because the major political institutions were controlled by the governor, but it was pluralistic because power was dispersed among major economic interests and (to a lesser degree) social and political organizations. Consultation and consensus building, rather contestation and majoritarianism, characterized policy making. Policy, as a result, has been consistent over time. Samara Like Yaroslavl’ and Perm’, the Samara region entered the transition with a relatively diversified economy, although, like them, it also depended heavily on defense manufacturing (particularly aviation). It has a relatively favorable location (situated on the Volga as well as on a railroad trunk line).70 Its second largest city, Togliatti, is home to Russia’s largest automobile maker, AvtoVAZ, maker of the Zhiguli and Lada cars; Togliatti is a company town: some 90% of the city’s revenues come from the car maker.71 The region also has some oil extraction and petrochemical industry. The region is heavily urbanized and has a large concentration of skilled workers and educated specialists. These legacy factors have tended to be assets. However, the defense sector fell into a severe depression in the early 1990s, making the region particularly dependent on continued output at AvtoVaz and the recovery of the oil and petrochemical industries. As a Russian expert observed, “the fear of a social explosion [was] constantly visible in many public statements of both local and national leaders.”72 The regional authorities actively led the adaptation of the region to the new market conditions. Early on they recognized that opening the region to ­investment and foreign trade would be vital to the success of the region’s economy. The regional leaders’ two top priorities, accordingly, were to create the conditions for a market-oriented economy and, at the same time, to support the large productive firms in the region (which were not necessarily compatible goals). Given the near collapse of some of the largest plants – particularly those tied to defense and aviation – the regime worked to maintain production at them. It generated funds to finance conversion projects and lobbied for orders from the federal government.73 The government intervened in the privatization process to ensure that new owners who were committed to the same goals as the administration took control of privatized firms. In addition, Samara was the first region to use federal bankruptcy legislation to ensure an orderly transfer of ownership as a means to maintain production. By late 1994, a number Ibid., p. 122. Philip Hanson, “Samara: A Preliminary Profile of a Russian Region and Its Adaptation to the Market,” Europe-Asia Studies 49:3 (1997): 407–429; Pavel Romanov and Irina Tartakovskaya, “Samara Oblast: A Governor and His Guberniya,” Communist Economies and Economic Transformation 10:3 (1998): 341–361; Lapina and Chirikova, Regiony-Lidery, pp. 26 ff. 71 Lapina and Chirikova, Regiony-Lidery, p. 33. 72 Romanov and Tartakovskaya, “Samara Oblast,” p. 224. 73 Lapina and Chirikova, Regiony-Lidery, pp. 48–49. 69 70

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of firms in the region were insolvent, but the giant aircraft manufacturing firm AVI.S, later called Aviakor, was the first to go through the new bankruptcy procedure. Output at the plant had collapsed almost completely by 1994, but the enterprise still owned enormous productive capacity and social funds (including 357 apartment buildings for its employees, 22 kindergartens, sports stadiums, sanatoria, and the like) and was a mainstay of the regional economy and social safety net.74 Navigating the bankruptcy process required cooperation among the firm’s management, the regional administration, the federal bankruptcy administration, and the courts, but the governor managed the process skillfully and brought in a young, capable new director from outside the enterprise to run the firm. Bankruptcy freed the firm from having to use what meager revenues came in to pay off bank debts rather than wages, and he vigorously went about expanding the firm’s markets. The firm worked with the regional government to transfer ownership of some of its social assets to the municipal government and to commercial entities.75 The bankruptcy process was closely supervised by the regional government, which used its leverage with regional banks, the bankruptcy administration, and the courts to ensure an outcome that suited its policy goals. The process was slow and painful. By the end of 1996, all the plant’s workers were on forced unpaid leave. But through the reorganization of the firm, the government brought in new ownership, new financing, and new management, and worked closely with the new managers to lobby Moscow for orders for new models of civilian passenger and cargo aircraft.76 Philip Hanson observes that the regional administration in Samara maintained extensive controls over the economy, much as regional administrations did throughout the country, including provision of soft credits and the intertwining of political and business elites,77 but he tends to regard these as obstacles to the development of the economy rather than as critical elements to the success of the region’s strategy for adapting to the new market environment. Certainly these measures sheltered regional enterprises from the full force of global competition, but it is hard to imagine how the region could have absorbed the loss of employment and social services that would have been triggered by the complete collapse of its major defense, aviation, and automotive industries. Like many authors who have studied the economics of the transition, Hanson argues that official figures on unemployment in the 1990s are greatly exaggerated.78 But even if so, the loss of employment at the state Pavel Romanov, “The Regional Elite in the Epoch of Bankruptcy,” in Conflict and Change in the Russian Industrial Enterprise, ed. Simon Clarke (Cheltenham: Edward Elgar, 1996), p. 219. 75 Ibid., pp. 226–227. 76 Hanson, “Samara,” p. 415; Romanov, “The Regional Elite,” pp. 238–239.Eventually the firm was brought under the “Basic Element” conglomerate owned by the oligarch Oleg Deripaska. 77 Hanson, “Samara,” p. 423. 78 Ibid., p. 409. 74

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firms undergoing restructuring brought about a massive drop in cash income to workers employed there and revenues to regional budgets, as well as a shift in economic activity and social welfare to in-kind and off-the-books channels. The expansion of the unreported, untaxed economy may have raised incomes for those employed in it, but it increased poverty and insecurity for the dependent population, and eviscerated the state’s capacity to provide basic social services. Therefore, the interventionist strategy employed by regions such as Samara, Yaroslavl’, and Perm’ were much more successful in achieving both productivity gains and social equity than the alternatives – a wholesale collapse of productive activity at inefficient state enterprises or the effort to prop up a Soviet-style system of state paternalism. The central figure in Samara’s regime from 1991 until 2007 was Governor Konstantin Titov. First appointed chief of administration in 1991, he won election in 1996 and reelection in 2000, and was reappointed to the position by Putin in 2005. He was eased out in 2007 and replaced by a senior director from AvtoVAZ. Like his counterparts in Perm’ and Yaroslavl’, Titov took an interventionist approach to managing the regional economy, although he always identified himself with the pro-market wing of the Russian political spectrum. He saw no contradiction between his commitment to build a market economy and his vigorous use of administrative powers to restructure firms, given the conditions in which the economy operated. In 1999, he said of himself: “Personally I have never been a social-democrat, although many say that what I am doing in Samara oblast’ is in fact social-democracy. Personally I am much more to the right, but I understand that today I cannot develop that.”79 Titov’s strategy was to maintain production at the major firms while gradually inducing them to produce for the market, expanding investment and output. He oversaw the selection of managers for a number of enterprises and lobbied actively for orders from the government to maintain production at the region’s industrial enterprises. He welcomed the formation of financialindustrial groups in the region and formed alliances with outside magnates who brought capital to the region – initially Berezovsky with AvtoVAZ, later Khodorkovsky and Yukos. He made a top manager of Yukos his deputy governor. But he did not turn the region over to any one conglomerate, nor did he seek to profit from his control by building a patronage-based regime. His aim was to maintain, and if possible to raise, economic output, and to provide for a stable social infrastructure, and in this Titov was one of the most successful governors in Russia. However, by the end of the 1990s, some elements of Titov’s institutional strategy faltered. For one thing, economic recovery made regional firms more “Сам я никогда не был социал-демократом, хотя многие говорят, мол, то, что я делаю в Самарской области  – это и есть социал-демократия. Я лично значительно правее, но я понимаю, что сегодня я не могу это развить.” Interview in Ekspert, August 2, 1999, “Politika podgotovka k vyboram.” http://dlib.eastview.com.ezp-prod1.hul.harvard.edu/util/printarticle.jsp?id=2797198

79

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independent of the government.80 Titov also damaged his standing with the regional elite by making an ill-advised bid to enter national politics. First he tried to create a governors’ bloc in early 1999 to compete in the Duma election in December 1999, and refused to join the United Russia bandwagon in the fall. Then the next year he ran for president. The regional elite thought his national political ambitions a sign of poor judgment and withheld its backing from his presidential campaign. Some of the Moscow oligarchs he counted on for support decided to back United Russia once it became clear that it was the Kremlin’s favored political vehicle. Titov was humiliated, receiving less than 1.5% of the presidential vote running against Putin. However, he recovered quickly, adroitly choosing to resign his post as governor and to call early gubernatorial elections, which he won. His standing in the region was weakened somewhat, however, and a group of candidates formed around the mayor of the capital city of Samara took a majority in the regional legislature in December 2001. Like Governor Lisitsyn, Titov’s success as governor rested on his skill in balancing multiple interests rather than in suppressing contestation. The growing prosperity of the region in the late 1990s and early 2000s resulted in a greater diversity and competition of interests. One respondent told Lapina and Chirikova: “[T]he pluralism of actors operating in the regional arena is increasing. And as a result, competition for power among various elite groups is increasing.”81 It is important to emphasize that, as in our other cases, the jockeying for influence was not primarily conducted through elections (although the outcome of legislative election in December 2001 was a measure of popular and elite dissatisfaction with the governor) but through regional bureaucratic and consultative channels. Powerful regional and Moscow interests (organized around the automotive works, the metallurgical industry, regional holding companies, and Moscow-based energy companies) entered the arena. Helping coordinate the demands of the major business groups is the regional branch of the RUIE, headed by two of the most powerful industrial directors in the region, which consults actively with the governor. The chair of the regional RUIE also heads the regional employers’ association, which works with the trade union federation and the regional administration on matters relating to wages and social policy. These corporatist structures help ­business both channel and settle its own internal disagreements, and ensure that the regional administration and major firms can keep tabs on one another. Decision making, as in other pluralistic regions, tends to be slow, deliberate, and organized around consensus building82; it uses the familiar Soviet ­methods of seeking the agreement of multiple organizations and agencies to major decisions (as one respondent put it, it is a “regime of chronic consensus building” – “rezhim khronicheskogo soglasovaniia”).83 Lapina and Chirikova, Regiony-Lidery, pp. 59–60, 111–112. Ibid., p. 116. 82 Lapina and Chirikova, Regiony-Lidery, pp. 149, 220–227. 83 Ibid., p. 149. 80 81

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The literature also agrees that Samara has a relatively open, pluralistic media environment.84 At the time of Lapina and Chirikova’s interviews, there were more than 600 newspapers and magazines published in the region, and media executives said that there were no overt political pressures on them. Rather, the media and regional government operated on the basis of an informal exchange of information for support. An official in the regional administration explained the arrangement as follows: “Agreements are the simplest option for relations between the media and the authorities. From our side, we can provide information. Bodies of power are the main suppliers of information. In this respect information is a commodity. For the information that we are able to supply, the media are willing to support us.”85 The authorities consciously avoided trying to manipulate the media directly, preferring to work through the self-interest of the media, and their business owners, in maintaining a cooperative relationship with the administration. Lapina and Chirikova did a content analysis of the regional press in 2001 and found that the content included items both favorable to and critical of the regional and local authorities. Similarly, Kelly McMann found that independent newspapers and broadcast organizations in Samara “do not suffer from government interference and are widely available,” and that, in contrast to Ulyanovsk, the independent media do not censor themselves.86 All three regions described here as showcases of successful, relatively polyarchic regimes adopted an interventionist strategy for guiding the transition to a market economy. None adopted radical reforms and all employed traditional Soviet methods of leadership – personal authority by the top leader, formal and informal channels for consultation, and subsidies to maintain production at often inefficient enterprises. They did so, however, in order to bring about a gradual adaptation to market conditions by opening the economy to outside investment, finding new product markets, and replacing owners and managers. Their methods were incremental and evolutionary – “Chinese,” as it were. Eschewing radical reform, they nonetheless recognized that the market economy opened new opportunities for those positioned to take advantage of it, and they worked actively to soften the impact for those (such as employees at the old state enterprises and workers in the budget sector) whose futures were threatened by the transition. This process of adaptation occurred through a search for consensus among economic and political elites, but a consensus that was actively forged by the governors. Indeed, as Lapina and Chirikova observe, in such regions, the governor, in effect, “formed the elite” by overseeing the privatization process, serving as a midwife to the creation of financial-industrial groups, selecting new owners and managers, and managing local bankruptcy proceedings. It is misleading to speak of a “merger” of political and economic elites in the McMann, Economic Autonomy; Lapina and Chirikova, Regiony-Lidery, p. 265. Lapina and Chirikova, Regiony-Lidery, p. 273 86 McMann, Economic Autonomy, p. 81 84 85

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regions in the latter part of the 1990s, because the case studies demonstrate that the political objectives of firm managers and owners and of political authorities remained different even when they were complementary.87 Rather, political and economic elites found institutional solutions to the challenges of cooperation. These sacrificed some degree of economic efficiency for the sake of maintaining regional stability. But they enabled the establishment of a consensus among the major interests of the region in preserving public services while restructuring industry for the marketplace. The model of businessgovernment relations in these more successful regions is closer to that of an exchange of benefits than of capture of government by business, or predation on business by the government, as Timothy Frye suggested based on his survey of businesess in 2000.88 It is this pattern that Putin sought to implement at the federal level, at least briefly,89 before the shift in 2003 toward a far more interventionist, sometimes predatory, policy toward big business.90 I have argued that the consultative structures that governors in more market-friendly, pluralistic regimes establish helped resolve two sets of collective dilemmas. First, they enabled individual firms to reach agreement more readily on common issues, such as how to share the burden of social support in the region and how to finance regional development. Second, such consultative mechanisms enabled the regional administration to assure business that it would refrain from taking advantage of productive investment. Economic councils and directors’ councils, a relatively open media system, and participation by both firm managers and regional officials in regional legislatures allowed the members of the economic and political elite to monitor one other to ensure that the gains and costs of regional economic activity were spread James Hughes, for example, notes the substantial increase of economic and administrative officials in regional legislatures. In 1990, 46% of the deputies in regional assemblies were administrative officials and firms managers, but by 1994, the number was 72%. He characterizes the close interaction of economic and political elites as suggesting an intertwining of the elites rather than their “bifurcation.” See James Hughes, “Sub-National Elites and PostCommunist Transformation in Russia:  A Reply to Kryshtanovskaya and White,” EuropeAsia Studies 49:6 (1997): 1017–1037. Vladimir Mau speaks of a “merger” of political and economic elites. These descriptions are evocative but reveal little of the goals or strategies pursued by each group, and they ignore the wide variation in the patterns of formal and informal interaction among them found across the regions. See Vladimir Mau, The Political History of Economic Reform in Russia, 1985–1994 (London: Centre for Research into Communist Economies, 1996), p. 95. It may be more helpful to think of the relations between economic and political elites in terms of models such as elite exchange, capture, collusion, predation, or other relationships governing the distribution of resources. Cf Frye, “Capture or Exchange”; Joel S. Hellman, Geraint Jones and Daniel Kaufmann, “Seize the State, Seize the Day”:  State Capture, Corruption, and Influence in Transition (Washington, DC: World Bank Institute, 2000). 88 Frye, “Capture or Exchange.” 89 cf Pauline Jones Luong and Erika Weinthal, “Contra Coercion:  Russian Tax Reform, Exogenous Shocks, and Negotiated Institutional Change,” American Political Science Review 98:1 (2004): 139–152. 90 Richard Sakwa, The Quality of Freedom: Khodorkovsky, Putin, and the Yukos Affair (New York: Oxford University Press, 2009). 87

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fairly and that the government was not unfairly favoring one sector or firm over another. They tended to be found in regions where the political leadership did not take a dominant ownership stake in major firms or create a state holding company for local enterprises, but instead encouraged productive investment and adaptation to national and international market competition. These governors sought to foster economic growth in order to raise income levels generally for the population, and increase tax revenues with which to maintain an active social agenda. Thus the more democratic regions fostered a higher level of coordination among economic actors and clear elements of pluralism in the political arena. The complementarity between the institutions facilitating coordination on the part of the economic elite in their transition to the market and those promoting political pluralism helps explain Stoner-Weiss’s finding in the mid-1990s that the regions with a higher concentration of production in a few firms were more successful at cooperating for the common good of the region. This paradox is explained by the fact that in an environment where actors inherited from the Soviet past a very low capacity for cooperation, instances of successful resolution of collective dilemmas came about as a result of active intervention by regional government in economic and social institutions. Neopatrimonial regimes, in contrast, relying on the extraction and distribution of rents and the suppression of independent political initiative, fostered the perpetuation of economic stagnation and social dependency. These propositions can now be put to the test using systematic measures of the level of openness and contestation in regimes throughout the country. To this task we turn in the next three chapters.

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Cambridge Books Online http://ebooks.cambridge.org/

The Politics of Inequality in Russia Thomas F. Remington Book DOI: http://dx.doi.org/10.1017/CBO9780511973024 Online ISBN: 9780511973024 Hardback ISBN: 9781107096417 Paperback ISBN: 9781107422247

Chapter 4 - Democracy and Inequality in the Russian Regions pp. 110-134 Chapter DOI: http://dx.doi.org/10.1017/CBO9780511973024.005 Cambridge University Press

4 Democracy and Inequality in the Russian Regions

The previous chapters argued that Russian regional governors had ­substantial autonomy to develop institutional arrangements in response to the crisis and opportunity presented by the breakdown of the Soviet order. Some devised neopatrimonial, autarkic regimes, where the governor and his allies owned and controlled most major enterprises and used revenues from them to maintain themselves in power. Others established pluralistic regimes with coordinating institutions that distributed the risks and benefits of market adaptation among enterprises and government. Arrangements of the latter kind helped ensure that basic social stability was preserved (and that the cost of providing public services was shared broadly) while encouraging the pur­ suit of new investment and markets for local producers. The previous ­chapter presented six case histories of regimes illustrating these regime types. Most regional regimes combined neopatrimonial and pluralistic ­elements, and many regimes have shifted over time as a result of the succession of guber­ natorial leadership. Moreover, even the most open, pluralistic regimes fall far short of the standards of liberal democracy. None, for example, has had a fully independent judiciary, a stable competitive party system, or (except sporadically) competitive elections capable of producing the alternation of leaders and opposition. The variation in scores reflects relative differences among the regimes in the degree to which they are open, pluralistic, and competitive. Still, the fact that these differences are significantly related to outcomes in the economy and society should alert us to the fact that dichot­ omous treatments of democracy may be less informative than continuous measures. Behind the abstract numerical scores on democracy/autocracy regime type scales lie specific coalitions of interests pursuing distinct polit­ ical strategies. Chapter 1 laid out three observable implications of this argument. First, regions scoring higher on an index of democracy will tend to have higher ­average income levels, lower poverty, higher social spending, lower social dependency, and higher inequality than other regions. Second, the higher incomes and income inequality of regimes with higher scores on the 110

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democracy scale arise from higher wage (pretax and transfer) income rather than income after taxes and transfers. The higher inequality they display reflects the greater differentiation of earned incomes at the upper end of the income distribution, not more generous redistributive taxing and spending policy. Finally, regimes with higher democracy scores have business environ­ ments that are more conducive to productive investment by firms. This chap­ ter focuses on the first argument, namely that more democratic regions have higher incomes and higher inequality. To substantiate this point, I use official data reported by Russia’s statistical agency, supplemented by data from sev­ eral other sources.1 These data cover all of the regions, or the “subjects of the federation,” as they are formally termed.2 The next two chapters examine the other two propositions on the basis of specific surveys of subsets of the regions. Employing the subnational territorial units of a large and diverse ­country such as Russia as observations has at least three advantages:  While hold­ ing a number of country-level features constant, it permits us to examine the effect of the considerable variety among regions with respect to political regime, starting conditions, and economic performance. Second, the available ­measures employ the same criteria and scales for all the units of observation, reducing unit heterogeneity and coder bias. Finally, as compared with other studies of postcommunist transitions, the available number of observations is almost three times the number if only national-level units are ­compared. It is therefore possible to obtain greater statistical leverage over cross-unit variation. A description of the variables used in this chapter and their sources is appended to this chapter, along with a full set of descriptive statistics. 2 The concept of subject of the federation was employed by the 1993 Russian constitution in order to recognize the formal equality of all eighty-nine units as constituent territories of the federation. Several of these units had been granted an upgraded status by the Russian parlia­ ment in 1991, and in one case (the Chechen-Ingush Republic), one republic-level unit split into two with the consent of the federal parliament in 1992. Thus by the time the new con­ stitution was adopted in December 1993, there were eighty-nine federal subjects, each enti­ tled to send two representatives to the upper house of parliament (the Federation Council). The subjects themselves differed in constitutional status. Twenty-one were ethnic-national republics; ten were autonomous okrugs (districts) (all but one of them located within other units), one was an autonomous oblast, two were cities (Moscow and St. Petersburg), six were krais (territories), and forty-nine were oblasts. Republics, autonomous okrugs (districts), and the one autonomous oblast were created in the Soviet period to recognize the popula­ tions living in territories with significant ethnic minorities. Autonomous okrugs are nested within larger territorial entities, although they also are treated as “subjects of the federa­ tion.” In recent years, several autonomous districts have been merged into their surrounding territories. Therefore, as of the end of 2009, there were only eighty-three subjects of the federation. For most of the analyses of this paper, I only examine the federal subjects that are not physically internal to other units and thus drop the autonomous districts. I also drop the Chechen Republic from all analysis because data is missing for most of the variables of interest. The maximum number of cases for most of the analysis reported here is therefore seventy-seven. 1

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The findings can be summarized as follows. Even taking into account the starting conditions with which the regions entered the transition, regions with relatively more open political regimes have seen greater income growth and a steeper reduction in poverty after the 1990s; however, at every level of income, more democratic regions also have higher levels of income inequality. They also tend to have higher levels of social spending and lower rates of social dependency, that is, shares of the population who depend on social transfers as their major source of income. 4.1.  Democracy, Income, and Output Not surprisingly, regional income is positively, albeit weakly, correlated with the democracy score. The simple bivariate correlation between mean real income in 2000 and the democracy score for the 1991–2001 period is r = .26 (p = .02); similarly, the correlation between the democracy score for 2001–2006 and mean real income in 2005 is r = .29 (p = .01). The correlation between the democracy scores and gross regional product per capita, adjusted for the regional price deflator, is similar but slightly lower (r = .19, p = .09, and r = .27, p = .015). Because it is likely that both differences in the degree to which regions exhibited higher democracy scores and their mean income and output levels are affected by a common set of factors (including levels of social and human capital at the time of the transition), we might well doubt whether the nature of the political regime exerts any independent impact on income levels and income distribution. Certainly factors associated with the legacy of human and economic devel­ opment help explain much of the variation across regions in their level of democracy in the 1990s. Table 4.1 presents the results of an OLS regression of the democracy score for 1991–2001 on a set of inherited social and economic conditions.3 Social development characteristics, as measured by urbanization and the percentage of children enrolled in preschool education in 1990, are signif­ icant and positive predictors of democracy in the 1990s, as is the share of the economy produced by industrial manufacturing in 1994 (used as a proxy for inherited industrial development). In this and subsequent estimations, I treat Moscow and St. Petersburg as dummy variables. As high-income, highly developed cities with the status of “subject of the federation,” including them might bias the results. Note that in this model, Moscow’s democracy score is lower than would be predicted given its level of urbanization and social devel­ opment, whereas St. Petersburg’s is higher. 3

Diagnostic tests indicate that collinearity among the independent variables is not severe. The question of spatial autocorrelation caused by common historical influences on neighboring regions or processes of the diffusion of modernizing influences is not immediately germane, because we are treating the regions as a cross-section at the point of transition.

