Download Post-crisis Economic Performance in Russia: Regional Aspects

Post-crisis Economic Performance in Russia: Regional Aspects
Evgeny Gavrilenkov1
Higher School of Economics
Summary
The paper discusses economic performance in Russia and attempts to identify key
problems in the reform agenda. It looks as if major factors that contributed to rapid
growth of the Russian economy immediately after the August 1998 crisis are well
known. Those are devaluation that resulted in import substitution and pushed Russia's
exports, low domestic energy prices that were not allowed to grow as fast as inflation,
and high world market oil price that contributed to substantial currency inflows in
Russia. Thus investments in the post crisis performance play a key role not only with
respect to their contribution to GDP growth, but also in the sense that they became a
driving force, or a catalyst, of economic growth in Russia in a broader sense. Most of
investments are allocated in the energy sector and some other export oriented sectors.
Exporters increase investment demand thus puling profits and wages manufacturing
industries that produce investment goods and some related sectors. Then with some lag
consumer demand goes up thus stimulating production in a broader range of industries.
In fact Russia's growth was driven by the already established big companies, while
new businesses were not emerging actively. In general barriers to entry remain high,
but they differ much by regions. Respectively regions' economic performance differed as
well. Given that establishing legal framework is not yet accomplished in Russia the
country's economic system was evolving mostly due to natural reasons. Such evolution
resulted in the emergence of a limited number of strong vertically integrated
companies taking control over the large part of the economy. Those conglomerates
penetrated the regions by acquiring other companies. Such economic system may
deliver high growth rates, but growth may be not stable. Strong "cooperation" (in fact
corruption) between businesses and local authorities looks natural in such case. Thus it
is also natural that the Russian authorities provide the majority of other economic
agents with very poor services. High barrier to entry business, corrupt judicial system,
poor property right protection, lack of transparency in decision making, etc., result in
Errors and misjudgments that might be found in this paper are solely those of the
author. None of the institutions the author belongs to is responsible for them. The
same pertains to views and ideas expressed in the paper.
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that economic agents largely avoid paying taxes. New businesses do not grow as fast as
they could. Although the government was able to stabilize the budget and the economy
was able to deliver rapid growth in recent years it does not mean yet that all problems
are solved. Russia still lacks efficient market institutions and thus growth is not
sustainable. Situation differs much by regions. The already established businesses tend
to merge with the authorities in order to be able to roll on. Weak and corrupt
administration is a result. Thus one comes back to the problem of low quality of the
above mentioned services which should be provided by the state. To break this vicious
circle one should urge comprehensive public sector reform. Regional data prove that
the better the institutions are the better for the economy. In the highly regulated
regions one my see higher unemployment, smaller number of new businesses, and
human capital outflows as a result.
Reforms and economic performance in 1999-2001
As it follows from regular statistics published by the Russian Central Committee
on Statistics (Goskomstat) the country's GDP increased about 21 percent and
industrial output increased more than 30 percent over the period of 1999-20012. So, at
the end of 2001 seasonally adjusted GDP has reached the level of the late 1993 as a
result. The 2000 performance was strong as never before since the 1960es. Really, GDP
increased 9,0 percent, industrial output grew over 10 percent and fixed investments
grew over 17 percent in 2000. Rapid growth of investments was one of the most
impressing results of fast crisis recovery. Consumption was also growing steadily in
2000, so that retail sales expanded 8,9 percent that was well in the wake of real
disposable income growth. They increased 9,1 percent in 2000 relative to 1999. The
2001 performance was also quite promising. GDP grew about 5 percent and investment
picked up by some 9 percent relative to 2000.
Data on the 2001 gross regional products is not available yet, nevertheless, one
may assume that differences among regions with respect to growth rates were
substantial. Really growth rates in industry, construction, agriculture varied across
Russia's regions dramatically. It is seen for instance that with respect to industrial
output the highest growth rate was delivered by the Rostov oblast (32,8 percent), which
is well above Russia's average (4,9 percent), while the worst performance was seen in
Kirov oblast (-11,5 percent). It is also important that growth rates were high in those
In April 2001 and then in January 2002 Goskomstat substantially revised national
accounts for 1998-2000 upwards.