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Democracy and Inequality Table 4.1.  Determinants of Democracy Dependent variable: Democracy score, 1991–2001 OLS using robust standard errors (standard errors in paren­theses) Preschool coverage, 1990 Urbanization, 1990 Manufacturing share of output, 1994 Moscow dummy St. Petersburg dummy Constant No. of observations r2

.12* 15.80* 6.88*

(.056) (6.32) (2.59)

–5.04* 10.18*** 3.92 77 .478

(2.27) (2.26) (3.50)

***p < .001; **p < .01; *p < .10.

Inherited development levels also help explain the political behavior of citi­ zens, and specifically the degree to which voting patterns of the regions reflect support for political and economic liberalization. Data on the share of the vote going to candidates and parties that represented a rejection of the communist system have been used in much of the literature to characterize the political profile of the regions.4 Taking simply one such vote – the percentage of vot­ ers expressing confidence (doverie) in President Yeltsin in the referendum of April 1993 (where voters were asked whether they had confidence in Yeltsin, confidence in the government, and whether they wanted to see early elections for Yeltsin and for the parliament) – we can identify the strongest correlates of a high level of support for Yeltsin. Table 4.2 presents two OLS models esti­ mating the strength of factors associated with the pro-Yeltsin vote. The first model is simpler and more efficient. Inherited levels of urbanization, preschool coverage, and the depth of the specialist pool – all indicators of human capital accumulation at the time of transition – are significant predictors of aggregate support for Yeltsin. The second column reports the results of adding measures of mean income and poverty. Doing so weakens the model; urbanization loses its significance in favor of poverty and income. Meantime, the preschool cov­ erage variable remains significant and the specialist pool variable almost so. It is as if the voters in regions endowed with high levels of human capital ­recognized this vote as a choice between a political and economic system that denied them the ability to capitalize on their human and social capital, and one that afforded them new opportunities to prosper. Thus, citizens in regions V. A. Kolosov, N. V. Petrov, and L. V. Smirnyagin, eds., Vesna 89: Geografiia i Anatomiia Parlamentskikh Vyborov (Moscow: Progress, 1991); L. V. Smirnyagin, ed., Rossiiskie Regiony Nakanune Vyborov-95 (Moscow:  Iuridicheskaia Literatura, 1995); Daniel Berkowitz and David N. DeJong, “Accounting for Growth in Post-Soviet Russia,” Wiliam Davidson Institute, Working Paper no. 127 (1999).

4

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Table 4.2.  Predicted Vote for Yeltsin, April 1993 Referendum Dependent variable: regional vote share voting confidence in Yeltsin OLS using robust standard errors (standard errors in parentheses) Model 1 Urbanization, 1990 Specialists per 1,000 population, 1989 Preschool coverage, 1990 Real income, 1992 Poverty rate, 1994 Fuel output concentration, 1994 Moscow dummy St. Petersburg dummy Constant No. of observations r2

.359* .055* .589***

–30.14 72 .679

(17.72) (.030) (.099)

(8.5)

Model 2 .128 .05

(.21) (.03)

.50***

(.10)

.026* –.129* 8.20

(.01) (.01) (7.0)

2.64 6.5

(4.87) (5.55)

–16.08 68 .611

(10.5)

***p < .001; * *p < .01; *p < .10.

higher in social and human capital gave a larger share of their vote to Yeltsin, who represented a decisive break from the communist past. Our question is whether differences in the level of democracy by region matter for the level and distribution of income even after accounting for inher­ ited assets and liabilities. Table 4.3 shows that they do. The first two columns show the coefficients for a model predicting mean real income (calculated as mean nominal income divided by the regional subsistence minimum for 2005), and the second two use the same covariates in a model of inequal­ ity (expressed as the ratio of the income of the 90th percentile to that of the 10th for 2006). In each case, the second column (models 2 and 4) presents a reduced model after a stepwise elimination of covariates whose statistical significance fell below the 80% level. Note that the democracy variable is sig­ nificant in both reduced-form models even after controlling for such legacy factors as natural resource wealth and human capital assets. Inequality in the 1990s (measured as the decile ratio in 1995) is significantly and positively associated with higher inequality in 2006 and negatively with income in 2005. Mean income in 1995 had a significant and positive relation with both income and inequality in the 2000s. Urbanization has a weak neg­ ative association with inequality but no relation to income after other factors are held constant. The depth of the specialist pool (the number of employed persons with higher or specialized secondary education per 1,000 persons)

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Democracy and Inequality Table 4.3.  Predictors of Income and Inequality, 2006

Dependent variable: Models 1 and 2: Regional mean income (2005) as multiple of subsistence minimum; Models 3 and 4: Decile ratio, 2006 OLS using robust standard errors (standard errors in parentheses) Income Model 1 Democracy score, 2001–2006 Decile ratio, 1995 Mean income, 1995 (adjusted) Poverty rate, 1995 Privatization, 1993 Urbanization, 2005 Specialist pool, 1989 Preschool coverage, 1990 Moscow dummy Fuel output, 1994 St. Petersburg dummy Constant r2 No. of observations

Inequality Model 2

Model 3

Model 4

.017* (.01)

.017* (.01)

.09* (.047)

.1* (.04)

–.04** (.01)

–.043* (.01)

.09* (.04)

.086* (.03)

1.18** (.41)

1.53*** (.13)

3.13*** (.55)

.02 (.01)

.029*** (.006)

2.96*** (.4)

.01 (.02)

–.44 (1.29)

–12.43* (4.76)

–12.82* (4.58)

.61 (.71)

–4.95* (2.57)

–3.85* (1.97)

.00 (.00)

.01** (.00)

.01** (.00)

–.00 (.00) .83 (1.14) 2.16*** (.51) .84 (.32) –.82 (1.25) .841 68

.02 (.02) 2.02*** (.47) .84*** (.12) –1.48 (.40) .835 68

13.48*** (2.44) 14.08*** (1.52) 1.68 (1.66) 2.16 (1.38) –.20 (1.26) –.36 (2.55) .92 68

1.3 (1.49) .919 68

***p < .001; **p < .01; *p < .10.

is positively related to inequality but not to income. Rather surprisingly, the extent of privatization – measured as the total number of federally privatized enterprises in the region per 1,000 population as of 1993  – was negatively associated with inequality but had no relation to income. The share of fuel production in total output as of 1994  – an indicator of the inherited natu­ ral resource intensity of the regional economy – is positively related both to income and to inequality. Overall, the model predicting inequality yields a slightly better fit to the data than does that for income, but both explain a substantial amount of the variance. Finally, the democracy score in both cases has a modest but observable association with the dependent variable. We can compare these two relationships graphically in Figure 4.1. It plots predicted values for both income and inequality taken from the reduced form

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The Politics of Inequality in Russia

30

40

Moscow city

20

Tiumen oblast

Predicted inequality

Krasnoyarsk

10

Kursk oblast

Predicted income Arkhangelsk

0

Tuva 15

20

25 30 Democracy score, 2001–2006

35

40

Figure 4.1.  Predicted income and inequality levels by democracy score.

models shown in Table 4.3 against the actual democracy scores for the 2001– 2006 period. That is, the values shown are those that would be predicted once factors such as urbanization, inherited human and physical resources, and previous levels of income and inequality were controlled for. Predicted income’s association with regime type is modest but positive and significant. The inequality model has a steeper slope for democracy. Note that Moscow, due to its extremely high income level, has a far higher inequality score than would be predicted given its modest score on the democracy scale (remem­ ber that it is a dummy variable, so does not affect the slope.) So does oil-rich Tiumen oblast.5 The model implies that if a region were to raise its democracy score from the level of Kursk (with a democracy score of only 20) to that of Krasnoyarsk (scor­ ing 38) – a difference of more than three standard deviations – while income and other variables remained constant, the ratio of the income of the average earner in the 90th decile to that of the 10th would go from about 11.3 to about 15. (The actual values were 10.6 and 15.5.) Likewise, a 20-point jump in the democracy score from that of Tuva (score of 17) to that of Arkhangelsk (37) – a 5

Tiumen’s predicted decile ratio is 24. Its actual value was 22. Moscow’s predicted and actual values are the same because Moscow was a dummy variable. Similar results are obtained whether we use a Gini index or the share of income received by the top quintile of the region’s population as our measure of inequality. Because the Russian statistical agency reports a more complete series of figures for the decile ratio, it is used here as the measure of regional income inequality.

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Democracy and Inequality

117

difference of about three and a half standard deviations – would push the pre­ dicted average income from about 15% above the subsistence level to over twice the subsistence minimum. Since the monthly income needed for an individual’s subsistence was estimated to be 3,105 rubles in Tuva, or about $111 at the pre­ vailing exchange rate, the average expected income would only have been 3,570 rubles, or $127 (note that the actual average was slightly higher, 4,067 rubles, or $145). By contrast, the subsistence minimum for Arkhangelsk was estimated at 3,574 rubles, or $127, so the predicted average income was 7,577 rubles, or $270. (The actual mean adjusted income was slightly higher, 2.18 times the subsistence minimum, or 7,791 rubles, or $278.) Thus if it were somehow pos­ sible to match all the other determinants of income in the two regions, raising a region’s democracy score by 20 points would more than double incomes. Although income and gross regional product per capita are closely corre­ lated, variation in the democracy index is entirely unrelated to gross regional product. Table 4.4 reports the results of two estimations regressing price­adjusted gross regional product per capita in 2005 on a series of variables that would be expected to affect it. As the table shows, GRP per capita is predicted by inherited human and natural resource assets (as indicated by the significant coefficients for the size of the educated population and the share of mineral extraction in output) and by the region’s output in the previous decade. All else being equal, per capita output in Moscow is 1,000 rubles higher than elsewhere. The first column reports the coefficients of a full model; Model 2 reports a reduced model after insignificant coefficients (those with a p-value less than .20) have been dropped by stepwise backward removal. In both mod­ els, the value of the democracy score has no statistical effect on gross regional product per capita (expressed as a multiple of the regional subsistence min­ imum). One possible interpretation of these results is that although similar factors affect output and income (such as the region’s inherited level of devel­ opment), income additionally reflects decisions made by firms about actual or reported wage levels. Possibly firms in regions rated higher in democracy pay higher wages, or they pay wages at similar levels but report a larger share and therefore pay proportionately higher taxes. Such an effect would be consis­ tent with the idea that the democracy index reflects the level of coordination between enterprises and government over incomes and social policy.6 6

It would be ideal to test this thesis directly by analyzing the effect of the democracy variable on payroll tax collections. Unfortunately, we do not have separate measures for the different tax revenue streams paid by enterprises to regional governments. The principal sources of tax revenues on which regional governments depend are the profits tax and income tax. These two sources comprised two-thirds of regional budget revenues in 2008. Therefore, figures on tax collections are a poor indication of enterprise compliance with the rules on payroll tax payment. There is some statistical association between the democracy score and total per capita tax collections in 2000 once gross regional product per capita is controlled for, but it is negative, and the effect disappears in 2003. The strong association between gross regional product per capita and tax collections suggests that tax collections reflect measurable output more closely than wages or incomes.

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Table 4.4.  Effect of Democracy Score on Gross Regional Product Per Capita Dependent variable: Gross regional product per capita, 2005, as multiple of regional subsistence minimum OLS using robust standard errors (standard errors in parentheses) Model 1 Democracy score, 2001–2006 Gross regional product per capita, 1995 Decile ratio, 1995 Poverty rate, 1995 Urbanization, 2005 Minerals as share of output, 2005 Preschool coverage, 1990 Specialist pool, 1989 Privatization, 1993 Moscow dummy St. Petersburg dummy Constant r2 No. of observations

Model 2

–.21

(.41)

1.62**

(.54)

–.32 .54* –.35 .81**

(.37) (.32) (.30) (.29)

.13

(.19)

.1

(.06)

167.1 53.68*** 8.67 –65.97 .75 68

(101.1) (13.89) (8.30) (40.95)

1.52**

(.49)

.57*

(.32)

.82**

(.29)

.06*

(.03)

140.16 41.63***

(85.12) (7.79)

-72.29

(37.48) .74 68

***p < .001; **p < .01; *p < .10.

4.2.  Wages, Social Spending, and Social Dependency Examining the relationship between regime characteristics and wage levels provides additional support for this line of reasoning. If it is the case that in regions that have established more effective coordinating and power-sharing institutions, incomes are higher because wages are higher or, at the very least, reported (and therefore taxed) wages are higher, then we should see positive associations between wage levels and democracy and between social spend­ ing and democracy. There is some evidence for both propositions. Table 4.5 and Figure 4.2 indicate the effect of democracy on real wages, holding unem­ ployment, urbanization, and the share of the region’s output concentrated in manufacturing (all expected to affect wage levels), as well as dummies for Moscow and St. Petersburg. The real wage level is expressed as a ratio of the mean nominal wage to the subsistence minimum. Table 4.5 indicates that regions scoring higher in democracy do pay higher wages. This result holds up even after controlling for factors such as the unem­ ployment rate, the share of manufacturing in the region’s output, the share

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Democracy and Inequality Table 4.5.  Predicted Real Wage, 2005, by Democracy Score Dependent variable: mean wage level as multiple of subsistence minimum OLS using robust standard errors (standard errors in parentheses) Democracy score, 2001–2006 Unemployment rate, 2005 Manufacturing share of output, 1994 Mineral share of output, 2005 Urbanization, 2005 Subsistence minimum, 2005 Moscow dummy St. Petersburg dummy Constant r2 No. of observations

.02* –.01 –1.28* .029* 1.5** –.00 .95** .31* 1.93 .587 77

(.01) (.008) (.51) (.01) (.45) (.00) (.27) (.15) (.46)

5

***p < .001; **p < .01; *p < .10.

4

Tiumen oblast

3

Perm oblast

North Osetia

Ulyanovsk oblast

1

2

r2 = .587 Coefficient = .02; p < .05

15

20

25 30 Democracy score, 2001–2006

35

40

Figure 4.2.  Predicted real wage by democracy score.

of mineral extraction in regional output, urbanization, and the cost of living in the region (measured as the subsistence level), as well as the Moscow and St. Petersburg dummies. The overall fit of the model is reasonably good. (All coefficients are significant at well above the .20 level, so only the full model is reported.) The difference between the wage level of an impoverished, autocratic region such as North Osetia (with a democracy score of 18) and that of a moderately

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The Politics of Inequality in Russia

democratic region such as Perm’ oblast’ (democracy score = 38) is consider­ able. The 2005 nominal mean wage in North Osetia was 4,722 rubles per month, or about $168 at the prevailing exchange rate, and the subsistence minimum was calculated to be 2,091 rubles, or $75. The predicted ratio was 2.32, or 4,859 rubles (about $173) (the actual real wage was slightly lower, about $168). In Perm’ oblast’, the nominal wage was 7,749 rubles, or $277, and the subsistence minimum was 2,880 rubles, or $103 dollars. The predicted real wage was 8,640 rubles, or about $308. Therefore, moving from a poor and authoritarian region such as North Osetia to a region 20 points higher on the democracy scale – a difference of almost four standard deviations – would raise the average wage by about 78% if all else were equal. To take a less extreme case – Ulyanovsk, with a democracy score of 26 and a predicted real wage of about $198 (and an actual real wage of $191) – raising its democracy score to that of Perm’ (an increase of about two standard deviations) would increase real wages by more than $100 a month, or almost 40%. More democratic regions are also associated with a higher level of social expenditures. Table 4.6 and Figure 4.3 illustrate the predicted relationship between the democracy score and the percent of a region’s budget spent on social transfers. The effect of the democracy variable is significant only at the 85% level in the expanded model (Model 1) after controlling for the share of pensioners in the population, the poverty rate, unemployment, mean real income, urbanization, and dummies for St. Petersburg and Moscow. In the reduced model (Model 2, showing the effect of removing variables with low significance), its significance rises to the 90% level. Figure 4.3 plots the pre­ dicted values for social expenditures against the democracy scores, using Model 2. If a region were to go from a low-democracy score of 20 (such as that of Kalmykia) to that of St. Petersburg (with a score of 36) – a distance of about three standard deviations  – its level of social spending would rise, all else being equal, from about 1.53% of the budget to about 2%. (In actual­ ity, Kalmykia’s social spending percentage was slightly higher than predicted, 1.57% as opposed to 1.53%, whereas St. Petersburg’s share lies close to the regression line. Note that the model fit in this equation is substantially lower than in most of the other models estimated here.) We would also expect higher scores on democracy to be associated with a lower rate of social dependency. Social dependency here is measured as the percentage of the region’s income that is derived from social transfers. The reasoning is that, even once such circumstances as the age structure, unem­ ployment rate, and poverty rate are considered, leaders in low-democracy regions pursue policies that keep the population more dependent on the state. The share of earned income in the regional income structure would be lower because incomes from employment in state and private enterprises would be lower whereas the share of income from social payments would be higher. Table 4.7 indicates that this is the case. (Model 1 presents the estimates for the full model; Model 2 reports the reduced model after insignificant coefficients have been dropped.)

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Democracy and Inequality Table 4.6.  Predicted Social Expenditures, 2004, by Democracy Score Dependent variable: Regional social expenditures as share of budget, 2004 OLS using robust standard errors (standard errors in parentheses) Model 1 Democracy score, 2001–2006 Share of pensioners in population, 2005 Poverty rate, 2004 Mean income, 2005 (adjusted) Urbanization, 2005 Unemployment rate, 2005 Moscow dummy St. Petersburg dummy Constant r2 No. of observations

.02 –.004*

(.01) (.002)

.01 .002

(.01) (.126)

.035 –.01 –.75 .03 .11 .22 77

Model 2

(.77) (.01) (.45) (.22) (1.08)

.02* .004**

(.01) (.001)

–.69***

(.07)

.06 .20 77

(.39)

2.5

***p < .001; **p < .01; *p < .10.

2

St. Petersburg

1.5

Kalmykia

r2 = .20

1

Coefficient = .2; p = .07

15

20

25 30 Democracy score, 2001–2006

35

40

Figure 4.3.  Predicted social expenditures by democracy index, 2004.

Higher levels of democracy are associated with lower levels of social depen­ dency, even after controlling for the share of pensioners in the population, the poverty rate, unemployment, mean real income, urbanization, privatization, and dummies for St. Petersburg and Moscow. The model includes a measure of

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The Politics of Inequality in Russia

Table 4.7.  Predicted Social Dependency Rate, 2006, by Democracy Score Dependent variable: Share of regional income from social transfers, 2006 OLS using robust standard errors (standard errors in parentheses) Model 1 Democracy score, 2001–2006 Share of pensioners in population, 2005 Poverty rate, 2004 Mean income, 2005 (adjusted) Urbanization, 2005 Unemployment rate, 2005 Privatization, 1993 Moscow dummy St. Petersburg dummy Constant r2 No. of observations

Model 2

–.126**

(.04)

–.07***

(.002)

.21*** –1.39*

(.05) (1.01)

–4.98* –.046 13.38* 3.07* 2.06* .31 .821 73

(1.99) (.74) (6.24) (3.49) (1.22) (4.62)

–.13**

(.04)

.07***

(.01)

.23*** –.86*

(.03) (.49)

–4.05* .07*** 1.52* –3.08 .817 73

(2.12) (.01) (.65) (3.11)

***p < .001; **p < .01; *p < .10.

privatization (the share of federal enterprises that had been privatized as of 1993 per 1,000 population) on the grounds that privatization might be expected to affect the size of the employed population. It is notable that the coefficient for privatization is positive and significant, implying that the larger the share of federally privatized enterprises in a region, the higher the dependency rate. Figure 4.4 plots the predicted social dependency rate from Model 2 against the democracy score, holding the other covariates constant. It shows that in a low-democracy region such as the republic of Karachaevo-Cherkessia (with a democracy score of 22), the predicted share of regional income deriving from social transfers is 17.1% (the actual share was 18.2%), whereas in a higherdemocracy region such as Novosibirsk (with a democracy score of 36 – about two and a half standard deviations higher), the predicted value of the social dependency indicator would be about 13.7% (it was 12.8% in fact). The results indicate that even controlling for other influences on incomes and income distribution, higher scores on the democracy index are associ­ ated with greater inequality, higher income, higher real wages, higher levels of social expenditures, and lower social dependency. 4.3.  Dynamic Effects At this point, we need to consider two objections to these findings. First, although I am arguing that regime characteristics affect the growth of income and income differentiation, I report only cross-sectional patterns rather than

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20

25

Democracy and Inequality

15

Karachaev-Cherkesiia

10

Novosibirsk

r2 = .817

5

Moscow city 15

20

25

coefficient = -.13; p = .001 Tiumen oblast

30

35

40

Democracy score, 2001–2006

Figure 4.4.  Predicted social income share by democracy score.

changes over time. Second, we cannot ignore the possibility that the differ­ ences in democracy scores are themselves endogenous to the economic and social processes that we are considering to be their effects. How can we be sure that regime characteristics have had an independent effect on the dynam­ ics of economic performance, particularly incomes, income distribution, wage rates, social spending, and dependency levels? With respect to the first problem, it would be optimal to use a panel tech­ nique and to treat each region in each year as an independent observation. Then we could straightforwardly measure the impact of regime characteristics on changes in income, income distribution, and the like over time. However, the available data do not allow us to do this. In the case of mean regional incomes and wages, for example, we face a serious problem from price infla­ tion. The state statistical agency has not reported a consistent series of real per capita income and wage figures covering the full period considered here, only nominal incomes and wages. The nominal figures must be adjusted to reflect actual changes in the cost of living for each region. I have used the annual regional subsistence minimum to standardize income and wage figures, but this introduces another potential source of error. The state’s calculations of the subsistence minimum are subject to changes in methodology. As a result, real income series show significant discontinuities, as we saw in Figure 2.2 in Chapter 2. For any one year, cross-sectional comparisons provide a reasonably good picture of differences across regions in income and wage levels. But calcu­ lations of growth are distorted by arbitrary shifts in the methodology used to calculate changes in the underlying price levels. Another difficulty with a panel

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method is that the principal explanatory variable – the democracy score – is available only for particular time points (and then is a summary average of a period of years) and does not have annual observations. Nor do we have full annual series for many of the other variables considered here, such as social spending. For this reason, cross-sectional analysis is the next best alternative. Nevertheless, recognizing that regime characteristics and economic per­ formance affect each other, we can examine the effect of the interaction of political institutions with inequality in the 1990s on inequality in the 2000s. The theory holds that more democratic regions are those where coordination between enterprise heads and political leaders encourages enterprises to con­ tribute more to the social welfare of the region and limits the ability of govern­ ment officials to appropriate rents, resulting in higher mean wages and incomes but also higher wage and income dispersion. If this line of reasoning is valid, we should see the effects of democracy on income and inequality in the 2000s magnified in regions where incomes were already higher and more differenti­ ated in the 1990s. In other words, in high-income, high-inequality regions, we should expect to see a dynamic effect where greater political openness in the 1990s contributed to both higher incomes and greater income differentiation in the 2000s. We would not see such an effect in low-growth, low-inequality regions where the regime is likelier to be paternalistic and authoritarian. To test for this effect, I estimate two interaction effects. First is the effect of the interaction of democracy and income in the 1990s (measured as the product of an estimate of real incomes by region in 1993 by the summary democracy score of the region in the 1990s) on incomes in 2005. The other is the effect of the interaction of inequality in the 1990s with democracy in the 1990s on inequality in the 2000s. Table 4.8 shows the results of the first test. The first model presents the esti­ mates without the interaction term, the second includes it. Even with the com­ ponent elements of the interaction term included in the model, the interaction term has a statistically significant relationship with incomes in 2005. Figure 4.5 shows this effect graphically. The actual 2005 income values are plotted against the interaction term along with the 95% confidence interval of the estimate of the relationship. Moscow and St. Petersburg, because they were treated as dummy variables due to their extreme high values on the income variable, are seen outside the confidence interval. To see whether democracy had a similar interactive effect on inequality, I interacted democracy in the 1990s with the inequality measure (the 90–10 decile ratio) as of 1995. The same regressors as in the previous table are used. Table 4.9 presents the results. Model 1 shows the results of the equation with­ out the interaction term, and model 2 includes it. The democracy score by itself has no relationship with inequality in the 2000s when inequality in 1995 is controlled for. But the interaction of democracy and inequality yields a sta­ tistically significant and positive coefficient, suggesting that where inequality was higher in the 1990s, the effect of democracy in the 1990s was to magnify inequality in the 2000s. Figure 4.6 gives an idea of the size of the effect.