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regions, which were able to increase production for domestic markets. For instance in
the case of Rostov oblast the highest growth rates were recorded in the light and food
industries and construction materials. Although in some cases growth was still largely
driven by exports (like in Tomsk oblast, where gas and oil extraction increased by 43,5
and 10 percent respectively). This paper attempts to analyze briefly major causes for
those differences from various angles: economic policies pursued by regional authorities,
natural evolution of the regional economic systems, external factors, etc.
It looks as if major factors that contributed to rapid growth of the Russian economy
immediately after the August 1998 crisis are well known. Those are devaluation that
resulted in import substitution and pushed Russia's exports, low domestic energy
prices that were not allowed to grow as fast as inflation, and high world market oil
price that contributed to substantial currency inflows in Russia. The 1998 devaluation
contributed to a substantial decline in household incomes that was compensated by
respective increase in corporate incomes thus contributing to expansion of investments
in fixed capital.
It should be emphasized, however, that in spite of high growth rates of investment
Russian corporate sector didn't fully use an opportunity to invest. The Russian
economy delivered high growth rates against the background of continuous capital
outflows that roughly accounted to a nearly one tenth of GDP both in 1999 an 2000.
This may witness that fast crisis recovery that took place in Russia in 1999-2000
occurred mostly through natural reasons, such as the above mentioned devaluation of
the ruble and high oil price and some other, but not as a result of the government
activity, 3 though the 2001 performance can be viewed from a bit different angle, since
the government plan was largely in action. The plan was aimed at reducing tax burden,
deregulation of the economy, stronger competition policy, etc., i.e. at improving the
business climate. Limiting the authority of the regional leader was another element of
the strategy. In 2000 the Russian president announced the need to reform the
legislative branch of the power, in particular the Federation Council. In 2001 governors
in the Federation council were replaced by special representatives, namely the
appointed senators. At the same time the new tax code and budgetary code were
introduced in 2001, which resulted in substantial reallocation of incomes (Table 1). As
seen from this table the share of the federal budget in total incomes grew substantially
Even despite that long-term economic strategy was prepared by the government in
the mid-2000. In fact it looks as if strategy implementation was lagging well behind the
release of the strategy.
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over the last two years. Thus the federal government attempted to reduce the influence
of local authorities not only from political standpoint, but economically as well.
Table 1. Allocation of Revenues by Federal and Regional Budgets in 1999-2001
Federal budget
1999
51%
2000
55%
2001
59%
Regional budgets
49%
45%
41%
Source: Ministry of Finance.
Political reform was aimed at establishing more unified legal system with respect
to eliminating major controversies between federal and regional regulations. The
restoration of the so-called power vertical was another objective of political reform
aimed at reducing corruption wide-spread in Russia's regions. In fact the improvement
of the business climate widely across all Russia's regions was the major objective
behind the reform of political system.
At the same time one may scarcely count on that that target was met, although the
recovery of investment in 2000-2001 was impressive. Most likely that it occurred not
due to a somewhat radical improvement of the business climate, but should be
considered as a side effect resulting from high corporate profits that were generated
mostly in the export oriented sectors. Really, some other indications prove that
business climate in Russia was not perfect yet. In 2000 foreign direct investments in
Russia ($2,7 bn.) decreased relative to the already low level that was recorded in 1999.
In contrast legal direct investments from Russia abroad ($3,2 bn) grew substantially in
2000 and for the first time exceeded foreign direct investments in Russia. In fact
Russia became net exporter of legal direct investments. This didn't change much in
2001: Russian companies continued exporting capital, foreign direct investments didn't
increase much, so that Russia remained next exporter of legal investments both in
2000 and 2001.