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Table 4.8.  Effect of Interaction of Democracy and Income in 1990s on Income in 2000s Dependent variable: Mean income, 2005 (nominal income as multiple of subsistence minimum) OLS using robust standard errors (standard errors in parentheses) Model 1 Interaction term Democracy score, 1991–2001 Real income, 1993 Fuel output share, 1994 Urbanization, 2005 Moscow dummy St. Petersburg dummy Constant r2 No. of observations

.018* .001** 1.23*** .55 3.61*** 1.39*** .70 .792 74

(.01) (.000) (.32) (.44) (.13) (.18) (.29)

Model 2 .0001* –.04* –.002 –1.28*** .54 3.61*** 1.6*** 2.13 .807 74

(.0000) (.02) (.001) (.32) (.42) (.12) (.17) (.65)

***p < .001; **p < .01; *p < .10.

4

5

6

Moscow city

1

2

3

St. Petersburg

5000

10000

15000

20000

25000

Democracy score, 1991–2001, times real 1993 income

Figure 4.5.  Predicted real income, 2005, by interaction term.

4.4.  Other Sources of Income and Employment The evidence presented in this chapter supports the thesis that regional ­differences in levels of democracy have an effect on income and income dis­ tribution, even when other factors affecting incomes, such as natural resource

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Table 4.9.  Effect of Interaction of Democracy and Inequality in 1990s on Inequality in 2000s Dependent variable: Decile ratio, 2006 OLS using robust standard errors (standard errors in parentheses) Model 1 Interaction term Decile ratio, 1995 Democracy score, 1991–2001 Mean income, 2005 (adjusted) Fuel output share, 1994 Urbanization, 2005 Moscow dummy St. Petersburg dummy Constant r2 No. of observations

Model 2

.09* .02

(.04) (.04)

.01* –.189 –.08

(.006) (.134) (.06)

3.16***

(.528)

3.0***

(.55)

1.51*** –.58 14.38*** –.78 7.11 .897 77

(1.63) (1.63) (2.292) (1.43) (1.76)

1.44*** –.70 14.88*** .81*** 4.60 .894 77

(1.63) (1.64) (2.31) (1.09) (1.33)

***p < .001; **p < .01; *p < .10.

10

20

30

40

Moscow city

0

200

400

600

800

1000

Democracy score, 1991–2001, times 1995 decile ratio

Figure 4.6.  Predicted inequality, 2006, by interaction term.

wealth and urbanization, are taken into account. Regions with higher incomes have higher income inequality, an effect magnified in the presence of democratic institutions. We have conjectured that the reason for this is that the democracy scores represent elements of self-constraint on the part of regional executives that give assurances to enterprise owners and managers that they will benefit

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from productive activity. As a result, in regions higher on the democracy score, enterprises are more successful and pay their employees more. Because earn­ ings are not only higher, but are recorded and taxed at higher levels, more ­democratic regions provide more in social transfer payments but have lower rates of social dependency. These trends continued through the economy’s sus­ tained recovery in the 2000s until the economic crisis beginning in 2008. The theoretical argument is that regimes higher in democracy are more successful at coordinating decision making on the part of regional enterprise managers over issues such as investment and provision of social services and ensuring that regional political executives will not redistribute enterprise gains for their own political interests. An additional source of support for the supposition that variation in the political institutions affects the regional business climate comes from exam­ ining the data on the development of small enterprises (defined as those with 100 or fewer employees). These can be state-owned or private. Overall, the small enterprises’ share of overall employment has risen considerably, from about 9% of the economically active population in 2000 to about 15% in 2008. However, regions vary widely in the size of the sector. The median region had about 12.5% of its economically active population working in small enterprises, with a standard deviation of 5. In Moscow, about a third of the economically active population is employed in small enterprises. Region by region, the democracy variable is positively and significantly related to the size of the small enterprise workforce. The regression results are shown in Table A4.10 in the Appendix on the website. The table indicates that even controlling for the size of the small enterprise sector in 1997, its share in 2008 is positively related to democracy. The small business sector expands more rapidly in the more open and competitive regions. On the other hand, it is not clear that small enterprises offset the concen­ tration of incomes in postcommunist Russia. Comparative studies of incomes and income inequality in the postcommunist region have stressed the impor­ tance of the small and medium business sector for mitigating poverty and inequality in the transition. Research by Berkowitz and Jackson as well as Keane and Prasad has shown that a combination of policies encouraging small business development together with effective targeted social support has reduced income inequality in Poland.7 Those regions where privatization pro­ ceeded fastest created a hospitable climate for entrepreneurship, facilitating the formation of small enterprises. These in turn tended to raise the income levels of the bottom quintiles of the population. In Russia, by contrast, those regions with the greatest extent of privatization saw a weakened regulatory 7

Daniel Berkowitz and John E. Jackson, “Entrepreneurship and the Evolution of Income Distributions in Poland and Russia,” Journal of Comparative Economics 34 (2006):  338– 356; Michael P. Keane and Eswar S. Prasad, “Inequality, Transfers, and Growth:  New Evidence from the Economic Transition in Poland,” Review of Economics and Statistics 84:2 (2002): 324–341.

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environment and less small business development. Small business development did not mitigate the growth in income inequality. The data show that region-by-region small business development, measured by share of employment, is positively correlated with inequality at each point over the period (r = .59 for 1997, .43 for 2001, .55 for 2005, and .45 in 2008). The fact that small business development in Russia is associated with higher inequality, not lower, is consistent with the idea that small enterprise owners are part of a relatively narrow and privileged stratum. Once the democracy score is included in a multvariate model predicting inequality, the size of the small business sector has no statistical effect on inequality. (The results are shown in Table A4.11 in the Appendix on the website.) The final piece of evidence for the proposition that property rights are more secure where elements of democracy constrain the power of ruling elites to prey on firms comes from data on the share of regional income derived from prop­ erty. Not surprisingly, the property income share is correlated with inequal­ ity, even without Moscow (property income and inequality are correlated at r = .41 in 2006 if Moscow is dropped, and .67 if Moscow is included). The data show that regions scoring higher on the democracy score in the 1990s have higher property income shares in the 2000s. (Table A4.12 in the Appendix on the website presents the figures from two models of property income.) Even after accounting for several variables that might be expected to have an association with personal wealth accumulations, including legacy assets such as natural resources and human capital, the effect of the democracy vari­ able is significantly related to property income once variables with insignifi­ cant coefficients are dropped from the model. Figure 4.7 displays the results graphically. It is worth noting, however, that while the democracy score for the 1990s has a significant association with property income, the democracy score for 2001–2006 does not. This result may reflect a lag in the effect of regime institutions on investor behavior or the vulnerability of the association to small changes in the value of the regime scores. 4.5.  Conclusion We observed in Chapter 2 that the rapid increase in income inequality in the early years of the transition reflected three convergent processes:  substan­ tial increases in wage differentiation as previous state-imposed restraints on wage scales were lifted, allowing successful sectors and enterprises to reward employees with higher earnings; the severe lag of wages and transfers behind prices, resulting in the sharp growth of poverty rates; and differences across regions in their ability to generate economic growth and provide social sup­ port. Better-off regions saw increases in average incomes and greater income differentiation as the greatest income gains went to those at the top of the scale. As time passed, however, the effect of differences in regional politi­ cal regimes played a greater role in determining income levels and distribu­ tion – but not output. As we saw, GRP per capita was not correlated with the

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15

20

Moscow city

0

5

10

Tiumen oblast

10

20

30 Democracy score, 1991–2001

40

Figure 4.7.  Predicted share of income from property by democracy score.

democracy scores whereas incomes and wages were. More open regimes had higher incomes and wages but also higher inequality. I argued that this pattern of income distribution resulted from coordination among regional leaders and enterprise owners and managers over the distribution of the costs and gains of the market transition. Wider pooling of the risks and benefits of the transi­ tion among the region’s employers, coupled with institutional guarantees on the part of regional rulers that limited their ability to violate the rights and interests of businesses, resulted in a larger share of firm profits being paid out in wages, or at least in reported (and therefore taxed) wages. In turn, higher payroll tax payments enabled the more democratic regions to pay out a larger share of social transfers in the regional budget. At the same time, fewer people were dependent on social income for their welfare even after controlling for the effect of the size of the pensioner population, poverty, and unemploy­ ment. These effects were modest but consistent across a number of different measures of economic and social performance. They were also borne out in the finding that regimes scoring higher on the democracy scale tended to have higher shares of employment in the small business sector and higher levels of income from property – both indications that more democratic regimes had firmer property rights. However, where regional rulers preserved traditional statist, paternalist policies, incomes grew less, poverty fell less, and inequality increased less. Undoubtedly the high level of intervention in the more demo­ cratic regimes carries significant efficiency costs, as enterprises are kept afloat in order to provide employment and social services even when they are tieing up assets that might better be used in other ways. But the low-democracy

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regimes are probably still more interventionist, with state control used more to extract rents than to solve collective action problems and maintain social services. In Chapter 6 we will explore the nature of government-firm relations more closely. In the next chapter, however, we will explore the relationship between earnings and total income in more detail using a large World Banksponsored survey of household incomes and expenditures. 4.6.  Variables and Sources I. Political

A. Regime characteristics 1. democracy scores

dem1 dem2 dem3 Summary ratings of level of democracy, coded by experts of Carnegie Moscow Center. dem1 = baseline rating for 1991–2001 dem2 = 2000–2004 dem3 = 2001–2006 See text for more information. Data available at: http://atlas.socpol.ru/indexes/ index_democr.shtml 2. Yeltsin confidence vote, April 1993 referendum

yvote_apr93 Percent of voters voting “yes” on first item of April 1993 referendum (“Do you have confidence in the president of the Russian Federation, B. N. Yeltsin?”) Tsentral’naia izbiratel’naia komissiia, Vybory prezidenta Rossiiskoi Federatsii:  Elektoral’naia statistika (Moscow:  Izdatel’stvo Ves’ mir, 1996), pp. 170–171. B. Spending on social expenditures sepercent04 Percent of regional budget expenditures devoted to social protection and employment services, 2004. Data from data set “Biudzhetnaia sistema RF,” created by project “University information system Rossiia,” http://www.bud­ getrf.ru (accessed July 2007). II. Social and economic measures 1. Real income (rubles per month)

real_inc92 real_inc93

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From Jeanine Braithwaite, “The Old and New Poor in Russia:  Trends in Poverty,” ESP Discussion Paper Series, Education and Social Policy Department, Human Resources Development and Operations Policy, The World Bank (1995). Estimates are for December 1992 and October 1993. meaninc95_adj meaninc00_adj meaninc05_adj Expressed as multiple of subsistence minimum. Mean income figures from Goskomstat divided by the subsistence level for given region in given year. (From Regiony Rossii: Sotsial’no-Ekonomicheskie Pokazateli, various years) 2. Inequality

decile1995 … decile2007 Ratio of incomes of richest decile of population to that of poorest, given year. Goskomstat: http://www.gks.ru/dbscripts/Cbsd/DBInet.cgi/ 3. Poverty

povrate94 … povrate07 Share of population living below subsistence level, given region, given year. From Regiony Rossii:  Sotsial’no-Ekonomicheskie Pokazateli, various years 4. Social income share

soc95 … soc06 Share of total income from social payments. Goskomstat: http://www.gks.ru/bgd/regl/B07_14p/IssWWW.exe/Stg/d01/ 04–06.htm 5. Property income share, 2005

prop05 Share of total income derived from property. Goskomstat:  http://www.gks.ru/bgd/regl/B07_14p/IssWWW.exe/Stg/d01/ 04–06.htm 6. Number of pensioners per 1,000 population, 2005

pens05p1k http://www.gks.ru/bgd/regl/B07_14p/IssWWW.exe/Stg/d01/04–05.htm 7. Unemployment rate, 2005

unemp05 From Sotsial’nyi atlas rossiiskikh regionov, published by the Institute for Social Policy, Moscow, http://atlas.socpol.ru (accessed May 2008).

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8. Small business development

sbempshare97 sbempshare01 sbempshare08 Employees in small enterprises as share of total labor force, 1997, 2001, 2008. Regiony Rossii: Sotsial’no-Ekonomicheskie Pokazateli, 2002, 2006, 2009 9. Extent of privatization, 1993

fpr93pc Number of federally privatized enterprises per 1.000 population. (Source:  Goskomstat; data kindly provided by Daniel Berkowitz). Refers to the number of enterprises privatized by federal government as opposed to regional or local government. 10. Gross regional product, 2005

grppc05_adj Gross regional product per capita, 2005, as multiple of regional subsistence minimum. grppc95_adj Gross regional product per capita, 1995, as multiple of regional subsistence minimum. From Regiony Rossii:  Sotsial’no-Ekonomicheskie Pokazateli, various years 11. Subsistence minimum

submin95, submin00, submin05 Level of subsistence minimum, per capita, whole population, for given year (1995 expressed in thousands of rubles). From Regiony Rossii: Sotsial’no-Ekonomicheskie Pokazateli, various years 12. Price deflator

deflator00, deflator05 Ratio of price of basket of consumer goods (2005) or subsistence goods (2000) to price of same basket at all-Russian average price, given in rubles per month. From Regiony Rossii: Sotsial’no-Ekonomicheskie Pokazateli, 2002 and 2006 B. Inherited assets 1. Specialist pool, 1989

vuz_specsec Number of specialists with higher or specialized secondary education per 1,000 employed population age, 1989 (from 1989 census).

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Source: Kratkaia sotsial’no-demograficheskaia kharakteristika naseleniia RSFSR: po dannym perepisi naseleniia 1989 goda Moscow: Goskomstat Rossii (Respublikanskii informatsionno-izdatel’skii tsentr, 1992), pp. 115–132. 2. Preschool coverage 1990

ps90 Percent of age-eligible children enrolled in preschool educational institu­ tions, 1990. From Regiony Rossii: Sotsial’no-Ekonomicheskie Pokazateli, 2006 3. Fuel output, 1994

fuel94 Fuel production as share of total output, 1994. Rossiiskii statisticheskii ezhegodnik, Goskomstat, 1995, pp. 742–747 4. Manufacturing as share of total output, 1994

manuf94 Rossiiskii statisticheskii ezhegodnik, Goskomstat, 1995, pp. 742–747 5. Urbanization, 1990, 2005

urban90 urban05 Urban residents as share of population. From Regiony Rossii: Sotsial’no-Ekonomicheskie Pokazateli, 2006 6. Mineral extraction: gross value added of mineral extraction industry, as share of total output, 2005

mineral05 From Regiony Rossii: Sotsial’no-Ekonomicheskie Pokazateli, 2007

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Table 4.10  Descriptive Statistics Descriptive Statistics

Mean

Median

Min

Max

dem1 dem2 dem3 yvote_apr93 sepercent04 real_inc92 real_inc93 nonrussian meaninc95_adj meaninc00_adj meaninc05_adj decile1995 decile2000 decile2006 povrate94 povrate00 povrate06 soc95 soc00 soc06 prop05 pens05p1k unemp05 sbempshare97 sbempshare01 sbempshare08 fpr93pc vuz_specsec ps90 fuel94 manuf94 urban90 urban05 deflator05 submin95 submin00 submin05 grppc05_adj grppc95_adj mineral05

25.38 26.21 27.21 55.14 1.87 387.22 412.03 23.67 1.65 2.42 2.18 9.12 10.23 12.69 26.43 41.84 20.35 16.66 15.87 15.61 4.76 272.51 9.18 7.99 7.20 12.79 .05 385.32 66.36 0.09 0.36 0.69 0.69 98.02 269.23 753.75 2921.44 33.05 31.99 7.76

25.00 26.00 27.00 56.1 1.86 352 384 15.2 1.63 2.27 2.06 7.50 9.30 11.8 24.00 39.90 18.90 17.40 15.30 15.80 4 271.90 7.70 7.22 6.45 12.78 .05 373.50 65.50 0.02 .36 0.70 0.69 92 243.4 709.8 2648 27.23 30.4 1.9

12.00 15.00 16.00 2.39 0.63 219 220 2.6 0.44 0.70 0.97 4.50 6.10 8.5 3.80 21.30 9.60 4.70 6.50 6.80 0.2 117.00 0.90 0.00 .45 1.63 0 325.00 22.30 0.00 0.00 0.27 0.26 79 153.6 603.4 2091 6.03 7.31 0

41.00 41.00 41.00 84.42 3.16 702 872 90.8 5.21 8.48 5.96 38.60 46.30 41.7 68.30 94.30 56.40 34.80 27.60 25.90 24.6 353.80 61.20 28.53 26.22 33.28 0.16 581.00 89.90 0.79 0.68 1.00 1.00 174 585.5 1292.5 6112 246.02 87.17 59.2

SD 5.54 5.57 5.58 13.56 5.43 103.42 121.37 21.17 0.57 0.97 0.73 5.33 4.81 4.21 13.66 14.04 8.55 4.38 4.15 3.95 3.44 36.54 7.07 4.08 3.98 4.77 0.03 46.43 11.32 0.14 0.16 0.13 0.13 18.84 88.37 129.91 749.19 27.58 12.89 12.06

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CV 0.22 0.21 0.21 .25 29.06 .27 0.29 .89 0.34 0.40 0.34 0.58 0.47 .33 0.52 0.34 0.42 0.26 0.26 0.25 0.72 0.13 0.77 0.51 0.55 .37 0.72 0.12 0.17 1.56 0.19 0.19 0.19 .19 .33 .17 .26 .83 .40 1.55

Cambridge Books Online http://ebooks.cambridge.org/

The Politics of Inequality in Russia Thomas F. Remington Book DOI: http://dx.doi.org/10.1017/CBO9780511973024 Online ISBN: 9780511973024 Hardback ISBN: 9781107096417 Paperback ISBN: 9781107422247

Chapter 5 - Regional Regimes and the Labor Market: Evidence from the NOBUS Sur vey pp. 135-151 Chapter DOI: http://dx.doi.org/10.1017/CBO9780511973024.006 Cambridge University Press

5 Regional Regimes and the Labor Market: Evidence from the NOBUS Survey

Chapters 1 and 2 showed that in the immediate post-Soviet period, regional governments stepped into the void left by the breakdown of the old planned economy and began making many independent decisions concerning employment, social services, and incomes. Because the central government was preoccupied with macroeconomic stabilization, privatizing federal assets, and the political struggle against communist and nationalist opposition, regional governments had substantial autonomy in constructing new informal arrangements, which they generally did in consultation with local enterprises. Most regions established some form of nominally corporatist structures for consultation among employers, labor, and government to deal with employment and social policy issues, although the agreements reached through the tripartite mechanisms were often no more than statements of aspirations. More effective regional governments also created structures for the aggregation and representation of the interests of major enterprises. In many regions, government was not a passive referee between business and labor, but intervened to construct the new system of economic and social relations. Governments and enterprise managers jointly set policy concerning employment, minimum wage levels, investment, competition, taxation, infrastructure development, and some elements of social policy. There were variations in this pattern. Some regional governments were more interventionist than others. In some regions, some enterprises were so large and powerful that they were effectively autonomous of the regional government. In others, regional government effectively nationalized the major local enterprises. In most regions, however, governments and major enterprises shared a common understanding of the importance of maintaining social stability by minimizing unemployment and maintaining essential social services. I have argued that regions where political leaders built effective consultative institutions between enterprises and government, responsibility for regional public services was shared more broadly, and government accepted a greater degree of openness and self-restraint. In these regions, enterprises paid higher wages, both at the lower end of the scale and, still more, at 135

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the upper end. Higher wages in turn produced higher income inequality as ­differentiation in wage levels was reflected in income dispersion. Effective coordination also meant that more of the wage bill was subjected to taxation, which ­permitted higher social transfer payments. At the same time, higher wage levels meant that a smaller share of total income in the region derived from social transfers. I described such consultative arrangements as exchanges of rights between government and enterprises. Enterprise owners and managers gained rights of voice in regional decision making over issues such as minimum wage levels, employment, investment, and the financing of social services in return for greater security of property rights and greater transparency in government decision making. Across the regions, these differences are matters of degree rather than of kind. Yet regions rated higher on the democracy scale showed consistently higher incomes, lower poverty, higher social payments, lower social dependency – and higher inequality, even after controlling for inherited human and physical capital. Regions with higher incomes in the 1990s had still higher incomes in the 2000s if they had more democratic institutions in the 1990s. Thus the effect of political institutions was to lock in differences in patterns of work, wages, and social welfare. Chapter 4 examined several forms of evidence for this chain of reasoning based on data drawn from the official Russian state statistical agency. We can take a closer look at the structure of income by region by breaking down income into its wage-based and social-income-based components thanks to a unique dataset called NOBUS (Natsional’noe obsledovaniie blagosostoianiia i uchastiia naseleniia v sotsial’nykh programmakh [National Survey of the Welfare and Participation of the Population in Social Programs]), which was conducted in 2003 by the Russian state statistical agency with World Bank funding. The survey was conducted on a sufficiently large scale to permit the analysis of regional population samples for more than half of Russia’s regions. The opportunity to analyze income data by both wage-based and social components allows us to compare the effects of cross-sectional differences in regional political and economic conditions on regional labor markets and social policy at a point when the Putin-era economic recovery had begun and political conditions had stabilized. With close to a ­t housand households per region in forty-seven regions, it is possible to sort out the effects of economic development from political regime type in determining the structure of wage-based and social income for individuals and households. 5.1.  The NOBUS Survey The NOBUS study surveyed 44,529 households, comprising 117,209 individual respondents in 79 regions. In 47 regions, there were sufficiently large samples to permit analysis of household-level variation within regions. These regions constitute 72% of the country’s population and 90% of the original

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survey sample group.1 In the analysis that follows, I consider the individuals and households in these 47 regions. According to the description of the survey published by the sponsors, the NOBUS sample was created using a multistage stratification method, that is, sequential random selection with a two-phase selection of households at the last stage.2 A preliminary wave was conducted in 2001 and the principal wave in 2003. To construct the sample, the population was divided into eight strata defined by type of residence. The largest residence type was cities of at least one million people; the smallest was rural settlements. In the first stage of sample construction, particular settlements were selected from each stratum with probabilities proportional to the size of the stratum. In the second stage, primary sampling units (PSUs) were chosen at random from within each settlement. In larger settlements, such as big cities, electoral precincts were used as the PSUs. In the third stage, particular households were selected from the list of the households compiled for the primary sampling units  – that is, either for the polling districts selected at the second stage (in large settlements) or for the less populated settlements selected at the first stage. These households were used for the preliminary wave in 2001, and the final NOBUS sample was selected from this set of addresses. The demographic and geographic composition of the sample closely approximates that of the country according to the most recent all-Russia census. In the analyses of individual and household-level units that follow, the statistical models take into account the stratified and clustered nature of the sample and weight the observations accordingly. The data are organized in two sets of files: those for individual respondents, and those for households. Somewhat different types of questions were asked in each category. For example, individuals were asked about wage-based income and several sources of social income, and households were asked about total cash income over the previous three months. In order to examine the role of wage-based and social income in total household income, I aggregated the individual-level responses back up to the household. In the analyses that follow, therefore, I report separately on the analysis of individual-level income, household total cash income, and household income totals that combine the separate wage-based and social income components. Finally, I consider regional differences with respect to the way incomes are distributed to identify political and economic influences on income concentration and dispersion. Categories of Benefits A major purpose of the NOBUS study was to determine the access of the population to various categories of cash social benefits from the state. These The data are available on the World Bank Web site:  http://web.worldbank.org/WBSITE/ EXTERNAL/COUNTRIES/ECAEXT/RUSSIANFEDERATIONEXTN/0,,contentMDK:20 919706~menuPK:2560592~pagePK:1497618~piPK:217854~theSitePK:305600,00.html 2 This account is drawn from the documentation found on the World Bank Web site. 1

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Table 5.1.  Cash Benefits Type of Benefit

No. of People Reporting They Received Benefit

Labor pension Social pension State pension Supplemental pension Infant allowance (for infants up to 6 weeks) Child allowance (for children up to 16 [in some cases 18] years of age) Unemployment compensation

Mean 3-Month Median 3-Month Amount Reported Amount Reported Received (Rubles) Received (Rubles)

28,401 1,658 1,981 1,438 824

4,738 3,077 7,882 1,695 1,574

4,818 2,963 6,600 1,500 1,500

13,735

170

240

817

2,181

1,572

include: allowances (such as payments for infant and child care), unemployment income, and four categories of pensions. For the forty-seven representative regions, Table 5.1 shows the breakdown of benefits received. The unemployment data contain some anomalies. There is a very wide range of reported levels of unemployment benefits, from 1 person claiming 1 ruble over 3 months, to 1 person (in Kamchatka) claiming to have received 27,000 rubles. Nine people claimed to have received at least 10,000 rubles over 3 months. Despite these oddities, the figures are included in the totals for social income. I have not included certain other categories of benefits that affected very small numbers of people or were concentrated in particular regions: maternity payments (334 people said they received them) birth: N = 571 disabled child care: N = 72 affected by radiation: N = 1,248. Nearly all are in Briansk (501), Orel (393), and Tula (125)3

The NOBUS survey also inquired into the use of nonmonetary social benefits, such as free or discounted health, transportation, and utilities services.4 These do not contribute to income, but some are widely used. For instance, more than 12,000 people availed themselves of the right to free urban public Tula is dropped from further analysis because the number of respondents was too low to be representative of the population. 4 Chapter 2 discussed the nature and distribution of nonmonetary benefits in relation to incomes and social welfare in the Soviet and post-Soviet periods. 3

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transportation; 6,444 people reported obtaining free or discounted medications. It is likely that these benefits, provision of which expanded greatly in the 1990s as cash-strapped federal and regional authorities widened the scope of eligibility to ever-larger categories of citizens for them in lieue of increasing the funding for public services, had the effect of mitigating poverty to some degree. However, because they were generally available to all citizens falling into the given category (such as all World War II veterans, veterans of labor, victims of disability, victims of Stalin-era repression, and so on), they were characteristic of the universalistic rather than redistributive social assistance principle of Soviet and Russian social policy. The fact that some income comprised nonmonetary benefits should be borne in mind as we consider the effect of regional differences on income levels and distribution. Adjustments for Prices and Household Size In the income figures, I have adjusted raw figures for regional price differentials by the subsistence minimum for 2003 for each region, calculated by the State Statistical Agency as minimum cost of subsistence (rubles per capita per month).5 In each case I have divided the monthly income figure by the regional subsistence minimum for 2003, yielding a figure expressing income as a multiple of the local subsistence line. Also, in some cases, the questionnaire asked for three-month totals. In these cases I have divided the figures by three in order to obtain a figure for average monthly income that can be compared with the monthly wage income figures. Finally, as noted before, in the figures on household income I have weighted household totals according to the number of members of the household (as reported by the first respondent from the household). To do so, I divided the household income totals for each category of income by the number of ­members of the household, yielding a rough per-member mean income figure for each household. 5.2.  Predicting Variation in Individual Income The general argument is that regimes rated higher on the democracy scale have different economic and social institutions than those lower on the scale. These institutions tend to be based on consultative arrangements between government and enterprises that promote firms’ ability to take advantage of market opportunities, support a higher level of formal and monetary economic activity in the region, and exhibit greater openness and self-restraint on the part of the political authorities. In turn, their labor markets are characterized by higher wages, wider wage differentials, and mildly redistributive social policies. Regions lower on the scale have more neopatrimonial regimes featuring 5

From Regiony Rossii and Regiony Rossii:  Sotsial’no-Ekonomicheskie Pokazateli, various years: minimum cost of subsistence, by region (rubles per capita per month).

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lower incomes and lower inequality. The analyses that follow attempt to subject these ideas to empirical testing. The results are consistent with those in the previous chapter. Whether we examine individual income at the individual or household level, and regardless of which of several alternative measures of income we use, we find that higher scores on the democracy scale are associated with a modest but significant positive effect on incomes. First we consider individual incomes (means and medians), then household incomes, and finally the distribution of household incomes by region. First, consider wage-based incomes for employed and self-employed individuals (N = 44,444), using STATA’s survey regression command, which weights observations according to the structure of the sample. Democracy has a positive effect on individual wages, even controlling for individual educational level and regional incomes and output. In Table 5.2, Model 1 presents the results of a simple regression of individual income on individual educational level and regional political and economic characteristics, whereas Model 2 includes two variables indicating region-level human capital assets. Overall, the model explains very little of the variation in ­individual wages but all the region-level variables are statistically significant. Table A5.2 in the Appendix (on the website) presents the results of an ­equivalent estimation but using a hierarchical nonlinear modeling technique – generalized linear and latent mixed models (GLLAMM) – which, like OLS for survey data, also permits weighting observations according to the probability structure of the sample. The results are very similar, except that the inclusion of the human capital variables in the GLLAMM specification washes out the effect of the democracy variable. It is significant, however, in the other three models. Tables A.5.2, A.5.3, A.5.5, A.5.6., and A.5.7 present similar replications using GLLAMM, although the models in Tables 5.4 and 5.5 could not be estimated. The GLLAMM results are generally quite similar to those of the simpler OLS modeling technique and are presented as tests of the robustness of the results. Figure 5.1 displays the predicted regional means for individual regions, ranked by their score on the democracy scale (based on the OLS model).6 The substantive significance of this is that moving from a relatively nondemocratic region such as Orel (with a democracy score of 19) to a more open region such as Samara (score of 33) – a distance of about two and a half standard deviations – would raise the average predicted wage from 1.39 to 1.71 times the subsistence minimum (in actuality, both regions’ wage levels were lower than the predicted levels; Orel’s was only 1.2, Samara’s 1.52 the subsistence minimum). This translates into an increase in expected monthly wage from about $80 to about $128, or a 60% increase. Note also that gross regional product (per capita, adjusted for prices) is a positive predictor of wages. It is included as a control to ensure that anomalous There is very little difference in the standard deviations around these estimates across regions.

6

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Regional Regimes and the Labor Market Table 5.2.  Individual Wage Income Dependent variable: total individual wage income, price adjusted Method: OLS for stratified samples

Education Democracy score, 1991–2001 Gross regional product per capita, 2000 (adjusted) Urbanization, 2000 Specialist pool, 1990 Preschool coverage, 1990 Constant r2 No. of observations

Model 1

Model 2

Coeff. (std error)

Coeff. (std error)

.146*** (.01) .016*** (.004) .007*** (.001) –.368* (.195) .067 .06 44,444

.146*** (.01) .014*** (.004) .007*** (.001) –.814** (.32) .001* (.0006) .009** (.003) –.538 (.29) .06 42,678

***p < .001; **p < .01; *p < .10. Kabardino-Ba Bashkortosta Sakha-Yakuti Mordovia SSR Orel oblast Adygei Repub Primorsk kra Tatarstan Dagestan Rep Kurgan oblas Rostov oblas Chita oblast Khabarovsk k Krasnodar kr Voronezh oblas Amur oblast KomiRepubl Pskov oblast Tambov oblas Altai Republ Astrakhan ob Kemerovo obl Lipetsk oblas Moscow city Novgorod obl Tver oblast Briansk obla Ivanovo obla Kamchatka ob Kirov oblast Omsk oblast Buryatia Moscow oblas Murmansk obl Tiumen oblas Kostroma obl Sakhalin obl Krasnoyarsk Udmurt Repub Volgograd ob Arkhangelsk Samara oblas Yaroslavl ob Novosibirsk Nizhnii Novg Sverdlovsk o St. Petersburg

0

.5

1

1.5

2

2.5

Fitted value

Figure 5.1.  Predicted earned income of employed persons by region by ­democracy score.

local economic conditions are not confounding the effect of political regime type. With them included, regions with extremely high-income economies – Tiumen’ and Moscow in particular – stand out as exceptional in their wage levels. The overall trend is clear, however:  Regions ranking higher on the democracy score pay higher wages.

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Table 5.3.  Household Cash Income Dependent variable: reported total cash income of household, last 3 months OLS for stratified samples Covariate

Coeffic (std error)

Democracy score, 1991–2001 Urbanization, 2000 Gross regional product per capita, 2000 (adjusted) Constant r2 No. of observations

.051** (.019) –1.69* (1.00) .029*** (.005) 5.32 (.46) .02 29,408

***p < .001; ** p < .01; *p < .10.

5.3.  Household Cash Income Next let us consider the effect of regime type on responses to the question, “Could you tell us the total cash income of your household over the last three months?” In the analysis, I drop households that did not respond to the question. The analysis finds that regime differences are significantly related to household cash income, even holding urbanization and gross regional product per capita constant. Substantively, the significance of moving from the poor, authoritarian region of Dagestan (with a democracy score of 22) to a high-democracy region such as Sverdlovsk (score of 39)  – a difference of more than three standard deviations – would be equivalent to raising the total cash income of a household over three months from 6.1 to 7.2 times the monthly subsistence level. That translates to a difference of $344 versus $521, or 51%. Figure 5.2 represents the effect graphically. The survey also asked about household spending, but the effect of the democracy variable on spending is not significant. 5.4.  Household Level of Analysis (Total Adjusted Wage and Social Income) Next I analyzed household incomes according to their wage and social income components. These measures are aggregates of wage and social incomes of all members of each household. The procedure used to construct the household income figures were as follows. I summed separately the total wage-based and social-based income for all members of each household, then weighted the totals by the number of members of the household, and reported the totals for the first member of each household (normally the person who filled out the questionnaire). Thus these figures can be considered to represent the average wage or income for individual members of each given household. I adjusted

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Regional Regimes and the Labor Market Table 5.4.  Household Spending Dependent variable: reported total spending of household, last 3 months OLS for stratified samples Coeffic (std error) Democracy score, 1991–2001 Urbanization, 2000 Gross regional product per capita, 2000 (adjusted) Constant r2 No. of observations

.004 (.004) –.263 (.24) .007*** (.001) 1.71 (.12) .01 35,616

***p < .001; ** p < .01; *p < .10. Kabardino-Ba Bashkortosta Sakha-Yakuti Mordovia SSR Orel oblast Adygei Repub Primorsk kra Tatarstan Dagestan Rep Kurgan oblas Rostov oblas Chita oblast Khabarovsk k Krasnodar kr Voronezh obl Amur oblast Komi Republi Pskov oblast Tambov oblas Altai Republ Astrakhan ob Kemerovo obl Lipetsk obla Moscow city Novgorod obl Tver oblast Briansk obla Ivanovo obla Kamchatka ob Kirov oblast Omsk oblast Buryatia Moscow oblas Murmansk obl Tiumen oblas Kostroma obl Sakhalin obl Krasnoyarsk Udmurt Repub Volgograd ob Arkhangelsk Samara oblas Yaroslavl ob Novosibirsk Nizhnii Novg Sverdlovsk o St. Petersburg

0

5

10

15

Fitted value

Figure 5.2.  Predicted cash income of household by region by democracy score.

for regional price differentials by dividing the income figures by the regional subsistence minimum for 2003. These procedures yield a series of household income figures:  wage-based income (price-adjusted, size-weighted); social income; total income; and the share of social income in the total. I also calculated the means and medians of these figures for each region as well as the adjusted mean wage and total household income levels for the top, middle, and bottom deciles. As expected, there are wide differences across the regions in the levels of income and the way it is distributed. In oil-rich Tiumen’, the average income of members of households in the top decile (whether we consider

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Table 5.5.  Predicting Total Household Income Dependent variable: weighted total household income, adjusted OLS for stratified samples Democracy score, 1991–2001 Gross regional product per capita, 2000 (adjusted) Education of head of household Mean income of region, 2000 Constant r2 No. of observations

.01*** (.001) .006*** (.001) .083*** (.003) –.042** (.017) .09 (.04) .10 40,483

total household income or total household wage income) is more than five times the subsistence level (equivalent to $355). In poorer regions, it is less than twice the subsistence minimum – and in impoverished Dagestan, it is scarcely more than the subsistence level (which was about $56 per month). In modestly wealthy regions, the multiple is between two and three times the subsistence level, or roughly $150–200 per month. In this way we can distinguish between the household and regional levels of analysis. Taking household income as the unit of observation allows us to examine both household-specific and regional effects. At the regional level, it is possible to consider regional political and economic determinants of the structure of income distribution. It allows us to answer the question: Do regional mean and median levels and distributions of income differ systematically as a function of economic and political factors? Taking the 40,000 households as our units of analysis (and treating them as a stratified survey sample), we find that the democracy score has a significant positive effect on total household income. The educational level of the head of the household (or person responding to the survey) also is positively related to the household income level. Figure 5.3 displays the results graphically, plotting the predicted average total household income (adjusted for household size and price levels) by region, ranked by the regions’ democracy scores. The democracy variable is strongly significant, even in the presence of the variable reflecting the educational level of the head of household. Our supposition is that the effect of the regional political regime on incomes operates through the labor market, not social policy. This idea is supported by the data. The effect of regime differences on total household incomes is almost entirely mediated through the wage or earned income side. As Table 5.6 shows, the regime variable has a significant relationship with wage income, even after accounting for the impact of gross regional product and mean price-adjusted incomes. However, as Table 5.7 indicates, the total household social income is hardly affected by the regime variable; the coefficient does not begin to approach

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Regional Regimes and the Labor Market Kabardino-Ba Bashkortosta Sakha-Yakuti Mordovia SSR Orel oblast Adygei Repub Primorsk kra Tatarstan Dagestan Rep Kurgan oblas Rostov oblas Chita oblast Khabarovsk k Krasnodar kr Voronezh obl Amur oblast Komi Republi Pskov oblast Tambov oblas Altai Republ Astrakhan ob Kemerovo obl Lipetsk obla Moscow city Novgorod obl Tver oblast Briansk obla Ivanovo obla Kamchatka ob Kirov oblast Omsk oblast Buryatia Moscow oblas Murmansk obl Tiumen oblas Kostroma obl Sakhalin obl Krasnoyarsk Udmurt Repub Volgograd ob Arkhangelsk Samara oblas Yaroslavl ob Novosibirsk Nizhnii Novg Sverdlovsk o St. Petersburg

0

.5

1 Fitted value

1.5

2

Figure 5.3.  Predicted total household income by democracy score.

Table 5.6.  Household Wage Income Dependent variable: weighted total household wage income, adjusted OLS for stratified samples Model 1 Democracy score, 1991–2001 Gross regional product per capita, 2000 (adjusted) Education Mean income of region, 2000 (adjusted) Constant r2 No. of observations

.0098*** (.001) .0064*** (.0009) .124*** (.004) –.55** (.018) –.47 (.041) .153 40,483

***p < .001; ** p < .01; *p < .10.

statistical significance in the OLS model. Social income is also slightly lower in regions with higher gross regional product per capita. This may have to do with the cash effect – wealthier and more democratic regions are those where incomes, both wage and social, rely more on cash; more income is out of the shadows. Therefore, it is logical to find that the democracy score is associated with lower shares of social income in total household income, even after controlling for regional mean incomes (Table 5.8). The democracy coefficient is negative

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Table 5.7.  Household Social Income Dependent variable: weighted total household social income, adjusted OLS for stratified samples Democracy score, 1991–2001 Gross regional product per capita, 2000 (adjusted) Education of head of household Mean income of region, 2000 (adjusted) Constant r2 No. of observations

–.0001 (.0005) –.0006*** (.000) –.04*** (.001) .013** (.004) .559 (.015) .069 40,483

***p < .001; ** p < .01; *p < .10

Table 5.8.  Share of Social Income in Household Total Income Dependent variable: weighted share of social income as proportion of total household income OLS using stratified sample Model 1 Democracy score, 1991–2001 Gross regional product per capita, 2000 (adjusted) Education Mean income of region, 2000 (adjusted) Constant r2 No. of observations

–.0015 (.0006) –.001*** (.0001) –.07*** (.001) .013** (.004) .90 (.02) .162 39151

***p < .001; ** p < .01; *p < .10.

and significant at the .011 level. The more democratic regions are those where households receive higher wages and where their total incomes are driven more heavily by earnings in the labor market. The consequence of this is greater differentiation of incomes, corresponding to higher differentiation of earnings. 5.5.  Aggregating to the Regional Level The final level of analysis the NOBUS data permit is that of the regional units themselves. Here we must be cautious, because the number of households per region is relatively small (on the order of 800–900 per region for the items we are considering) and the questions of the representativeness of the sample are greater. We should use these data as complements to the regular household surveys reported in Rosstat’s annual reports on incomes. The great advantage to using these data is that we can examine the distribution and concentration of wage and social income separately for each region, and relate these patterns

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to the other evidence we have about regional political, social, and economic characteristics. The variables we use in this section are the regional mean and median levels of household wage and social income, weighted as always by household size and adjusted for regional price levels. In the interest of simplifying the presentation, only the results of these estimations will be reported. The tables are available in the Appendix on the website. Consistent with previous results, the democracy variable has some modest ­positive effect on average household total incomes (weighted, adjusted), even when urbanization and gross regional product are accounted for. As we saw using individual- and household-level income data, more democratic regions tend to have higher average household incomes (Table A.5.9). The effect is weaker when we look at median incomes (Table A.5.10). The democracy effect is, as we saw in the tables earlier in this chapter and when looking at Rosstat data, driven by wage income (Table A.5.11), so that the social share of incomes tends to be lower in the more democratic regions, but the effect is insignificant (Table A.5.12). This effect is stronger if we analyze the median share of social income and control for poverty and the age structure of the region (defined as the proportion of the population in 1990 that was past retirement age) (Table A.5.13). Regions with more pensioners have higher average shares of social income at the household level. Democracy’s effect depresses the share still further. This means that democracy’s effect on the earnings share of household income is positive, because the social share and wage share sum to one for each household. This result is consistent with the finding in the previous chapter that more democratic regions have lower social dependency rates. Figure 5.4 graphs the results, plotting the predicted value of the median share of household income composed of social income by the actual democracy scores for 1991–2001. 5.6.  The Distribution of Household Incomes by Region The association between the regime characteristics and household incomes is strongest at the top end of the income distribution. When we regress the mean earned incomes of the top decile for each region on the democracy score, and control for output, incomes, and prices, as well as urbanization, the democracy variable is significant (at the < .10 level) and positive. Table A.5.14 (available on the website) shows the results in tabular form, and Figure 5.5 plots the predicted values of the mean level of earned income of the top decile (size and price- adjusted) against the actual values of the democracy score for 1991–2001.7 7

Although the overall price level of the region, indicated by the subsistence minimum, is already included in the adjusted general income and output figures, it is included here despite the extremely small coefficient on the grounds that earnings of particular groups may be differentially sensitive to inflationary trends. Dropping it slightly reduces the size of the of the democracy variable and increases its standard error, but leaves it positive and significant at the 80% level.

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The Politics of Inequality in Russia

Fitted values .3

.4

Kabardino-Balkaria

Sverdlovsk oblast

.1

.2

r2 = .63 Coefficient = -.007; p < .05

15

20

25 30 Democracy score, 1991–2001

35

40

6

Figure 5.4.  Predicted mean social share of household income.

4 3

Sverdlovsk oblast

2

Fitted values

5

Tiumen oblast

Kabardino-Balkaria

Coeff = .02; sig = .09

1

r2 = .75 15

20

25 30 Democracy score, 1991–2001

35

40

Figure 5.5.  Predicted mean household wage income of top decile.