It is also seen that in spite of high growth rates in 1999-2001 the number of small
businesses, employment in that sector and output produced by small businesses were
essentially invariable, although some minor fluctuations could be seen. Moreover, in
2001 small business was shrinking: the number of small companies decreased by
nearly 4 percent in January-September, employment decreased by 3 percent over the
same period. Though aggregated data related to small businesses should be of course
treated with caution. Since there was a lot of evidence that in the past years a number
of small businesses were established just to make a singe financial transaction, namely
to transfer money to another company, which in turn transferred it further and finally
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money settled offshore. There is a perception that in 2000-2001 a number of such
companies was not growing as fast as before. Nevertheless most likely that real small
businesses producing some real output were not booming both in 2000 and 2001. This
is somewhat different from crisis recoveries in many other countries: growth in the
early transition in the Eastern Europe was largely driven by entrepreneurial activity
and rapidly growing new companies. In contrast, in the post-crisis Russia the number
of bureaucrats of various levels was growing steadily. Moreover, that was happening
throughout the 1990-es (chart 1). This chart shows growing employment in public
administration (federal, regional, municipal levels) against the background of
shrinking Russia's population. The impact of growing number of bureaucrats (largely
corrupt and incompetent) on regional economies will be illustrated below.
Chart 1. Employment in the Public Administration and Russia's Population in 1994-2000
148500
1200
148000
1150
147500
147000
1100
146500
1050
146000
145500
1000
145000
144500
950
1994
1995
1996
1997
Population, th. people (left axis)
Employment in public administration, th. people (right axis)
Source: Goskomstat
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1998
1999
2000
Institutional changes and growth
As was seen, economic growth in Russia in 1999-2001 occurred against the
background of growing employment in public administration, which in principle might
have pointing on that law enforcement in the country was in progress. The paper,
however, argues that was not the case yet. Really, one of the major outcomes that
follow from the revised growth figures is that growth acceleration in 2000 was not as
rapid as was considered prior Goskomstat's revisions of national accounts for 19982000. In fact the difference between 9,0 percent growth in 2000 and 5,4 percent growth
in 1999 (which are the revised growth figures) is a bit less important relative to the
case of 7,7 and 3,2 growth rates in 2000 and 1999 (old data). It means that probably the
impact of high oil price on economic performance was initially slightly mistreated.
External factors are really important for Russia, but this only one side of the coin. It
could be the case that rapid growth in 2000 originated not from the external factors
only, but largely due to the internal reasons as well, due to the evolution of the entire
economic system in the first order. In fact, it is known that real exchange rate after
devaluation of 1998 dropped back to the level of late 1994-early 1995. It means that
both at that time and after the 1998 crisis Russian producers could enjoy the same
degree of protection from foreign competition. Though in 1994-1995 the economy was
still shrinking, while after 1998 it began growing. So it may indicate on that at least
some changes on the micro level as well as in the entire economic system took place:
more companies learned how to make profits in the market environment, more
investments began flowing into the economy, a more efficient, (but obviously not
perfect), financial intermediation developed.
The need to reallocate "excessive" financial resources that are generated by the
export-oriented sectors to the rest of the economy is one of the key problems for Russia.
Exporters are able to accumulate "excessive" profits largely due to the still existing
distorted relative prices, including undervalued ruble, cheap energy, cheap labor, etc.
Such price distortions result in some sort of hidden subsidization, so that exporters
enjoy low costs domestically and high profits from foreign trade. Since institutions in
Russia are still unable to "process" all the value added generated in the domestic
economy, substantial part of those profits goes offshore. Weak institutions, such as lack
of financial intermediation, poor property rights guarantees, frequent violations of the
minority shareholders' rights, high barriers to entry the market, etc. are not attractive
for the investors. Actually the government attempted to solve those problems in its
long-term strategy, but this appears to be rather long lasting process and until this is
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done confidence will remain low and investment risks will remain relatively high in
Russia. Until the ideal institutional system designed in the government strategy is in
place, economic system may evolve in different ways. Poor institutional system,
frequent changes in the "rules of the game" was the major impediment for growth in
the 1990-es.
Actually the key problem of reallocating of excessive value added from the
exporters to the rest of the economy should be somehow managed. Simple
administrative reallocation through higher taxation of the exporters should be
considered as one of the theoretically acceptable ways. To some extent it was taking
place in the past years, when the government collected more taxes through higher
export duties. It was also the case in the past decades and low efficiency of such
mechanism is well known. More recently it could be also seen that the more taxes the
government was able to collect, the more they spent to finance domestic economy. High
inflation in the early 2001 was another result of such administrative reallocation of the
value added. As always there was an illusion that the more they pay to pensioners and
those employed in the public sector (as usual regardless economic situation) the better
for the economy it would be. Too rapid increase in public spending in the background of
temporary slow down of growth that was the case in the fourth quarter of 2000 resulted
in a higher than expected inflation in 2001.
Another way of reallocating value added could be associated with the reallocation
of property. There were indications that Gazprom 4 acquired a great number of
agricultural lands and food processing enterprises in Southern Russia, oil companies
were also taking control over manufacturing sector of the Russian economy. It has been
reported that Russian aluminum giant “Siberian Aluminum” has taken control over a
large number of manufacturers in the machine building sector, including car
manufacturers and companies producing heavy machines for road construction. That
was also the case with “Northern Steel” which was rapidly expanding their business in
the machine building industry and in some other manufacturing sectors. In the fall of
2001 “Norilsknickel”, a world largest producer of nickel and other non-ferrous metals
announced plans to invest in agricu lture and food processing. There have been a
number of publications in the media witnessing that Russian exporters began investing
more broadly across the economy 5, thus taking control over regional economies. In the
Gas monopoly, which was frequently criticized for inefficient corporate governance,
nevertheless remains the biggest Russian company
5 To some extent such ownership concentration of was going on already at the early in
mid 1990-es, so that the term FIGs (Financial-Industrial Groups) was already widely
used in the literature (see for instance World Bank report "Dismantling Russia's
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short and medium run such evolution of the economic system may contribute to a
substantial improvement of the macro indicators: high growth rates are achievable
both in the case of investments and consumption. This should happen at the expense of
shrinking net exports so that capital flight is expected to go down.
To some extent evolution towards this direction will be similar to the Asian type of
economy, South Korean, for instance. Finally the economy may be divided by a dozen or
two big Russian "chaebols", vertically integrated conglomerates, that will control the
bulk of the country's assets. It happened not only in Korea, but in Philippines, or
Indonesia where fifteen richest families took over from 60 to 70 percent of the country's
assets. It looks as if Russian economic system somehow evolves largely towards this
type of organizational structure. By all means there are some natural differences
between the emerging Russian type chaebols and the authentic Korean ones. In the
case of Russia the emergence of those vertically integrated companies can be attributed
(at least at the initial stage) to a natural evolution of the country’s economic system,
while in Korea’s chaebolization was purposefully shaped along with other policies
carried out by president Park.
The Russian Ministry of Railways, a natural monopoly, is in fact not a pure
ministry but another example of such chaebol. Apart from delivering transportation
services 6 they developed some other businesses, especially due to that in the past years
it was easy to obtain tax exemptions and other privileges for the government agency.
Since Railways ministry was setting prices, they charged exporters much more than
other companies. Benefiting from the foreign trade Railways ministry accumulated
substantial financial resources. So, as other conglomerates they started investing more
broadly. But even in this case one can not say that establishing such a chaebol was the
government objective.
Too close ties with the government is one of the major drawbacks of such system7.
It means lack of transparency in decision making, less competition (both domestic and
Nonpayments System. Creating Conditions for Growth" prepared by Pinto, Drebentsov,
Morozov (1998). Although economy at that time was shrinking, fixed investments were
not growing and thus FIGs could not be treated as substitutes to financial
intermediators. The process of the emergence of large vertically integrated companies
substantially intensified after the 1998 crisis.