The effect of moving from a poor and autocratic region such as Orel to one such as Sverdlovsk (which are separated by 20 points and two and one half standard deviations on the democracy scale) would be equivalent to raising the predicted mean wage income of the top decile from about 1.9 times the regional subsistence level to 2.27 times it, or $110 per month versus $164 – a

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Tiumen oblast 5

Coeff = .02; sig = .07

4 3

Sverdlovsk oblast

2

Fitted values

r2 = .758

1

Kabardino-Balkaria

15

20

25 30 Democracy score, 1991–2001

35

40

Figure 5.6.  Predicted mean total household income of top decile.

difference of close to 50%. The overall level of economic development is by far the most important factor in the difference, but even after accounting for variation in economic development, variation in political development also has an effect. The effect is much the same if we take the mean total household income of the top decile (Table A.5.15 on the website); the democracy coefficient is now .02, and the prediction is slightly more precise. Figure 5.6 displays the results of the model. What about the relationship between the regime variable and the income of the middle and bottom groups of the distribution? A regression of the mean wage-based income of the middle decile on the same economic and political variables (see Table A.5.16 on the website) indicates that the effect of political regime type on incomes in the middle is fading, although still significant at the .213

Kaliningrad

.2

Ulyanovsk oblast

Yaroslavl oblast Samara oblast Perm oblast

0

Primorsk krai

10

20

30

40

Democracy score, 1991–2001

Figure 7.5.  Party saturation, legislative elections, 1996, by predicted democracy level.

the mid-1990s is then regressed against these predicted democracy scores. The purpose of the exercise is to determine whether there is a consistent positive relationship between the predicted democracy score based on modernization and the given aspect of democratic development. The first figure shows that there is a barely positive association between competitiveness in the governor’s race in 1996 (or the year nearest 1996 when a gubernatorial election was held) and the democracy score  – as should be expected, given that the competitiveness of elections is one of the components of the index. Even so, high-democracy regions such as Yaroslavl’, Samara, and Perm’ rank lower on competitiveness than do Ulyanovsk and Kaliningrad. On the other hand, the association between turnout and the modernization-based predicted democracy scores is negative. This reflects the fact that the most authoritarian governors’ regimes were the most successful in securing (or at least reporting) high electoral turnout. In Russian regions, low turnout is a better indicator of an open regime than is high turnout. Finally, there is no statistically significant association between democracy and party saturation, measured as the proportion of candidates running in the local legislative elections in or around 1996 who were nominated by parties or electoral associations. Party development was substantially lower in the democratic high-performers than in a number of less democratic regions. In short, knowing the general level of democracy that would be expected in a given region based on its level of modernization entering the post-Soviet period would give us little or no useful information about the actual institutions of the region – how competitive elections were, how much electoral participation there was, and how thoroughly political parties had entered the

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arena. In fact, whereas competitiveness shows a slight positive association with modernization, and turnout a slight negative association, party saturation is completely unrelated to it. The lack of consistency across these three indicators of democratic development – competitiveness of governors’ races, election turnout, and party saturation of the political arena  – suggests that governors had some discretion in determining how the political arena would be organized. The least-democratic governors organized high turnout in gubernatorial elections and minimized opposition, whereas more democratic governors tended to face more opposition but in an environment of lower electoral turnout. Also, neither type of regime was more likely to be characterized by strong party activity. As Henry Hale showed in his book, Why Not Parties in Russia?, business, the Kremlin, and governors all were able to supply the information and resources that parties would normally provide in an environment of robust party-based political competitions.17 It is also the case that differences in levels of democracy across the regions are explained somewhat better by institutional factors, particularly whether the region’s administrative status privileged an ethnic national minority or not. The post-Soviet Russian federation inherited a complex structure of territorial subdivisions featuring not only a distinction between territorial units that were organized around ethnic nationality and units that were regarded as ordinary administrative subdivisions of the state, but also across administrative status. Although under the Federal Treaty of 1992, and then in the December 1993 constitution subsuming that treaty, the eighty-nine territorial subdivisions were all equal as “subjects of the federation,” in fact they ­comprised six different types. As we know, at the time the new constitution was adopted in December 1993, there were eighty-nine federal subjects:  twenty-one ethnicnational republics, ten autonomous districts (okrugs), one autonomous oblast, two cities (Moscow and St. Petersburg), 6 territories (krais), and forty-nine oblasts. National republics, autonomous okrugs, and the autonomous oblast were explicitly created in the Soviet period to give nominal recognition to territories with significant ethnic minorities. Autonomous okrugs are nested within larger territorial entities, and under Putin, several were merged with their surrounding territories. For that reason, although Russia had eightynine subjects of the federation in 1993, currently there are only eighty-three subjects of the federation. A number of observers have pointed out that the political leaders of ­ethnic territories often claim to defend the interests of ethnic national minorities against the centralizing impulses of the federal government – a strategy that has enabled many of them to preserve a measure of political autonomy both in the 1990s and, to a lesser degree, in the 2000s.18 As Henry Hale noted, the Henry Hale, Why Not Parties in Russia? Democracy, Federalism, and the State (Cambridge: Cambridge University Press, 2006). 18 Steven L. Solnick, “Federal Bargaining in Russia,” East European Constitutional Review 4:4 (1995):  52–58; Tomila Lankina, Governing the Locals:  Local Self-Government and Ethnic 17

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presence of a compact ethnic minority residing in a territory created opportunities for skillful leaders in a number of the ethnic republics and districts to manipulate claims of ethnic solidarity in order to consolidate autocratic patronage machines.19 Myagkov, Ordeshook, and Shakin note that the ethnic territories in Russia have higher incidence of voting fraud than do ordinary regions (although they find that ordinary regions in the Putin era have come increasingly to resemble their ethnic national counterparts in the flagrant use of election falsification). They cite the example of Nurlatinskii district in Tatarstan in the 2004 presidential election where three-fourths of the voting precincts reported 100% turnout and 55% reported 100% of the votes cast for Putin.20 Certainly the features of the ethnic territories associated with the “institutionalization of ethnicity” (in Hale’s terms) lend themselves to the construction of authoritarian rule. Therefore, we should expect that a dichotomous variable indicating whether the region is administratively defined as an ethnic territory (a republic, national district, or national oblast) or not (and thus a regular oblast, a krai, or one of the two federal-level cities [Moscow and St. Petersburg]) would be significantly related to the region’s democracy score. A simple comparison of the range of scores of the two types of region confirms this supposition (Figure 7.6).21 The five-percentage-point difference between these two groups of regions in the mean democracy score is statistically significant (Table 7.3). Is the difference between the ethnic and nonethnic territories an artifact of their different population mixes? That is, perhaps not the administrative status, but the share of the population comprising non-Russian ethnic minorities Mobilizaion in the Russian Federation (Lanham, MD: Rowman & Littlefield, 2004); Vladimir Gel’man, “Dinamika subnatsional’nogo avtoritarizma:  Rossiia v sravnitel’noi ­perspektive.” St. Petersburg:  Evropeiskii universitet v Sankt-Petersburge, Tsentr ­issledovanii modernizatsii, Preprint M01/08, 2008. Among the case studies of particular ethnic regimes are: V. V. Mikhailov, Respublika Tatarstan: Demokratiia ili Suverenitet? (Moscow: n.p., 2004); Kimitaka Matsuzato. “From Ethno-Bonapartism to Centralized Caciquismo: Characteristics and Origins of the Tatarstan Political Regime, 1990–2000,” Journal of Communist Studies and Transition Politics, 17:4 (2001):  43–77; Henry E. Hale, “Bashkortostan:  The Logic of Ethnic Machine Politics and the Consolidation of Democracy,” in Growing Pains, ed. Timothy J. Colton and Jerry F. Hough (Washington, DC: Brookings Institution, 1998), pp. 599–636; and Elise Giuliano, “Who Determines the Self in the Politics of Self-Determination? Identity and Preference Formation in Tatarstan’s Nationalist Mobilization,” Comparative Politics 32:3 (2000): 295–316. 19 Henry E. Hale, “Explaining Machine Politics in Russia’s Regions: Economy, Ethnicity, and Legacy,” Post-Soviet Affairs 19:3 (2003): 228–263. 20 Mikhail Myagkov, Peter C. Ordeshook, and Dimitri Shakin, The Forensics of Election Fraud: Russia and Ukraine (New York: Cambridge University Press, 2009), p. 82. 21 Note that this graph includes all the regions for which democracy scores are available, including regions that are physically located inside other regions. Elsewhere in the book, the “encapsulated regions” are removed from analysis due to uneven availability of data. The outlier among the ethnic territories is the Republic of Karelia, bordering on Finland, with a democracy score of 37.

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Accounting for Regime Differences Table 7.3.  Democracy Scores by Territorial Administrative Status Two-sample t test with equal variances Administrative Status Mean Democracy std. Score, 1991–2001 error Nonethnic region Ethnic region

26.67 21.32

.62 .98

No. of obs. 57 31

95% Confidence Interval 25.4 19.3

27.9 23.3

10

Democracy score, 1991–2001 20 30

40

Difference of means: t = 4.7967. Pr (T > t) = 0.0000.

Non-ethnic

Ethnic

Figure 7.6.  Distribution of democracy scores by administrative status of region.

matters for regime characteristics (we might conjecture, for example, that regions with a higher share of non-Russians in their population might be more favorably disposed to redistributive, patronage-based economic policies). And indeed, the share of non-Russians in the population has a negative, and modestly significant (p = .11), bivariate association with democracy scores. But in a fully specified model, in which the population composition variable and the ethnic territorial status variable are added to the set of variables from Table 4.1 that were found to be the strongest predictors of variation in democracy levels, the demographic variable dropped out. Meanwhile, the administrative status of the region was found to be a significant predictor of democracy scores (Table 7.4). On the other hand, only some of the difference in the democracy levels between ethnic and nonethnic regions can be attributed to the operation of authoritarian ethnic machines. In general, the ethnic territories are significantly less modernized than their nonethnic counterparts: Their average level

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Table 7.4.  Ethnic Composition and Modernization as Predictors of Democracy Scores Dependent variable: Democracy score, 1991–2001 OLS with robust standard errors

Share non-Russian, 1992 Ethnic status of region1 Urbanization, 1990 Manufacturing share of output, 1994 Preschool coverage, 1990 Moscow dummy St. Petersburg dummy Constant No. of observations r2

Coefficient

Std. error

.03 –3.11* 13.49** 6.68** .11* –4.47** 10.52*** 6.41 83 .52

.03 1.58 4.41 2.33 .04 .58 1.63 3.60

Ethnic administrative status variable is coded 1 if region is a republic, national district, or national oblast, and 0 otherwise. ***p < .001; **p < .01; *p < .10. 1

of urbanization in 1990 was 55%, as compared with an average of 73% for others; manufacturing represented an average of only 29% of their output in 1994, as opposed to 37% for other regions; only 367 out of every 1,000 adults in the ethnic regions had a tertiary-level education, as opposed to 392 per thousand in the nonethnic regions; and about 18% of their workforce worked in agriculture in 1995, as opposed to 13% for other regions (all differences statistically significant at least to the .01 level). In many ethnic territories, therefore, the large agrarian economic sector and relatively smaller base of well-educated people reinforced the institutional characteristics that facilitated the construction of authoritarian political regimes. A final possibility is that the degree to which the population is ethnically homogeneous affects the likelihood of democratic development. In a number of cross-national studies, ethnic fractionalization has been found to be significantly related to the quality of political institutions and the stability of political regimes.22 Measures of ethnic fractionalization (using a standard Herfindahl Alberto Alesina, Reza Baqir, and William Easterly, “Public Goods and Ethnic Divisions,” Quarterly Journal of Economics 114:4 (1999):  1243–1284; William Easterly and Ross Levine, “Africa’s Growth Tragedy:  Policies and Ethnic Divisions,” Quarterly Journal of Economics 112:4 (1997):  1203–1250; James D. Fearon, “Ethnic and Cultural Diversity by Country,” Journal of Economic Growth 8 (2003): 195–222; Rafael LaPorta, Florencio Lopez-­ de-Silanes, Andrei Shleifer, et al., “The Quality of Government,” Journal of Law, Economics, and Organization 15 (1999): 222–279; Paolo Mauro, “Corruption and Growth,” Quarterly Journal of Economics 110:3 (1995):  681–712; Adam Przeworksi, Michael E. Alvarez, Jose Antonio Cheibub, et al., Democracy and Development: Political Institutions and Well-Being in the World, 1950–1990 (Cambridge: Cambridge University Press, 2000).

22

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Accounting for Regime Differences Table 7.5.  Ethnic Heterogeneity and Modernization as Predictors of Democracy Scores Dependent variable: Democracy score, 1991–2001 OLS with robust standard errors Coefficient Ethnic fractionalization, 1989 Urbanization, 1990 Manufacturing share of output, 1994 Preschool coverage, 1990 Moscow dummy St. Petersburg dummy Constant No. of observations r2

–5.90* 14.72* 6.89* .14* –5.15* 10.12*** 5.0 72 .497

Std. error 2.40 6.91 2.64 .05 2.38 2.39 5.12

***p < .001; **p < .01; *p < .10.

fractionalization index) are sometimes used as instruments to verify that the quality of political institutions is not endogenous to economic development. A number of studies have shown that societies with higher ethnic polarization are less likely to agree to provide universalistic public services.23 It is reasonable to conjecture, therefore, that regions higher in ethnic fractionalization at the point Russia became independent might have found it harder to construct new political institutions extending equal and universal political rights and representation. Tables 7.5 and 7.6 indicate that this is indeed the case. Table 7.5 finds that in a model predicting democracy scores, with the same controls for urbanization, preschool coverage, and dummies for Moscow and St. Petersburg, a measure of ethnic fractionalization from the 1989 census is significantly and negatively related to democratization. Overall, about half the variation in democracy scores is explained in this model – about the same explanatory power as we found in Table 7.4, where the ethnic status of the region and the percent non-Russians were included as variables. Table 7.6 reports the results of a model where the percentage of non­Russians is interacted multiplicatively with ethnic fractionalization. The reasoning is that the effect of ethnic divisions may be more pronounced in regions where the share of the non-Russian population is larger, that is, where it is less likely that political transition occurs within a common Russian-based cultural environment. Indeed, this is the case. The overall share of variation explained rises substantially, to .625. The interactive term is highly significant. The ethnic fractionalization term by itself loses its significance, while the variable Alberto Alesina and Edward L. Glaeser, Fighting Poverty in the US and Europe: A World of Difference (New York:  Oxford University Press, 2004); William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics (Cambridge, MA: MIT Press, 2002).

23

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Table 7.6.  Ethnic Heterogeneity Interacted with Share Non-Russian as Predictors of Democracy Scores Dependent variable: Democracy score, 1991–2001 OLS with robust standard errors

Interaction term (ethnic fractionalization* percent non-Russian) Percent non-Russian Ethnic fractionalization, 1989 Urbanization, 1990 Manufacturing share of output, 1994 Preschool coverage, 1990 Moscow dummy St. Petersburg dummy Constant No. of observations r2

Coefficient

Std. error

–.50***

.12

.27*** .26 10.33* 8.99** .13** –3.71* 11.25*** 4.39 71 .625

.06 4.45 5.98 2.83 .05 2.01 2.02 4.63

***p < .001; **p < .01; *p < .10.

Table 7.7.  Ethnic Fractionalization Scores by Territorial Administrative Status Two-sample t test with equal variances Administrative Mean Fractionalization Std. error No. of obs. status Index, 1989 Nonethnic region Ethnic region

95% Confidence Interval

.21

.018

54

.178

.251

.55

.023

18

.254

.346

Difference of means: t = –9.92. Pr (T < t ) = 0.0000.

measuring percent non-Russian becomes positively associated with democracy. Thus it appears to be the combination of ethnic fractionalization with the domination of non-Russians that impedes the formation of democratic institutions. Including the dichotomous variable for ethnic status of the region to the model adds no additional explanatory power, nor does including a variable interacting it with ethnic fractionalization. This is because ethnic territories are themselves far more fractionalized than are nonethnic territories, as Table 7.7 shows. These results indicate that both institutional factors – notably the ethnic territorial status of the region  – and factors associated with the socioeconomic and ethnic composition of regions affect the variation in regional regime characteristics. These socioeconomic legacies are related, however, to institutional

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factors. The Russian state inherited a set of ethnic-territorial subdivisions that were ­created under Soviet rule. Ethno-territories were created to represent ethnic minorities, but tended to exist in regions that were already more diverse ethnically, and were often less economically developed. Therefore, the institutional legacy of the newly independent Russian federation reflected ­differences in social and political development, differences that remained important as the new political order in postcommunist Russia took shape. Certainly they affected the ­propensity of a regime to adopt more open and competitive ­political ­institutions, as is suggested by the fact that where modernization was least advanced, and where the population was ethnically fractionalized and predominantly nonRussian, the odds of constructing democratic institutions were slim. 7.3.  Organized Pluralism The third and most serious objection to the endogenous democratization ­perspective is that the capacity for effective political participation by groups in society, their ability to restrain the state’s overweening power and to protect civic interests and rights, is not necessarily an automatic outgrowth of social development. In the late 1980s, many observers argued that Gorbachev’s democratizing reforms represented a belated acknowledgment of the ­functional imperatives that arose from trying to govern a modern industrial society with institutions developed when Russia was a largely agrarian society. These included more freedom for public expression and association, as well as channels for the aggregation and articulation of demands. For example, to the historian Moshe Lewin, Gorbachev’s program of political liberalization was best understood as a “sequel” to the transformation of Russian society over the course of a few traumatic decades from a peasant to an urban and industrial society.24 The consequence of this process was the creation of a large body of self-aware, educated, “middle class” groups whose continued commitment to the regime’s well-being required recognition of their rights as participants and not merely subjects of the state. Many other observers reached similar conclusions. To explain the logic of Gorbachev’s reforms, some cited the rapid rise in educational attainments in Soviet society over the past forty years, others the transformation of Russia from an agrarian and peasant society to one predominantly urban, industrial, and “middle class.” Seweryn Bialer, for example, described Soviet society as one “socially dominated by a large new middle class, which, while politically fragmented and powerless, nonetheless shaped social values for the larger society.”25 Brian Silver, analyzing the results of the Soviet Interview Project, Moshe Lewin, The Gorbachev Phenomenon: A Historical Interpretation (Berkeley: University of California Press, 1991). 25 Seweryn Bialer, “Gorbachev’s Program of Change:  Sources, Significance, Prospects,” in Gorbachev’s Russia and American Foreign Policy, eds. Seweryn Bialer and Michael Mandelbaum (Boulder, CO and London: Westview Press, 1988), p. 236. 24

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argued that the leaders were acting out of a concern for the “apparent disaffection of the educated class as a whole .… This is the middle class for whom the Big Deal was arranged. This class is growing in size and importance to the Soviet economy, but with its increasing political sophistication comes increasing disaffection.”26 Stephen White posited that “the middle class is typically more active and better informed than the mass of industrial workers,” and linked to this feature of social stratification the relative success the authorities enjoyed in activating at least nominal participation in public life in the late 1980s.27 Jerry Hough identified a new urban administrative class aspiring to enjoy western cultural values.28 Vladimir Shlapentokh characterized the broad social stratum of those in late Soviet society who were characterized by high education, a modest but comfortable manner of life, and self-­identification as middle class. These included not only white-collar and professional strata, but some high-paid blue-collar workers as well.29 Indeed, a survey in the late Soviet period found that 43% of the population considered themselves to belong to the “middle stratum.”30 Still, although the “middle class” concept might apply to urban Soviet managers and professionals with respect to their consumption tastes, it is important to remember that the Soviet middle class lacked ownership of productive property. Its aspirations and social identity may have been comparable to those of its counterparts in the capitalist West, but without property rights to defend, its political role was quite different from that of a bourgeoisie in a feudal or capitalist society where, as Barrington Moore famously observed, “no bourgeois, no democracy.” A propertyless bourgeoisie may be much more interested in seeking the state’s protection for the security of its livelihoods than in demanding political rights as guarantees of the security of property rights. The modernization perspective certainly helps explain the wave of democ­ ratization that occurred in the Soviet state in the late 1980s. Modernization contributed to forming the social and psychological milieu that enabled ­citizens to respond energetically when Gorbachev launched his campaign of glasnost’. Thanks to the relaxation of ideological and administrative controls over the expression of public demands, tens of thousands of informal organizations sprang up. The “informals,” as they were called (neformaly), were organizations created without explicit authorization from the party and led outside its nomenklatura system for vetting and naming cadres. Some Brian Silver, “Political Beliefs of the Soviet Citizen,” in Politics, Work, and Daily Life in the USSR, ed. James R. Millar (Cambridge: Cambridge University Press, 1987), p. 127. 27 Stephen White, Political Culture and Soviet Politics (London:  Macmillan Press, 1979), p. 64. 28 Jerry Hough, Opening the Soviet System (Washington, DC: Brookings Institution, 1988). 29 Vladimir Shlapentokh, “Social Inequality in Post-Communist Russia: The Attitudes of the Political Elite and the Masses (1991–1998),” Europe-Asia Studies 51:7 (1999):  1167–1181; Yu. A. Levada, Sovetskii prostoi chelovek:  opyt sotsial’nogo portreta na rubezhe 90-kh. (Moscow: Mirovoi okean, 1993). 30 Yu. A. Levada, Sovetskii prostoi chelovek, p. 53. 26

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survived into the present day (an example is the famous League of Committees of Soldiers’ Mothers), and a few were transformed into political parties. For the most part, however, the young, glasnost’-era civil society was not capable of ­articulating the demands of well-defined segments of society or of sustaining political action over any length of time. Trade unions, as we have seen, were both fractured into competing federations and dominated by a conservative, state-oriented, clientelistic leadership that quickly subordinated itself to the interests of employers and the state. This was true to a lesser degree in the case of employers. Because private enterprise was illegal under the Soviet regime, business associations were, ipso facto, impossible. Therefore, the first business associations formed from organizations of state enterprises formed in the late Soviet era. The Russian Union of Industrialists and Entrepreneurs (RUIE) is the principal example of these, although it was not the only association of state enterprises to form in the wake of the transition. One leading competitor, Yuri Skokov’s Federation of Manufacturers of Russia, formed an electoral bloc for the December 1995 elections headed by the highly popular army general Alexander Lebed’. Defense industries were represented by yet another organization, the League for Support of Defense Enterprises.31 Only the RUIE, ­however, has preserved its identity and increased its influence over time. Even for the RUIE, however, every aspect of its relationship with the state has been guided by the state. Under Putin, in keeping with the regime’s attempts to shape civil society around a model of “managed pluralism,”32 the authorities sought to consolidate business interests and made the RUIE the principal vehicle for state-business consultation. Nonetheless, much as Putin created a dominant party in the form of United Russia, but also maintained a small potential rival to it – Just Russia – as a check on United Russia’s potential to challenge it, so the regime has also hedged its bets by creating two other business associations to offset RUIE’s power:  OPORA, with a mandate to represent the interests of small and medium-sized businesses, and “Business Russia,” which actively engages in electoral politics. The authorities also revived another organization inherited from the Soviet era that had grown defunct, the Trade-Industrial Chamber. As president and again as prime minister, Putin has often made a point of meeting with these associations as well as RUIE, demonstrating that the state has the power to set the terms for its consultations with organized business. Under Putin, the state made it clear what the RUIE’s role would be in developing policy directed at creating a more business-friendly economic environment, and firmly kept it from restraining the state’s actions against individual firms and industries. Within these limits, the RUIE has considerable Julian Cooper, “Defense Industries in Russia and the Other Post-Soviet States,” in State Building and Military Power in Russia and the New States of Eurasia, ed. Bruce Parrott (Armonk, NY: M. E. Sharpe, 1995), p. 76. 32 Harley Balzer’s term. Harley Balzer, “Managed Pluralism: Vladimir Putin’s Emerging Regime,” Post-Soviet Affairs 19:3 (2003): 189–227. 31

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autonomy, which it maintains through its near-monopoly on big-business representation. The pattern is similar to that traced by Ben Ross Schneider in his study of Latin American business associations. In Latin America, according to Schneider, “states organized and disorganized business.” He found that in countries with cohesive and effective business associations, the state had acted to provide selective benefits for businesses to join together in associations in order to build political support, solicit ideas and structure dialogue, or delegate responsibility for implementing policy.33 Similarly, in the more democratic regions in Russia, governors created business councils to build political support, acquire information, force enterprises to aggregate collective preferences and resolve interfirm disputes, and assist in policy implementation. Modernization in the Soviet era may have helped create a broad base of support for associational and political freedom, but it left little in the way of an infrastructure of civil society that could support a corporatist or pluralist system of interest intermediation. As a result, for the most part when social interests articulate collective demands, the organizations that aggregate their members’ interests and represent them in bargaining with the state, as well as the channels through which the state bargains with them, have been created on the initiative of state actors. Pluralism, in short, must be organized; and under Russian conditions, it is usually organized by the state. Another way of approaching the same issue is to ask whether the condition of pluralism is intrinsic to the distribution of economic and social power or an attribute of an explicitly political capacity for collective action and ­representation. That is, if the democracy scores should be more properly understood as reflecting organizational pluralism in Dahl’s sense – as a system of dispersed inequalities, with each center of power capable of representing the interests of a significant enterprise or sector  – then measures of the degree to which economic capacity is spread out evenly across multiple productive enterprises should be good indicators of the structural basis for political pluralism. A standard Herfindahl-Hirschmann index of the distribution of production across industrial enterprises in the region to measure its “effective number of enterprises” should therefore be positively correlated with the democracy scores. The effective number of enterprises is measured by taking the reciprocal of the sum of squared shares of each industrial enterprise’s volume of employment or output per region, where industry is defined as manufacturing, mining, electric power generation, and industrial services. The data were collected from the Russian industrial registry by J. David Brown and John S. Earle (I am grateful to them and to Scott Gehlbach for providing the data). Data are available for 1990 and 1991. If the “structural pluralism” argument is right, regions with higher effective numbers of enterprises should have more diffused sources of political influence, and therefore higher democracy scores. 33

Ben Ross Schneider, Business Politics and the State in Twentieth-Century Latin America (Cambridge: Cambridge University Press, 2004), p. 5.

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30

Moscow oblast

20

Krasnodar krai

r = .019 (sig = .873)

10

Democracy score, 1991–2001

40

Accounting for Regime Differences

0

5

10

15

20

Effective number of enterprises, 1990, by employment

Figure 7.7.  Democracy score by enterprise dispersion, 1990 (by employment).

No such relationship was found, however. None of the four series is related to regional democracy scores, as Figures 7.7 and 7.8 show. Figure 7.7 reports enterprise dispersion by employment, Figure 7.8 by output. The patterns for the 1991 figures are essentially the same. No relation is observed between the dispersion of economic power among industrial enterprises in a region and its level of democracy. Nor is there any relationship between the democracy scores and the dispersion of production across branches of the economy (data not shown). Evidently, to the extent that the democracy scores are measuring the dispersion of power, what matters is the institutional capacity for social interests to aggregate and represent their demands and to keep state power in check, rather than simply the way productive assets are distributed across firms or branches. This result again supports the argument that the pluralism that drives differences in the operation of political power must be actively organized. The final piece of empirical support for this argument may be found in comparing the actual democracy scores of the regions with the levels that would be predicted knowing only the regions’ modernization levels entering the postcommunist transition. These predicted democracy scores are the same variable that we considered earlier when we determined that they bore next to no relationship with such institutional features of the regional regimes as electoral competitiveness, voter turnout, and party saturation. Now let us compare the actual and the predicted scores across the regions by subtracting the predicted level of democracy in the 1990s from the actual level. The difference may be regarded as a residual that cannot be explained by simple

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30

Moscow oblast Moscow city

20

Krasnodar krai

r = .136 (sig = .246)

10

democracy score, 1991–2001

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0

5 10 Effective number of enterprises, 1990, by output

15

Figure 7.8.  Democracy score by enterprise dispersion, 1990 (by output).

modernization, but that might be affected by actions and institutions of the governors and other political elites. A high negative differential would indicate a democratic underperformer, a region whose observed level of pluralism and democracy is well under its potential level. By extension, a high positive score is the sign of an overperformer, a region where the local political elite had established working democratic institutions at a level beyond what would have been expected given its modernization level. Table 7.8 lists the regions ranked by the difference, from the largest underperformers to the highest overperformers. The democratic overperformers include regions where the governors established directors’ councils and other structures for regular consultation with the economic elite of the region, whereas the high underperformers are primarily but not exclusively ethnic enclaves where the leaders built autocratic political machines. Thus modernization theory tends to confuse the existence of a body of potential support for democratic political institutions with the actual capacity of would-be participants to organize and aggregate their preferences. A number of studies of the Soviet society, and more generally of communist societies, have pointed to a wide gap between the relatively high levels of such modernization indicators as literacy, educational attainments, industrialization, urbanization, communications and transportation infrastructure, and provision of public services, and the low level of capacity in society for ­self-organization and collective representation. Levels of generalized trust are significantly low, and levels of participation in civic life are extremely low. In

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Accounting for Regime Differences Table 7.8.  Democratic Over- and Underperformers Bashkortostan Tatarstan Kalmykia Kabardino-Balkaria North Osetia Primorsk krai Mordovia SSR Magadan oblast Sakha-Yakutia Ulyanovsk oblast Khabarovsk krai Orel oblast Saratov oblast Vladimir oblast Tula oblast Komi Republic Ivanovo oblast Kursk oblast Novgorod oblast Rostov oblast Adygei Republic Moscow oblast Penza oblast Tver oblast Murmansk oblast Smolensk oblast Kirov oblast Pskov oblast Kemerovo oblast Tuva Republic Voronezh oblast Altai krai Mari-El Republic Amur oblast Kamchatka oblast Kaluga oblast Sakhalin oblast Karachaev-Cherkessia Moscow city St. Petersburg Briansk oblast Kurgan oblast Astrakhan oblast Kostroma oblast Tomsk oblast

–8.13 –7.89 –6.89 –6.77 –6.33 –6.03 –5.62 –5.58 –5.55 –4.35 –4.32 –4.21 –4.18 –4.11 –4.10 –3.87 –3.26 –3.24 –3.19 –3.13 –2.64 –2.12 –2.03 –1.78 –1.67 –1.64 –1.64 –1.28 –1.25 –1.02 –0.95 –0.85 –0.61 –0.56 –0.40 –0.32 –0.15 –0.11 0.00 0.00 0.01 0.30 0.52 0.66 0.88 (continued)

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Table 7.8.  (continued) Khakassia Orenburg oblast Chita oblast Tambov oblast Riazan oblast Stavropol krai Krasnodar krai Udmurt Republic Belgorod oblast Omsk oblast Tiumen oblast Ingush Republic Leningrad oblast Arkhangelsk Vologda oblast Yaroslavl oblast Lipetsk oblast Chuvash Republic Buryatia Chelyabinsk oblast Samara oblast Kaliningrad oblast Dagestan Republic Krasnoyarsk krai Volgograd oblast Karelia Irkutsk oblast Nizhnii Novgorod Perm oblast Novosibirsk Altai Republic Sverdlovsk oblast

0.98 1.00 1.03 1.16 1.16 1.26 1.39 1.75 1.93 1.99 2.00 2.01 2.55 2.74 2.89 3.18 3.27 3.33 3.53 3.84 4.08 4.16 4.62 5.11 5.12 6.39 7.03 7.16 7.21 7.27 8.70 9.52

this respect, the postcommunist societies stand out for their low level of civic engagement, and among these, Russia has one of the lowest rates of civic participation in the postcommunist world. Marc Morjé Howard found that the average number of organizational memberships per person in older democracies in the mid-1990s was 2.39 (with the United States significantly higher, at 3.59), in a group of non-postcommunist third-wave democracies 1.82, and in postcommunist societies .91 – with Russia nearly at the bottom of the last group, with an average rate of organizational membership per person of .65.34 34

Marc Morjé Howard, The Weakness of Civil Society in Post-Communist Europe (Cambridge: Cambridge University Press, 2003), p. 80.

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Richard Rose characterized Russian society as resembling an hourglass for the fact that state officials are closely bound to one another in administrative networks and state agencies. For their part, ordinary citizens are closely tied to each other in bonds of kinship and friendship.35 But membership in associations mediating between the authorities and private citizens remains extremely low, even by the standards of other postcommunist societies.36 So severe is the problem of trust and collaboration, even in the stratum of elites who run major enterprises, that – as Kathryn Stoner-Weiss found – only in regions where productive capacity was highly concentrated was there sufficient “elite social capital” to enable productive cooperation among the heads of major enterprises and between them and state officials.37 The problem of low societal capacity for collective action has been cited by many observers of Russian society, past and present. Usually we attribute the heavy involvement by the state in society to an authoritarian impulse in Russian political culture or official ideology. Yet we should not assume that in the top-heavy, state-dominant pattern of social organization that recurs in Russia, the state’s intervention has always squeezed out social capacity for self-organization. As a result of the long legacy of coercive mobilization of society by the state, on those occasions when state officials do seek social partners to enact policy, they sometimes find that society’s amorphousness and fragmentation are too great to allow it to offer more than nominal support. It is more common for society to mobilize against state initiatives than to organize to influence the framing of particular policy options. When state officials complain about this problem, we usually, and with justification, dismiss the complaints as self-serving rationalizations for statism and authoritarianism. However, the fact that the same observations are voiced at points when liberalizing leaders solicit advice from social organizations on policy suggests that state agents sometimes act on behalf of or in lieu of social partners, or themselves create social partners to share the responsibility for formulating and implementing policy.38 Richard Rose, “Russia as an Hour-Glass Society:  A Constitution without Citizens,” East European Constitutional Review 4:3 (1995): 34–42. 36 Richard Rose, William Mishler, and Neil Munro, Russia Transformed: Developing Popular Support for a New Regime (Cambridge: Cambridge University Press, 2006). 37 Kathryn Stoner-Weiss, Local Heroes: The Political Economy of Russian Regional Governance (Princeton, NJ: Princeton University Press, 1997). Note, however, that this observation is not borne out in the findings shown in Figures 7.7 and 7.8 in this chapter. 38 An example is a revealing outburst by the young, liberal governor of Kirov oblast’, Nikita Belykh. Speaking at a roundtable in September 2009, Belykh observed that when he was in opposition, he hated those in authority (vlast’). And he still does today, perhaps even more so: 35

But, frankly speaking, I have begun not to like society as well .… A more destructive, implacable, inadequate and obtuse institution than society does not exist. We sit down at the table with it and discuss problems, reach an agreement, sign a protocol, and the next day they rally against everything outside my windows. This takes away any desire to conduct any sort of negotiations .… The apotheosis of all this is the trade unions.

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The argument made in this book is that the differences in the levels of democratic pluralism across regions measured in the democracy scores we have examined reflect not only the differing levels of potential for collective organization in defense of political and property rights that was accumulated by the accretion of educational levels, industrial development, urban concentration, and growth of incomes and assets. To be realized institutionally, state actors initiated new forms of societal association and vehicles through which the state actors consulted with societal actors. To the extent that the state was ready to encourage social self-organization, in the search for negotiating partners, sources of intelligence, consent to state policy, and support for state initiatives, it lent them a measure of power and restrained its own capacity to swallow up social initiative. The motives for these institutional innovations on the part of more enlightened governors are not always readily reducible to concepts such as modernization or external threat. They do seem in part to be the products of past institutional habits of consultation and accommodation (reflected in the self-image of elites in regions such as Perm’, Yaroslavl’, and Sverdlovsk that they are moderate, consensus-oriented, and enlightened compared to other regions). The reflexes of the more predatory, neopatrimonial governors are less mysterious:  They are maintaining the authoritarian and kleptocratic style of rule that became prevalent in many regions in the late-Brezhnev era, when “stability of cadres” was prized by the gerontocratic Brezhnev entourage above goals of economic growth and modernization. The argument, therefore, is that state-led modernization, referring to changes in social organization intended to stimulate economic productivity and increase the state’s capacity to compete successfully in the international arena, has been accompanied by state efforts to build institutions for collective self-representation by social actors whose expertise and authority are valued by the state to achieve its modernization goals. These efforts tend to pluralize power by lending some capacity for autonomous organization and interest aggregation to actors in society. Because the alternative to such statedirected institutional innovations is not a robust, autonomous civil society, Society, he continued, is not ready for dialogue: They are so used to sitting and grumbling at the kitchen table and going out onto the street, that they don’t see another format for civic activism in life. When all of a sudden, unexpectedly someone comes to people and asks them to express their wishes, suggestions, proposes to help with a legislative initiative, to issue an order, everything stops right there. Everything stops right there. People ask me when finally will they repair the road between Kirov and Perm’, although it was repaired 2 months ago. They ask ‘why don’t you pay attention to sports in the oblast?’ although in this year of crisis, we spent 25 times more than in the last, pre-crisis year. People fail to recognize the good things the authorities do: Any actions are regarded either as a provocation or they simply don’t notice them and don’t see them .… Those whom I saw as allies are doing everything to make me strangle them. I hold myself back to avoid turning into a dictator, and not to destroy the liberal idea. (Quoted in Polit.ru, September 11, 2009.)

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but a condition of generalized atomization and mutual mistrust in society (thick, dense ties at the level of kinship and friendship, with much weaker associational ties in society), state actions designed to give elite actors the capacity to overcome barriers to collective effort actually disperse power, although characteristically in patterns of asymmetric relations between state and its social partners where the state defines the terms and agenda of the relationship. Still, examined from the outside, to the extent that the state has established these limited forms of pluralism, it has restrained some of its own power and recognized the authority of centers of power outside the state. This pattern, resembling the picture of “dispersed inequalities” that the pluralist school ascribed to community power in the United States in the 1950s, is presumably what is being measured with the Petrov democracy scores: a pattern of state-initiated, limited democratic pluralism as opposed to the continuation in post-Soviet conditions of the traditional Russian pattern of neopatrimonial authoritarianism. This leaves us with an argument that goes roughly as follows. Regions entered the post-Soviet era with significant differences in some aspects of modernization, such as industrial development and urbanization. In other respects, the differences were relatively smaller, such as in the pool of ­educated ­specialists they inherited or the degree of media saturation. They also differed demographically and by administrative status. These differences affected the degree to which different segments of their societies and leaderships responded  – favorably or not – to the opening to democratic and market reforms. These differences were manifest in the way they voted in the April 1993 referendum on whether or not to support President Yeltsin: Regions with larger numbers of citizens who could anticipate being better off under new democratic, marketoriented arrangements tended to give more support to Yeltsin. But democratic electoral mechanisms were far less decisive in determining who would exercise power locally, because Yeltsin appointed governors for most of the first half of the 1990s while local legislatures (which were elected) were deliberately weakened and prevented from checking gubernatorial power. Therefore, governors had substantial discretion in choosing the basic strategy for rule, and they differed widely in political vision and skill. Some, particularly in regions with a higher level of potential support for democratic and market reform, sought actively to manage the transition to the market economy. They created or reinforced the capacity of local enterprises to share the burdens associated with transition, including the responsibility for maintaining social stability by providing an employment safety net and a system of cash benefits funded through taxation. In such regions, governments tended to restrain their own power to exploit enterprises and instead encouraged productivity-enhancing efforts, such as new investment. In contrast, in regions with a smaller social basis of support for democratic and market institutions, rulers protected their own power by expanding government control and ownership over the economy. Productive investment was lower and redistribution higher; poverty and social dependency were higher.

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Most regions combined elements of pluralism and patrimonialism, ­ epending on the strategy of the governor and the skill with which he carried d it out. Regions with a greater capacity for elite self-organization but relatively incompetent, grasping, or autocratic governors (as in Kaliningrad at the end of the 1990s) saw an elite revolt against the governor. In other instances, governors whose democratic aspirations outpaced the appetite for reform among the regional elite were soon replaced with governors more congruent with the preferences of the business elite. Yet for the most part, it appears that the governors and their close associates were the prime movers in setting the terms of the bargain between government and the regional enterprise leadership, shaping both the goals and strategy of regional political development. It is difficult to see how matters could have been otherwise given the low capacity for social self-organization inherited from the Soviet system.

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Cambridge Books Online http://ebooks.cambridge.org/

The Politics of Inequality in Russia Thomas F. Remington Book DOI: http://dx.doi.org/10.1017/CBO9780511973024 Online ISBN: 9780511973024 Hardback ISBN: 9781107096417 Paperback ISBN: 9781107422247

Chapter 8 - After the Crash pp. 201-216 Chapter DOI: http://dx.doi.org/10.1017/CBO9780511973024.009 Cambridge University Press

8 After the Crash

“Should a primitive economy based on raw materials and endemic corruption accompany us into the future?” – President Dmitrii Medvedev, “Go Russia!” (September 10, 2009)1

In September 2009, President Dmitrii Medvedev published a widely publicized article entitled, “Rossiia Vpered!” (“Russia, Forward!” or, more loosely, “Go Russia!”). Medvedev laid out a sweeping indictment of the institutions and attitudes that had made the impact of the 2008–2009 worldwide recession so devastating to Russia, and described the reforms that he considered necessary to set the country right. He argued that the crisis proved that the economy was still rooted in the Soviet system: Twenty years of tumultuous change has not spared our country from its humiliating dependence on raw materials. Our current economy still reflects the major flaw of the Soviet system: it largely ignores individual needs. With a few exceptions domestic business does not invent nor create the necessary things and technology that people need. We sell things that we have not produced, raw materials or imported goods. Finished products produced in Russia are largely plagued by their extremely low competitiveness.2

Not only is the economy inefficient, declared Medvedev, but its democratic institutions are tenuous and its civil society is weak and still “semi-Soviet.” Medvedev argued that Russia required a thoroughgoing modernization of its economy, society, and political system, but one accomplished through noncoercive means. Future growth should be fueled by innovation, particularly in energy, information, space technology, and medicine. In the political sphere, healthy party competition was needed to keep government honest and responsive, and to link society to the state. More broadly, he called for a society in Dmitry Medvedev, “Go Russia!” Text in English translation from: 2 Ibid. 1

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which citizens would no longer exhibit the traditional attitudes of ­passivity and paternalism but instead would take responsibility for their own and ­society’s well-being. Judicial and law enforcement bodies would root out corruption. Social welfare institutions would harmonize market incentives with an efficient social safety net administered by the state. Appropriate incentives would harmonize the interests of individuals, society, and government. Needless to say, the ideal state outlined by Medvedev would differ radically even from the most successful of the regional regimes described in this book. They still rested on traditional enterprise paternalism, a very limited role for electoral competition, a semicorporatist system of consultation between big business and government, and informal authority patterns. Recall, for example, that the highest levels of personal, informal communication between enterprise managers and regional officials were found among both the least democratic and most democratic regional regimes. The latter, however, had replaced the institutional vacuum of the least democratic regions, where ­corruption, predation, and social dependency remained high, with a more institutionalized environment in the economy and polity. In regions with stronger formal institutions, enterprises were willing to pay and report higher earnings, which in turn reduced poverty and social dependency, and facilitated higher social spending by government. What can the findings in this book tell us about the problems described by Medvedev and the reforms that would be needed to overcome them? Do they shed any light on the reasons that the economic crisis struck Russia with such force? Our starting point was the observation that income inequality had grown the most in those regions whose regimes were the most open and competitive. I argued that this finding reflected variation in the effects of the institutional arrangements regulating relations between business and government in different regions. The fact that Russia and the United States are very similar in their structure of income distribution, and that both are higher in income inequality than other countries to which they might be compared, suggests that political institutions such as those governing business-government relations, the labor market, and social policy must complement purely economic explanations for trends in income distribution. But the fact that interregional variation in income in Russia is twice that of the American level suggests that regional differences in Russia are more important in structuring income. The divergence of regional trajectories is not only a consequence of Russia’s much greater territorial size, but also a result of the pronounced decentralization of power in the 1990s. Notwithstanding the apparent uniformity of political institutions across the country, actual power relations varied markedly depending on inherited endowments and the strategies of political and ­economic actors. Chapter 2 showed that these differences in regime characteristics at the regional level in Russia were not entirely the product of the differential impact of modernizing forces in the Soviet and pre-Soviet eras. Rather, they were

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also related to choices made by regional executives about government relations with local enterprises and organizations, made under conditions of acute stress caused by transition from a planned to a market economy. These choices were forced on regions as a result of the decentralization of power to regions, some of it through drift, some explicitly through delegation. In an environment where civil society was, as President Medvedev put it, weak and still “semi-Soviet” (and labor, in particular, was fragmented and dependent on employers), the role of enterprises was all the more crucial to the nature of these arrangements. A major reason these informal or quasiformal arrangements concerning decision making over economic and social policy were so critical to the region’s response to the economic crisis brought about by the end of the Soviet planned economy had to do with the way the Soviet system was organized. Enterprises stood at the center not only of the system of economic production, but also of the system of social benefits. The population depended on employment for monetary incomes, but the planned nature of the economy meant that money had only limited value. Much social infrastructure, such as housing, medical care, child care, recreation, often even basic consumer goods, was ­administered through the place of employment. Enterprises could not be converted into exclusively profit-maximizing production units until means could be found to transfer obligations for funding and administering social provision to government. Both enterprises and governments were slow to carry out this transfer. Governments could not take on responsibility for providing unemployment assistance, maintaining housing and utilities services, and managing the enterprises’ social assets until they had developed adequate administrative and financial capacities. Enterprise directors recognized the strategic leverage that control over social obligations gave them vis-à-vis workforces and governments. Even many of the new enterprise directors, with modern orientations, willingly held on to the traditional paternalistic role for strategic reasons.3 Thus even the most open and competitive regimes, where formal institutions in the social and economic sphere were relatively effective, still left a sizable role for informal institutions both within enterprises and in enterprise-government relations. In the most authoritarian regimes, informal relations of the traditional neopatrimonial kind were reinforced by the absence of countervailing pressures from state or society. The quasiformal arrangements in the more progressive regions helped forge institutional solutions to two sets of collective dilemmas: those facing enterprises themselves as they coped with the economic and social problems of the post-Soviet transition; and those affecting business-government relations. The first challenged enterprises to coordinate around agreed responses to issues such as maintaining the regional social infrastructure, averting mass layoffs, 3

Alla E. Chirikova, “Russian Directors:  Management Strategies and Behavioral Models.” Sociological Research 42.3 (2003): 6–52; Idem, “Vzaimodeistvie vlasti i biznesa v realizatsii sotsial’noi politiki: na poroge peremen.” Spero 9 (2008): 53–66.