6 National railways is a government property
7 Russia’s unwillingness to follow OPEC and reduce oil production in 2001 in order to
keep prices high apart from political reasons my indicate that the government was
taking into account Russian oil companies’ strategic interests, even despite that low oil
price may complicate budget execution and debt service in particular. Since Russian oil
companies are interested in increasing their market shares, since they have
accumulated enough resources in the past years, they would probably prefer staying
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foreign), more protection and more corruption, etc. To some extent such system is
similar to the administrative type system, where both political and business elite have
joint interests and cooperate closely. Such system does not need developed banking
sector and financial markets since reallocation of financial resources could be arranged
mostly within those vertically integrated chaebols. In the case of Russia each vertically
integrated conglomerate is closely tied to one or several affiliated banks. Gazprom, who
established Gazprombank8 is an example. Lack of transparency in most of those
Russian chaebols is a result and thus strong reluctance in accepting international
accounting standards by Russia's corporate sector looks natural.
Aside from potential instability of growth underdeveloped financial sector may
contribute to some other problems. In particular since the economic system with
dominant role of a limited number of large conglomerates usually does not offer
attractive financial instruments it may be rather difficult to accumulate private
savings and carry out pension reform as was targeted by the Russian government. In
addition international experience proved that big vertically integrated conglomerates
suffer from relatively poor corporate governance: there is a lot of cross-subsidization
cases, and many other flaws. Though it may appear that in the short and medium run
such system may deliver rapid success and give birth to various illusions among policy
makers. So, it is important that the authorities should fully be aware of long -term
problems that may be produced by the chaebol-based system.
Third way of the reallocation of the value added from a limited number of
exporters to the re st of the economy is associated with institutional and structural
reforms. This way is associated with the adjustment of relative prices in the first order.
with low oil price and smaller profits in the short run, but expand their presence on the
market in the long run.
8 It is worth mentioning that some of the Russian chaebols emerged from the real
sector companies. Gazprom, Lukoil are such examples – from the very beginning oil or
gas business was the major for their founders. In contrast some chaebols emerged from
the financial sector. Oil company Yukos was established by the MENATEP banking
group which failed during the 1998 crisis but was able to shift most of its assets to the
oil business. Norilsknickel went under the control of the UNEXIMBANK during the
1995 “loans for shares” deals, aimed at supporting Mr.Yeltsin during the 1996 election.
UNEXIMBANK also failed after 1998 crisis, but most of the assets has been preserved
in the non-ferrous metals business. It is quite indicative that in the case of Russia
banking sector emerged rapidly at the very initial stage of transformation. Due to easy
start up of the banking business in the early 1995 most of the most initiative
businessmen turned to banking business since Central Bank of Russia in 1992-1993
provided commercial banks with credits at substantially negative interest rates. This is
somewhat different from Poland, where the most smart and initiative people started
their business either with trade either with production of goods.
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Distorted relative price structure allowed some sectors to be in fact subsidized by
others. In particular non-ferrous metallurgy was heavily subsidized by the power
industry. Too low electricity tariffs (1,5 cents per one kWh as an average for 2000 and
1,7 cents for 2001) resulted in that several energy intensive industries enjoyed low
costs in Russia and high profits outside. It appears that in fact cheap energy is a
competitive advantage for some selected sectors of the economy, but is a disadvantage
for the economy in general.
Rise in energy prices 9 would enforce energy intensive exporters of semi-finished
products, such as ferrous and non-ferrous metals, chemical products and some other to
start considering energy saving, cost reduction, modernization as key steps aimed at
long awaited restructuring. It means that bigger part of the value added which is now
generated by those exporters should be reallocated to manufacturing on market
principles, namely through increasing domestic demand for more efficient technologies,
machines and equipment.