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and deciding how much of a role to allow outside firms. To the extent that firms could coordinate on a common response to the crisis of transition, they could ease the shock of adaptation and take advantage of new opportunities. Because firms were already closely tied to the state at the regional level, coordination on their strategies for coping was preferable to letting each enterprise face the uncertainties and perils of the transition environment in isolation. Similarly, enterprises and government confronted a problem of cooperation. Government could only solve its fiscal needs by squeezing enterprises for taxes, contributions to social funds, and in-kind support for social programs. Enterprises responded by evading their tax obligations through a variety of stratagems. Both sides were in a position where commitment to an agreed level of enterprise contributions and government-provided public services would be preferable to constant confrontation, but without some mechanisms for ensuring that commitments to cooperation would be honored, a solution to the dilemma was elusive. Solutions were found in a few regions as governors devised quasicorporatist consultative bodies and encouraged a more open and competitive political arena to signal serious commitment to political self­restraint and pluralism. The strength of such arrangements, we observed, affected the level and structure of earned incomes. The more democratic regions pay higher wages on average and particularly so at the upper end. Owing to the higher earned incomes, and presumably higher levels of reporting them and paying taxes on them, governments in such regions are able to spend more on social transfers. Such regions feature smaller shares of the population living in poverty and dependent on social income. They also have higher inequality of earnings and incomes. Enterprises evidently feel greater security because they report lower levels of corruption and higher levels of investment. To be sure, even those regions scoring highest on the democracy scores are closer to benevolent paternalism than actual democracy, but they stand in sharp contrast to the neopatrimonial regimes where the governor and his entourage own or control most resources, stifle the growth of incomes, and leave a larger share of the population in a dependent status, with more living in poverty. Average wages are lower, as is overall inequality, because there are fewer individuals at high income levels. Still, entrepreneurship is limited, even in the most successful regions. Region by region, higher levels of employment in small enterprises are associated with higher inequality, not lower. Even the more democratic regimes featured high barriers to entry for small business owing to a policy emphasis on ensuring the survival of large, formerly state enterprises on which the survival of the region depends. They rested on consultation and a sharing of costs of market adaptation between government and large enterprises. Chapter 2 showed that the financial crash of August 1998 prompted the center to adopt some of the power-sharing practices observed in the more successful regions. The federal government and big business agreed to scrap their former antagonism and mistrust in favor of a more cooperative relationship. The center encouraged coordination among political and economic actors, and

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incorporated them into policy making. For example, during his brief ­tenure as prime minister, Evgenii Primakov regularly consulted with the leaders of the main factions in parliament, included a communist in his cabinet, and forged a consensus around a moderately market-oriented economic policy. Starting with Primakov and continuing under his successors, the government reached an agreement with big business on a new tax system, exchanging a substantial reduction in tax rates for a much higher level of tax compliance by business.4 The new Duma that convened in January 2001 developed a powersharing internal governance arrangement that overcame the sharp polarization between communists and democrats that had characterized the previous two convocations. The new prime minister, Vladimir Putin, developed an inclusive system of policy making that accommodated the interests of business and labor in drafting new liberalizing legislation on taxation, social welfare policy, and labor market policy. Some of Putin’s liberalization agenda went far beyond what the Gaidar government had achieved in the early 1990s. At the same time, he pushed the oligarchs to enter the RUIE so that it could aggregate the interests of big business more efficiently, and formed two other business associations to represent small and medium businesses. These measures were backed by a display of coercive muscle signaled by the prosecutions of two opposition-minded oligarchs (Berezovskii and Gusinskii) and a warning from Putin to the oligarchs at a meeting in the Kremlin in July 2000 that they should cease meddling in high politics. The combination of these carrots and sticks toward big business, reinforced by the oil-lubricated economic recovery, resulted in a restoration of fiscal health in the state and investor confidence. Real incomes began rising, poverty fell, and inequality grew as groups tied to the boom sectors – energy, construction, finance, and retail trade – saw earnings gains that far outpaced those in other sectors. Some time in the first half of 2003, however, for reasons that remain unclear, the Putin regime changed course. In place of the bargaining and self-restraint that marked central government policy in the 1999–2003 period, Putin shifted toward a policy of pressure and intimidation toward large private business interests, and nationalization of a number of privatized firms. The most dramatic example of this was the campaign against Yukos and Khodorkovsky that began in the summer of 2003 and ended with Khodorkovsky sentenced to a prison sentence of eight years for tax evasion and embezzlement, along with the dismantling of Yukos and the resale of its assets at bargain prices to the politically connected, state-owned oil firm, Rosneft’.5 Many similar moves to force firms into bankruptcy so that they could be taken over (and often Pauline Jones Luong and Erika Weinthal, “Contra Coercion: Russian Tax Reform, Exogenous Shocks, and Negotiated Institutional Change,” American Political Science Review 98:1 (2004): 139–152. 5 On the Yukos affair, see Richard Sakwa, The Quality of Freedom: Khodorkovsky, Putin, and the Yukos Affair (New York: Oxford University Press, 2009) and William Tompson, “Putting Yukos in Perspective,” Post-Soviet Affairs 21:2 (2005): 159–181. 4

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resold) by state-connected firms followed.6 Putin also created several large state corporations that served as holding companies for state-owned firms and formerly private firms that the state renationalized.7 Concomitant with these steps, Putin also moved to centralize power further in the political arena. In addition to eliminating the direct election of governors and the single-member district tier of parliament, he also pursued a strategy of making United Russia an authoritarian dominant party that would use patronage, repression, and electoral fraud to ensure its domination of the political system. The sustained prosperity of the 1999–2008 period blunted the impetus to carry out further reforms and encouraged entrenched bureaucratic factions to redistribute rents by taking over companies. The rents from state-owned and state-connected energy firms, such as Rosneft’ and Gazprom, also financed the rise of United Russia and the political machine it controlled.8 Concurrent with these moves toward authoritarianism and redistribution of assets, however, the Putin regime also maintained its efforts to liberalize and rationalize the economy and society. It overhauled the pension system, encouraged the expansion of mortgage credit, invested in national programs to improve education, housing, health, and rural infrastructure, and built up the sovereign wealth funds as a hedge against future declines in the international price of oil. These steps helped mitigate the effects of the 2008 crash. Nonetheless, President Medvedev was right to declare that the crash revealed the deeper weaknesses of the institutional arrangements constructed since the end of the communist regime. Fueled by a rising ruble, cheap international credit, and rising oil prices, Russia’s economy had experienced a boom, reflected in the rising incomes we have traced in the preceding chapters. The worldwide crash struck Russia with particular force because of the combined impact of the reversal of foreign credit flows and the calamitous shrinkage of oil and gas revenues as energy prices fell to a third of their former level. Some of these practices were outlined in a scandalous interview that appeared in a prominent business newspaper in late 2007. The inteviewee, who had handled many of these transactions, stated that the head of the group carrying them out was Igor’ Sechin, a deputy prime minister considered to be the leader of an informal bureaucratic clan uniting a number of figures tied to the security police. See Maksim Kvashe, “Partiiu dlia nas olitsetvoriaet silovoi blok, kotoryi vozglavliaet Igor’ Ivanovich Sechin,” Kommersant, November 30, 2007, p. 20. 7 As of the end of 2009, there were seven state corporations (defined legally by their privileged status – they are chartered by parliament as nonprofit firms formed to hold state property; they pay no tax on profits; and once transferred to them, their assets are no longer considered state property and they cannot be subjected to bankruptcy proceedings). The seven were: Rosatom; Rostekhnologii (which owns more than 500 firms, including large holdings in the automotive, shipbuilding, aviation, and defense sectors); Rosnano; the Olympic construction company Olimpstroi; Vneshekonombank (through which the state directs much of its crisis relief); the Agency for Insuring Bank Deposits; and the Fund to Assist the Housing-Utilities Complex. See Polit.ru, August 14, 2009; Ol’ga Proskurnina and Evgeniia Pis’mennaia, “Khroniki 1999–2009 gg.: Po semi karmanam,” Vedomosti, August 31, 2009. 8 Thomas F. Remington, “Patronage and the Party of Power:  President-Parliament Relations under Vladimir Putin,” Europe-Asia Studies 60:6 (2008): 965–993. 6

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Russia’s economy contracted more deeply than that of any economy in the G-20.9 Its stock market lost more than three-fourths of capitalization from May to October 2008. The state budget fell into the red, closing 2009 with a deficit equivalent to 5.9% of GDP. Output contracted 9.5% in the first quarter of 2009 alone.10 Manufacturing – particularly machine building, metallurgy, and other labor-intensive branches  – was devastated.11 As of April 2009, manufacturing output was 25% below its April 2008 level.12 Unemployment rose to more than 10% of the economically active population by April 2009. Richard Rose’s New Russia Barometer survey, conducted in June 2009, found that 15% of population had been out of work at some point in the past twelve months.13 As of the fall of 2009, it was still more than 9%. Yet even though unemployment rose sharply, it was much less than it might have been. Many studies found that firms tried to avoid laying off workers whenever possible, resorting instead to the same methods they had used in the 1990s – reducing workers’ pay and hours, putting workers on forced leave and furlough, cutting bonuses, and simply holding back wages. Wage arrears rose; according to official statistics, about a half million people at any given point in 2009 were owed back wages. Rose’s NRB survey reported that 24% of the population had not been paid for at least some portion of their work time in the past twelve months.14 Another survey, in May 2009, reported that wage arrears affected 38% of the population.15 Sociologists studying the labor market warned that the return to the informal practices of the 1990s (wages paid “in the envelope” and so on) had negative effects: It starved the budget and social support system of cash revenues, and postponed the necessity of painful restructuring and modernization of industry.16 Prime Minister Putin as well as experts warned that the old problem of unreported wages and shadow economic activity was wrecking budget discipline.17 Barter returned, as it had in the 1990s, as an alternative for insolvent enterprises, as did the use of promissory notes (vekselia, or bills of exchange), to settle interenterprise accounts.18 Polit.ru, October 2, 2009. Polit.ru, April 23, 2009. 11 Mikhail Sergeev, “Zatiazhnoi krizis pokhoronit mashinostroenie i oboronu,” Nezavisimaia gazeta, May 15, 2009. 12 “Output Data Boosts Fears of Instability,” The Moscow Times, May 19, 2009. 13 Richard Rose and William Mishler, “The Impact of Macro-Economic Shock on Russians,” Studies in Public Policy no. 464, Center for the Study of Public Policy, University of Aberdeen, Aberdeen, Scotland, 2009, p. 18. 14 Rose and Mishler, “Impact,” p. 19. 15 “Na zaderzhku zarplaty zhaluetsia tret’ rossiian,” Vedomosti, July 20, 2009. 16 This was the point made by a team of sociologists in a report to the RUIE in September 2009. Anton Denisov and Mikhail Sergeev, “Snizhenie zarplat khuzhe uvol’nenii,” Nezavisimaia gazeta, September 16, 2009. 17 Nezavisimaia gazeta, March 26, 2009; Mikhail Sergeev, “Ekonomika spolzaet v seruiu zonu,” Nezavisimaia gazeta, August 14, 2009. 18 Nadia Popova, “Barter Making a Major Revival,” The Moscow Times, April 13, 2009. 9

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As the crisis spread in the last quarter of 2008 and first quarter of 2009, real incomes began to fall due to the combined effect of lost earnings and persistent inflation. Because of the sharp fall in earnings in the private sector, real incomes were 6.7% lower in January 2009 than in January 2008 despite increases in the real income of pensioners and budget-sector employees (employees in state-supported institutions, representing about a quarter of the total workforce).19 Earnings fell most steeply in the sectors where they had risen fastest during the boom years, particularly the financial industry, retail trade, construction, and energy.20 In the financial services sector, earnings fell by as much as a third or more.21 Yet inflation persisted: For 2008, it was 13.3% and for 2009, it was 8.8%. Therefore, the efforts of the regime to support incomes by raising pensions and budget-sector employee salaries ran afoul of the continuing increase in prices. Poverty rose substantially, owing to layoffs, inflation, and the strain on the social safety net. Rosstat estimated that as of the first quarter of 2009, 24.5 million people received incomes below the subsistence level, which was equivalent to 17.2% of the population and represented an increase of onethird over the last quarter of 2008.22 The number of people who reported that they were saving none of their income rose from 68% to 72%, suggesting that both poor and middle-income groups were facing strains.23 The government’s response was more vigorous than it had been in the early 1990s, owing in part to the substantial financial reserves it had accumulated during the preceding years. At the start of the crisis, the government had about $180 billion in the two stabilization funds it had created, the Reserve Fund and the National Welfare Fund, plus $350 billion in currency reserves.24 The government tapped these funds to keep banks and major firms afloat, as well as to prop up the social safety net. In an address to the United Russia Party in November 2008, Putin announced a number of measures to benefit business and prevent a social crisis: cutting the profits tax; raising the amortization deduction for businesses; easing taxes on small businesses; raising unemployment benefits 44% (from 3,400 rubles per month, about $113, to 4,900 rubles, or about $163); raising pensions by more than 50% as of 2009; raising wages for budget-sector employees (employees in state-supported institutions – ­representing about a quarter of the workforce) by 30% at the Polit.ru, December 22, 2008; Mikhail Sergeev, “Rossiiane stremitel’no bedneiut,” Nezavisimaia gazeta, February 20, 2009; Daria Nikolaeva, “Dokhody padaiut na fone zarplat,” Kommersant, May 6, 2009. 20 Polit.ru, March 6, 2009. 21 Anzhela Druzhinina, “Rossiiskiie bankiry ostalis’ bez premii,” Nezavisimaia gazeta, September 29, 2009. 22 Mikhail Sergeev. “Pogruzhenie v nishchetu,” Nezavisimaia gazeta, August 31, 2009. 23 Igor’ Naumov, “Rossiiane zatiagivaiut poiasa potuzhe,” Nezavisimaia gazeta, March 25, 2009. 24 Philip P. Pan, “Russian Elite Look to Kremlin for Aid as Wealth Evaporates,” Washington Post, October 17, 2008. 19

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beginning of 2009; and subsidizing manufacturing.25 Altogether, Putin told a group of miners in March 2009, the government’s various efforts to prop up the economy were costing the equivalent of 12% of GDP.26 The government also worked to address another aspect of the crisis, that of large firms in company towns. Often the dominant firms in such towns are extremely inefficient but are the sole source of livelihood for the town’s population. Though estimates vary, Russia has 300–400 such “mono-cities,” defined as cities where at least 20% of the populations are directly tied to a particular enterprise, or where a particular enterprise accounts for at least half of total output. About a quarter of the urban population lives in such ­cities. Of these, 100 or so are at or near a crisis point, and 15–20 are in severe crisis.27 A good example is the city of Togliatti (named for the Italian communist leader) in Samara oblast. Togliatti’s population of 700,000 relies entirely on the AvtoVAZ automobile firm, which (as of the start of the crisis) employed more than 100,000 people. The case of AvtoVAZ is therefore an illuminating example of the dilemma posed by large, inefficient manufacturing firms in company towns, particularly given AvtoVAZ’s importance to the economy generally. The central government has paid close attention to the crisis at AvtoVAZ. AvtoVAZ is the country’s largest automaker, producing more than 900,000 units a year in good years and representing about a quarter of the Russian auto market.28 (It produces the Zhiguli/Lada car originally modeled on Fiat.) Three owners hold a quarter of its shares each: the investment firm TroikaDialogue, the French carmaker Renault, and the large state holding corporation, Rostekhnologii.29 Some 60% of the revenues of the city of Togliatti come from AvtoVAZ, according to the city’s mayor.30 The firm also was spending some 1.7 billion rubles (about $60 million) a year on social programs for the city.31 As sales began falling in late 2008 and the firm’s debts to its suppliers and lenders mounted, the plant’s managers turned to the central government for help. By early 2009, the firm was in crisis. Car sales were falling rapidly, banks raised interest rates, and the firm raised prices on the cars. Inventory of unsold cars grew. The firm cut production, but rather than laying off workers, which would have required costly severance pay, it gave them a choice between coming to work or staying home and receiving two-thirds of Nezavisimaia gazeta, November 24, 2008. Polit.ru, March 12, 2009. 27 Polit.ru, July 8, 2009; September 29, 2009; December 15, 2009; Sergei Kulikov. “Gradoobrazuiushchii vzryv,” Nezavisimaia gazeta, December 15, 2009. 28 “AvtoVAZ Confirms Plans to Lay Off 25% of Work Force,” Moscow Times, September 24, 2009. 29 Vedomosti, August 28, 2009. 30 “Mer Tol’iatti: sotsial’naia obstanovka v gorode odnoznachno napriazhennaia,” Vedomosti, September 8, 2009. 31 Nadia Popova, “AvtoVAZ Woes Cast Cloud Over City,” The Moscow Times, February 27, 2009. 25

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their wages. Finally, on March 31, 2009, the government agreed to provide a ­bailout package, declaring that it would provide 25 billion rubles (more than $1 billion) to the Rostekhnologii holding company to pay off the firm’s debts, and another 50 billion rubles to the Samara regional government to support social programs.32 One reason for the government’s willingness to bail out AvtoVAZ was ­concern about the effect of the firm’s failure on the social fabric in Samara region and beyond. Putin remained in close touch both with the firm’s management and with the governor of Samara, Vladimir Artiakov. Putin hardly needed to impress on Artiakov the point that maintaining employment at the firm and preserving social stability in the region were the governor’s responsibility. (This was because, as Putin helpfully reminded him, “there are about one million people living there who are tied to that enterprise.”33) The firm recognized the need to reduce employment but depended on the regional government to provide unemployment benefits, retraining, and alternative forms of employment. Management, local and regional authorities, the trade union at the plant, and the central government worked out a plan. In September 2009, the firm announced that it would lay off 27,000 employees, of whom 13,000 would be pensioners, 5,500 who were nearing pension age, and another 5,000 white-collar employees. Of these, 9,100 would be given new jobs in subsidiary organizations under AvtoVAZ’s auspices (the hope was that once production began to expand, some of them would be called back to work at the parent firm).34 By then, production had fallen to about 65% of capacity, and workers had been cut back to twenty hours a week (pushing low-wage workers below the poverty line). By November, a general agreement solving the immediate crisis was reached. The central government engineered the replacement of the general director of the firm, won a commitment from Renault to invest in new technology so that the firm could assemble a new line of Renaults, and worked out an agreement between the enterprise and the regional government to transfer some of the firms’s social assets to the regional government and to auction off others. As part of the Renault deal, Putin promised another 50 ­billion rubles to the firm in state aid.35 The Samara oblast government promised to create more than 14,000 new jobs funded out of the regional budget.36 The immediate crisis has been averted, but in the longer run, it is not clear that the firm is economically viable. Given the dependence of the city of Togliatti on the firm, however, and the lack of short-term employment options for the autoworkers at AvtoVAZ, it is likely that the central and regional governments will continue to find makeshift arrangements to keep the firm afloat. Maria Antonova, “Putin Promises Big Money on Visit to AvtoVAZ,” The Moscow Times, March 31, 2009. 33 Polit.ru, June 12, 2009. 34 Polit.ru, September 24, 2009. 35 Polit.ru, November 23, 2009. 36 Polit.ru, November 27, 2009. 32

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Russia’s automobile industry, like that of the United States, is politically sensitive, in part due to the high concentration of industrial workers in cities like Togliatti, the importance of the industries to regions such as Samara, and the threat of the ripple effect from the industry’s demise. The 2008–2009 crash hit Russia’s car industry very hard:  Overall production fell about 60% and sales about 50% in 2009. AvtoVAZ’s overall sales fell about 44% for the year, although the firm retained its place as the country’s largest automaker.37 Auto industry executives therefore hoped that economic recovery would generate a new burst of demand in the future. However, given the extremely inefficient production methods at AvtoVAZ (in a report to the government, the firm’s new management acknowledged that its products were “of extremely low quality” but blamed its suppliers – some of whom are monopolists – for many of the problems), it is likely that the firm will need state support for years to come. Although the case of AvtoVAZ was unusual in the degree of high-level attention it attracted from the government, it illustrates a more general point about the effect of the adaptive institutional arrangements devised in the 1990s and early 2000s. Even in a relatively open and competitive region such as Samara, the legacy of an enormous industrial enterprise such as AvtoVAZ, on which the city of Togliatti and the surrounding region of Samara are so heavily dependent, constrained the choices faced by management and government. The coping strategies developed by major enterprises and regional governments softened the force of incentives for radical restructuring of the inherited industrial plant. They could be sustained so long as international oil prices remained high. Then firms such as AvtoVAZ continued to find a domestic market for their products and felt little pressure to reduce the scale of their social responsibilities. Under the impact of the new global crisis, however, the high production costs of such firms had become unsustainable, but the government has less capacity to assume their social responsibilities and even less interest in allowing them to fail. By finding ways to keep firms such as AvtoVAZ going, the accommodative arrangements worked out between government and business averted pressure for more far-reaching institutional reforms. At the regional level, more open, competitive political environments may have been conducive to lower corruption, higher investment, and longer time horizons than were authoritarian, neopatrimonial regimes. They also tended to produce more favorable environments for small-business development, as Chapter 4 showed. But even the most market-friendly of regions allowed inefficient enterprises to avoid direct competition in the global marketplace. As in other oil-rich countries, high world oil prices allowed the leaders to avoid facing the longer-term consequences of a weak institutional environment.38 Maria Antonova, “Car Sales Sink 49%, Seen Level This Year,” Moscow Times, January 15, 2010. 38 Michael L. Ross, “The Political Economy of the Resource Curse,” World Politics 51:2 (1999): 297–322; William Tompson, “The Political Implications of Russia’s Resource-Based Economy,” Post-Soviet Affairs 21:4 (2005): 335–359; William Tompson, “A Frozen Venezuela? The ‘Resource Curse’ and Russian Politics,” in Russia’s Oil and Natural Gas: Bonanza or Curse?, ed. Michael Ellman (London: Anthem Press, 2006), pp. 189–212. 37

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Thus the institutional conditions that allowed real incomes to rise and ­ rotected parts of the population from paying the cost of deep restructuring p left Russia acutely vulnerable to the effects of the global recession of 2008– 2009. Whether the current crisis will be an impetus for substantial reform remains to be seen. The 1998 crisis was sufficiently severe that it helped overcome the polarization in the political arena and between business and ­government, and the effects of the new institutional arrangements adopted at the time were reinforced by the change of leadership from Yeltsin to Putin and, perhaps most importantly, the rapid economic recovery due to the devaluation of the ruble and the steady rise in oil prices after December 1999. The current environment may not be as propitious for significant change. Still, some of the institutional legacies of the 1990s and the 2000s are ­favorable. The crisis of state breakdown that followed the collapse of the Soviet political system has ended. The state now has a much stronger capacity to collect taxes and meet its fiscal obligations. Particularly notable, from the standpoint of the importance of enterprise-government relations, is the fact that the state has built a viable social safety net. The pension system now consists of a combination of savings, defined contributions, and defined benefits, although it will face severe strains in the future from the ageing of the population, the large increases in pension benefits under Putin, and the system’s vulnerability to volatility in revenues from energy revenues. The makeshift Polanyi-esque mechanisms of social self-preservation that got the country through the crisis conditions of the 1990s are not needed any longer. The modest measures taken in the 2000s to spur the expansion of a property-owning middle class by encouraging savings and investment will help achieve ambitious goals laid out by Medvedev. To the extent that an entrepreneurial class grows, it will reduce income inequality and check some of the more predatory impulses on the part of state officials. Such a path of development, however, would require different political arrangements than the benevolent paternalism and corporatism observed in the more successful regions. President Medvedev is undoubtedly right to declare that such a model would require full democracy, with guaranteed political rights, a competitive party system, accountable government, and an independent judiciary. Against those standards, the actual policy measures that he proposed are woefully inadequate:  They included such reforms as adjusting the size of regional legislatures so that they are proportional to the regional population. The president has said nothing about the large-scale use of fraud and coercion to fix elections and ensure United Russia’s domination, or the repression of political opposition. Despite President Medvedev’s repeated statements to the effect that state corporations are a transitional form whose time has passed, no state corporations have been broken up. Indeed, he appears to be depending on them to carry out his program of modernization. Medvedev’s emphasis on the need for gradualism and persuasion rather than violence in carrying out the modernization agenda rejects both the Stalinist model of “revolution from above” and the radical reforms

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of the early 1990s, but seems tacitly to acknowledge the fact that powerful bureaucratic interests will block any serious effort to reform the economy or political system. The longer-term solution is a new alignment of social and individual incentives through comprehensive reform of political and economic institutions. When market-oriented policy reforms worked in the 1990s and 2000s, it was because they enabled new organized actors to take advantage of new rights. They created institutions that aligned the private self-interest of market actors with the larger social interest in fostering productive behavior. Examples include the new tax code of 2000 that lowered marginal tax rates and induced firms to pay more in taxes and social contributions. In other cases, the establishment of quasiformal institutions, such as regular consultation between governors and major enterprises and between the executive and the heads of party factions in the Duma, enabled actors to solve collective dilemmas. The rule raising the minimum wage to at least the level of the subsistence minimum could only be enforced once both governments and enterprises benefited. Only once the economy had recovered to the point where revenues were expanding steadily were enterprise managers willing to pay (and pay taxes on) higher wages, confident that the higher tax payments would come back in the form of better public services. Where private incentives were at odds with social interests, reforms of formal institutions led to corrupt or distorted outcomes (as was the case with much of the privatization of state enterprises, which produced massive asset stripping in the early phase). When formal institutions are ineffective, actors resort to informal practices to cope with uncertainty and stress. As we saw, there is much anecdotal evidence that, in response to the current economic crisis, reported wages are falling and being replaced with “in the envelope” wage payments and other informal practices  – probably with the result that actual income inequality is rising. This book represents an attempt to explain the apparent anomaly that the most democratically run regions of Russia are also the ones featuring the highest income inequality. It has developed an argument linking the political regime, the character of government-firm relations, and compensation practices on the part of firms. Although the book seeks to explain inequality by taking advantage of regional political variation across the country, it is motivated by a conviction that, over the long term, inequality has a profound impact on the ability of the state to provide public goods. Simply put, we have ample evidence from the comparative literature that societies polarized by differences of wealth and income or ethnicity and race do a worse job of providing the basic services expected of contemporary states in a globalized world:  basic security, equality of legal rights, provision of universal education, health care and infrastructure, and amelioration of extreme differences in social wellbeing. Recent distributive theories of democracy, such as those of Acemoglu and Robinson and of Boix, call attention to the strategic interests of wealthy ruling elites in a polarized society, who are likely to resist democratization in anticipation of its redistributive effects. Therefore, persistent inequality can

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have cumulative effects, where inequality of wealth and inequality of power reinforce one another. A universalistic system of social welfare provision such as that developed in the Soviet state certainly reduces some forms of inequality, specifically those associated with differences in wealth and monetary income. But the heavy use of nonmonetary forms of income, coupled with the reliance on the workplace as a channel for distributing monetary and nonmonetary incomes, countered the apparent egalitarianism of incomes policy. And to the extent that the enterprise-centered system of social support and incomes policy continued into the post-Soviet era, it only further widened the inequality generated by the decompression of money earnings, the inadequacy of state-administered, monetary forms of social transfers, and the extravagant rents captured by those in sectors favored by the integration of the economy into the global marketplace. The post-Soviet state was too weak to replace the Soviet model of income and social policy with one putting enterprises entirely on a marketoriented footing and providing universal, redistributive, and cash-based social protection. The central government, motivated by a mixture of ideological and purely practical considerations, off-loaded responsibility for many of the social obligations the Soviet state had managed to the regions. In assuming them, regional governments turned to the large enterprises to maintain and expand their traditional paternalistic role in providing for social welfare. From the standpoint of economic theory, the arrangements that the more democratic regions adopted under these circumstances were suboptimal because they allowed many of the inefficiences of the Soviet economy to continue. The heavily patrimonial arrangements in the least democratic regional regimes were even worse because they preserved heavy social dependence and poverty. The variation among regional regimes only underscores the relative weakness of the central government in enforcing its reform program while maintaining its responsibility for providing a uniform set of public services and social benefits. However, the regions that featured a higher level of democracy and pluralism did manage the trade-off between market competition and social protection more successfully than the less democratic regions. The evidence shows that overall earnings were higher, social dependency lower, investment higher, and corruption lower in such regions. I interpreted the higher scores on the democracy scale as reflecting a characteristic of such regions close to Dahl’s view of democratic pluralism as the “dispersion of inequality.” In return for the higher autonomy and political voice enjoyed by enterprises in the more pluralistic regions, their managers had greater freedom to set differentiated wage levels for their workforces: Lower-end wages were higher in such regions, but still higher were wages at the upper end. The Soviet state was not a weak state, but its strengths were ill-suited for managing an effective capitalist welfare system, and its weaknesses hampered its ability to adapt to a market-oriented economic environment.39 Its 39

Timothy J. Colton and Stephen Holmes, eds., The State after Communism (Lanham, MD: Rowman & Littlefield, 2006).

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administrative capacity, such as its ability to collect taxes, was weakened further over the course of the transition beginning in the late 1980s. At the end of the 1990s, the newly elected President Putin acknowledged the power of those narrow oligarchic interests in whose hands immense wealth had been concentrated, and substantially reduced tax rates – which under Yeltsin had been stratospheric on paper but largely evaded in practice. Putin did expand the central government’s role in social policy, but the system retained its bias toward universalism over redistribution on both the tax and expenditures sides of the fiscal ledger. At the same time, Russia’s case suggests that in a weak state, where ­government is blocked by political resistance and bureaucratic incompetence and corruption from using the fiscal system to offset earnings differentials through progressive taxation and effective redistribution, dispersed authority over incomes and social benefits restricts predation by the rulers and encourages enterprises to pursue opportunities to benefit from participation in the marketplace. A weak state cannot simultaneously provide an egalitarian, universalistic social welfare regime, political freedom and equality, and pluralistic autonomy for social organizations: It can choose two of these three goals but not all three. If it increases its extractive capacity, it may be able to construct a Bismarckian system of social protection based on strong employers’ and labor associations, but at the expense of political rights. Or it could expand political rights and accept the autonomy of business enterprises and other social organizations, but at the cost of inequality in the sphere of income and welfare. The post-Soviet Russian state moved in the latter direction, both at the level of the central government and in some of the regions where governors built a limited, pluralistic version of democracy based on inclusive, consultative relations with the heads of major enterprises and restrained their own appetites for rents and bribes. The result was widening inequality in incomes. The variation across the regions in economic performance, income levels and structure, and regional regime characteristics that we have tracked here owed in part to the inheritance of the Soviet system, but it also resulted from the breakdown in state administrative capacity that accompanied the transition from communist party rule and central planning. In its weakened condition, the post-Soviet state gave regional governors wide discretion to establish their own styles of government and strategies for coping with the economic crisis. Differences in the levels of democratic pluralism and income inequality therefore reflect the considerable loss in state capacity associated with the regime transition. In turn, the rising gap between rich and poor imperils efforts to build state capacity. But the fact that inequality and pluralism vary in direct proportion suggests a broader conclusion: In a weak state, inequality is the price of pluralism.

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Index

Acemoglu, Daron, 18, 213 Alesina, Alberto, 9, 13, 15–16, 186–187 American Political Science Association, 11 Arkhangelsk oblast, 116–117, 196 arrears, 47, 52, 55, 57, 62, 71, 73–74, 94, 98, 102, 207 Artiakov, Vladimir, 210 Ashwin, Sarah, 40, 53–56 August 1998, financial crisis, 36, 58, 60, 73, 204 AvtoVAZ, 73–74, 100, 103, 105, 209–211 Bartels, Larry M., 6, 15, 20 Bashkortostan, 33, 184, 195 BEEPS (Business Environment and Enterprise Performance Survey), 34, 152–153, 155–157, 159, 170 benefits nonmonetary (in-kind), 24, 35–36, 38, 41–42, 46, 48, 54, 62, 65–66, 75, 81, 88, 138–139, 154, 170–171. See also l’goty social, 26, 35–36, 40–41, 43–44, 46–49, 51, 54–56, 64–65, 84, 94, 137–138, 153, 203, 214–215 Berkowitz, Daniel, xiv, 28, 89, 113, 127, 132, 169 Bialer, Seweryn, 189 Boix, Carles, 15, 18–19, 213 Bollen, Kenneth A., 16 Bourguignon, Francois, 18–19 Brandolini, Andrea, 7–9 Bryansk oblast, 82 Buryatia Republic, 56, 83, 196 capital, human, 1, 4, 19–21, 24, 28, 83, 89, 112–114, 128, 140, 155, 180

capital, physical, 2, 4, 136, 174 Chirikova, Alla, 45, 52, 79, 83, 96, 98–103, 106–107, 170, 203 Chita oblast, 56, 83, 196 Chong, Alberto, 18 Chubais, Anatolii, 29 Clarke, Simon, 23–27, 40, 42–45, 52, 104 collective bargains, 55 Commander, Simon, 23, 25–27, 47, 52 communist regime, 1, 206 corporatism, 54, 60, 106, 135, 192, 202, 204 corruption, xii, 32, 101, 162–163, 169, 172, 201–202, 204, 211, 214–215 Crowley, Stephen, 40, 42–43, 45, 47 Dagestan Republic, 142, 144, 196 Dahl, Robert, 17, 33, 175–176, 192, 214 Darden, Keith, 177 democracy, xi, xii, xiii, 11, 14–19, 21, 32–33, 80, 85, 91, 105, 110, 112, 114–130, 136, 139–142, 144–145, 147–149, 157, 160, 162–169, 172–173, 176–180, 182–188, 190, 192–193, 198–199, 204, 212–215 Duma, State, 63, 65, 88, 106, 205, 213 economic crisis of 72, 206, 211 elections, 32, 34, 59, 79, 84–88, 93, 95–96, 99, 106, 110, 113, 182, 191, 212 employment, xiii, 12, 22, 24–25, 31, 34–36, 38, 40–42, 45–47, 52, 54, 56, 58–59, 63–64, 68, 72–76, 81, 89, 98–99, 102, 104, 120, 127–130, 135–136, 150, 153, 170, 192–193, 199, 203–204, 210 enterprise paternalism, 45, 52–53, 202 Esping-Andersen, Gosta, 3, 20–21 ethnic fractionalization, 186–188

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European Bank for Reconstruction and Development (EBRD), 34, 152 Federal Assembly, 62, 66, 86–88 Federation of Independent Trade Unions of Russia, 53–54, 64 Filtzer, Donald, 44 Friedman, Benjamin M., 15, 17 Frye, Timothy, xiv, 90, 100, 108, 154, 173 funds, extra-budgetary, 50, 95 Gaidar, Egor, 29–30, 83, 92, 205 Gazprom, 99, 206 Gel’man, Vladimir, xiv, 78, 84, 184 Gerry, Christopher J., 27 Gini index, 1, 3, 5–6, 9, 12, 25, 116 Glaeser, Edward, 9, 13, 15, 187 globalization, 2–4, 13, 17–18 Gorbachev, Mikhail, 29–30, 35, 44, 53, 84–85, 94, 177, 189–190 Goryachev, Yurii, 94–96, 176 governors, 30, 46, 59–60, 76–77, 80, 82–83, 85–88, 90–92, 96, 99, 105–108, 110, 150, 153–154, 156, 170, 173, 176, 182–183, 192, 194, 198–200, 204, 206, 213, 215 Gradstein, Mark, 18–19, 26 gross regional production (GRP), 37, 117, 128, 169, 178 Grzymala-Busse, Anna, 177 Hacker, Jacob, 5, 15, 20 Haggard, Stephan, 40–41, 174 Hale, Henry, xiv, 99, 183–184 Herrera, Yoshiko, 175 Hough, Jerry, 184, 190 Houle, Christian, 15, 17 Huntington, Samuel, 14 incomes, real, 29, 124, 208, 212 inequality, income, xi, xii, xiii, xiv–2, 4–7, 9–16, 18, 20–27, 31–33, 38, 42, 52, 75, 110, 112, 116, 126–128, 136, 170, 202, 212–213, 215 inequality, wage, 4, 23, 26, 31 inflation, price, 25, 46, 123 informality, 36, 38, 47, 52, 74–75, 107, 207, 213 Inkeles, Alex, 16 institutions, political, 2 Ivanovo oblast, 82, 195 Iversen, Torben, 3, 20–21

Jackman, Robert W., 16 Jackson, John E., 28, 127 Justman, Moshe, 18–19 Kaliningrad oblast, 70, 96–97, 99, 176, 182, 196, 200 Kalmykia, 120, 195 Kalmykia Republic, 33 Karachaevo-Cherkessia Republic, 122 Karelia, 184, 196 Karelia Republic, 33 Kathryn Stoner-Weiss Kathryn, 30, 77–78, 99, 154, 175, 197 Kaufman, Robert, 17–18, 40–41, 174 Keane, Michael P., 127 Krasnoyarsk krai, 82, 116, 196 Kursk oblast, 116, 157–158, 162, 195 Kuznets curve, political, 18–19 l’goty (nonmonetary benefits), 48, 65, 88. See also nonmonetary (in-kind) Labor Code, 54–56, 62–63, 69–70 labor market, xiv, 3, 20–21, 26, 46, 58, 75, 144, 146, 150–151, 202, 205, 207 Lankina, Tomila, 78, 80, 172, 177, 183 Lapina, Natalia, 79, 83, 96, 98–103, 106–107, 170 Leningrad oblast, 85, 157–158, 176, 196 Levada Center, 66 Li, Quan, 18 Lipset, Seymour Martin, 14, 17 Londregan, John B., 14, 17 Lukoil, 98–99, 101 Luong, Pauline Jones, 50, 58–61, 108, 205 Matsuzato, Kimitaka, 79, 184 McCarty, Nolan, 6, 16, 20 Medvedev, Dmitrii, xiv, 59, 74, 76, 201–203, 206, 212 Meltzer, Allan H., 19–20 Mickiewicz, Tomasz M., 27–28 middle class, xiv, 3, 10–11, 14, 17–19, 21, 189, 212 Milanovic, Branko, 2–3, 25–26, 36, 47–48, 51 Mitchneck, Beth, 79, 101, 155 modernization, 28, 61, 173–175, 177, 180, 182, 186–187, 189–190, 193–194, 198–199, 201, 207, 212 Moore, Barrington, 190 Moscow, city, xii, 14, 32–33, 37–38, 54, 56–57, 61, 73–74, 79–80, 82–86, 88–89, 92–93, 98–102, 104, 106, 111–122,

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Index 124–128, 130–131, 133, 141, 157–158, 176, 181, 183–184, 186–188, 190, 195, 207, 209–211, 213 Muller, Edward N., 15–17 Nazdratenko, Evgenii, 91–93, 95–96 Nizhnii Novgorod oblast, 56, 157, 161, 196 NOBUS survey, 12, 34, 48–49, 51, 135–138, 146, 151 nomenklatura system, 190 North Caucasus, 33, 56, 157 Novosibirsk oblast, 122, 157–158, 161, 196 Obama, Barack, 11 oligarchs, 30, 60–61, 100–101, 106, 205 Orel oblast, 138, 140, 148, 195 Organization of Economic Cooperation and Development, 75 patrimonialism, 175, 200 Pension Fund, 50, 63, 67, 69 pensions, xii, 18, 26, 36, 38–40, 42, 46–47, 50–52, 57, 62–63, 67–69, 71–74, 88, 138, 206, 208, 210, 212 Perm’ krai, 59, 82, 97–103, 105, 120, 182, 198 Petrov, Nikolai, xiv, 32, 77–78, 80 Pierson, Paul, 5, 15, 20 Piketty, Thomas, 5 pluralism, 32–33, 106, 109, 156, 175, 180, 191–194, 198–200, 204, 214–215 Polanyi, Karl, 46, 60, 75, 212 polyarchy, 33, 81 Pontusson, Jonas, 3, 13, 20–21 Poole, Keith T., 6, 14, 16–17, 20 Posner, Daniel N., 15 poverty, xii–2, 7, 13, 15, 22, 24–25, 31–34, 37–38, 47, 52, 82, 105, 110, 112–113, 120–121, 127–128, 136, 139, 147, 150– 151, 171, 199, 202, 204–205, 210, 214 Prasad, Eswar S., 127 Primakov, Evgenii, 58–61, 76, 173, 205 Primorsk krai, 91–92, 99, 195 privatization, xii, 25, 46, 50, 90, 92, 98–99, 103, 107, 115, 121, 127, 132, 157, 169, 173, 213 property rights, xiii, 15, 128–129, 136, 156, 159, 162, 169, 173, 190, 198 Przeworski, Adam, 17, 173–174 Putin, Vladimir, xiv, 10, 30, 34, 36, 40, 48, 56, 58–65, 67–69, 72–74, 76–78, 80, 82–83, 88, 93–94, 96–97, 100, 105–106, 108, 136, 173, 176–177, 183–184, 191, 205–210, 212, 215

Quinlan, Dan, 16–17 redistribution, xi, xii, xiii, xiv, 2, 6, 9, 12–14, 16, 19–21, 23, 36, 38, 40, 50–52, 79–80, 111, 139, 150–151, 170, 173, 178, 185, 199, 206, 213–215 rents, xii, 23–24, 32, 76, 79–80, 92, 109, 124, 130, 150, 155, 169, 206, 214–215 Reuveny, Rafael, 18 Richard, Scott F., 19–20 Robinson, James, 18, 213 Rodrik, Dani, 3–4, 17 Rose, Richard, 58, 197, 207 Rosenthal, Howard, 6, 16, 20 Rosneft’, 205 Ross, Michael L., 17, 211 Rosstat (Federal Service for State Statistics), 23, 42, 69, 146–147, 208 Rostov oblast, 157, 195 Rubinson, Richard, 16–17 Rueda, David, 13, 20–21 Russian Union of Industrialists and Entrepreneurs, 59–60, 67, 98, 102, 106, 191, 205, 207 Saez, Emmanuel, 5 Samara oblast, 45, 56, 59, 73, 78, 82, 97, 100, 103–107, 140, 157–158, 162, 175–176, 182, 196, 209–211 Schneider, Ben Ross, 192 setka (state wage scale), 43 shadow economy, 51, 57–58 Shaimiev, Mintimir, 79, 88, 176 Shlapentokh, Vladimir, 190 Shleifer, Andrei, 29, 31, 90, 154–155, 173, 186 Silver, Brian, 189–190 Simpson, Miles, 18 Sirowy, Larry, 16 small business development, 127–128, 132, 211 small enterprises, 127, 132, 204 Smeeding, Timothy M., 7–9, 12 social contract, 35, 40, 150 social dependency, xiii, 22, 33–34, 82, 109–110, 112, 118, 120–122, 127, 136, 147, 150, 152, 156, 199, 202, 214 social insurance, 41, 53–54, 57, 61–63, 67, 72, 74, 88 social partnership, 54, 64 social welfare, 2, 22, 24, 34, 36, 38, 41, 45–46, 48, 50, 52, 56, 59–60, 62, 75–76, 81–82, 91, 105, 124, 136, 138, 153, 169–171, 205, 214–215

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Soskice, David, 3, 20–21 St. Petersburg, 33, 37, 71, 82, 85, 111–115, 118–122, 124–126, 157, 160–161, 176, 181, 183–184, 186–188, 195 stabilization, 25, 135, 208 stabilization fund, 73 state capacity, 30, 175, 215 state enterprises, 25–26, 50, 52, 55, 58, 84, 105, 107, 191, 204, 213 Stephens, John, 20–21 Stoner-Weiss, Kathryn, 78, 82, 84, 96, 100–101, 109, 175 subsistence minimum, 14, 29, 38–39, 47, 56, 64, 69–71, 74, 114–115, 117–120, 123, 125, 131–132, 139–140, 143, 147, 169, 213 Summers, Larry, 11 Surkov, Vladislav, 11 Sverdlovsk oblast, 33, 59, 82, 142, 148, 157–158, 175, 196, 198 Tatarstan Republic, 79, 82, 85, 88, 176, 184, 195 tax income, 12, 57–58, 62–63, 117 mineral extraction, 62 profit, 57, 150 single social, 59, 61–63 value-added (VAT), 59, 62 tax code, 61–63, 213 tax compliance, 57, 60–63, 172, 205 territories, federal, 2 Titkov, Alexei, 32 Titov, Konstantin, 105–106, 176 Tiumen’ oblast, 82, 141, 143 Togliatti (city), 74, 103, 209–211 Tolstopiatenko, Andrei, 23, 25–26, 47, 52 trade unions, 12, 34, 53–55, 62, 70, 73, 197 transition, market, xi–1, 3–4, 10–11, 17, 22–26, 28, 31–35, 38, 46, 51, 76, 80, 82,

91, 102–104, 107, 109, 112–113, 127–129, 153–155, 161, 170, 173–174, 177–178, 187, 191, 193, 199, 203–204, 215 tripartite agreements, 54–56, 70–71 tripartite commissions, 54 Tuva Republic, 14, 56, 83, 116–117, 195 Udmurtia Republic, 79, 155 Ulyanovsk oblast, 94–95, 99, 107, 120, 176, 182, 195 unemployment, xii–1, 6, 24–26, 37, 48, 51–52, 56–58, 73, 104, 118, 120–121, 129, 135, 138, 154, 203, 207–208, 210 United Russia party, 10, 95, 106, 191, 206, 208, 212 United States, xi–1, 4–13, 20, 23, 42, 74, 155, 196, 199, 202, 211 Verdier, Thierry, 18–19 Voronezh oblast, 157, 195 wage scale, 25, 36, 43 wage, minimum, 2, 9, 32, 36, 47, 55–56, 62, 64, 69–71, 135–136, 150, 213 wages, nominal, 26 wages, real, 26, 39, 71, 118, 120, 122 Weinthal, Erika, 50, 58–61, 108, 205 White, Stephen, 11–12, 86, 108, 190 World Bank, xi, xii, 3, 9, 13, 16, 23–24, 26, 34, 36, 47–48, 51, 100, 108, 130–131, 136–137, 152 Yaroslavl’ oblast, 59, 78–79, 97, 101–103, 105, 155, 176, 182, 198 Yeltsin, Boris, 35, 40, 48, 54, 58–59, 61, 84–88, 91, 93–94, 96, 98, 113–114, 130, 153, 177, 199, 212, 215 Yemtsov, Ruslan, 23–25, 47, 52 Ziblatt, Daniel, 14–15

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