Actually the Russian government adopted restructuring plans for some natural
monopolies, for RAO UES 10 in particular, which assumes steady relative price
adjustments. It could be shown that rise in the electricity (and respectively gas) prices
will inevitably require further structural reforms, in the transportation sector in
particular 11 . Housing sector reform should be another priority. Those reforms will
require solving some technical problems, such as how to create the mechanism of
targeted subsidization of the poorest part of population, for instance, but they are
solvable. Present peculiarities when the richest part of population that occupies bigger
apartments and consumes more heat and electricity and is more heavily subsidized by
the state through low energy prices should be abolished. This is similar to
subsidization of the metal exporters.
We do not argue for the immediate rise of the domestic energy pieces up to
international levels
10 United Energy System, a joint stock company, a monopoly in the power industry
11 From macroeconomic point of view elimination of cross-subsidization in transport
sector is necessary in order to achieve the needed gap between electricity prices and
the rest of them. If rise in electricity tariffs will result in respective rise in cargo
transportation tariffs, then the chain inflation will spread somehow across other
sectors finally resulting in higher consumer prices for the bulk of products. That was
the usual case in Russia in the past years. Rising passenger transportation tariffs will
allow transportation companies to keep profits unchanged, and at the same time costpush inflation will not spread across the economy. The same is true for housing sector.
This will inevitably change the structure of household expenditures, but in the right
way.
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In fact it appears that the evolution of the Russian economic system will go on in
between of the three options described above, but in the short run chaebolization is the
most likely way. To cultivate other mechanisms of the developed market economy the
government should urge structural reforms, which are closely associated with the
substantial changes in efficiency of production, or, more generally, factor productivity.
On some regional aspects of economic performance
Penetration of Russia's vertically integrated conglomerates into regional economies
was somehow going along with growing number of bureaucrats. Russian Goskomstat
provides with the data on employment in the public administration by Russia's regions.
It can be seen from those data that the number of bureaucrats (measured, say, per
1000 people) vary substantially across Russia. This figure is rather small in Moscow
and Moscow oblast, in St.Petersburgh and Leningradskaya oblast, while in some
regions (like autonomous okrugs, i.e. in the national based administrative units - parts
of Russia's oblasts or republics) this figure is more than 10 times higher. There are
some close relationships between the number of bureaucrats-"regulators" in the regions,
namely the number of people employed in public administration per 1000 residents of
the region, and economic performance.
Chart 2 shows that there is some clear correlation between the number o
bureaucrats and development of small businesses. So, the higher the concentration of
the regional bureaucracy the smaller the number of small businesses operating in the
region. Chart 3 shows that the higher the concentration of bureaucrats in the region,
the higher the unemployment is. Chart 4 indicates on that there is more foreign direct
investment coming in the regions with low concentration of bureaucracy. Finally, Chart
5 shows that people tend to move from highly regulated regions to the regions where
barriers to entry are lower.
Of course some other factors determining unemployment, capital inflows,
migration, etc. in the regions can be determined. It is also true that those charts do not
say much about the causation of the phenomenon under consideration, i.e. they do not
prove clearly that unemployment is high only due to that the economy is over-regulated.
Really, by all means, high unemployment in less regulated Dagestan, Ingushetia,
Northern Osetia is largely caused by Chechenian war. Unemployment is modest in
highly regulated Chukotski autonomous okrug, but it is also true that unemployed can
not survive in that climate. The have to move away. Those regions are exemptions,
however.
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Chart 2. Concentration of the Bureaucracy in the Regions and Small Businesses
500
400
350
300
250
200
150
100
50
0
4
6
8
10
12
14
16
Employed in the public administration per thousand people
Chart 3. Concentration of Bureaucracy and Unemployment by Regions
35
Ingushetia
30
North Osetia
Dahestan
25
Unemployment (in percent)
One small enterprise per number of people in the region
450
20
15
10
Chukotka
5
0
0
5
10
15
20
Employment in public administration (per 1000 people)
12
25
30
Chart 4. Concentration of Bureaucracy and Foreign Direct Investment by Regions
500
FDI (US dollars per person)
400
300
200
100
0
0
5
10
15
20
25
30
25
30
-100
Employed in public administration (per 1000 population)
Chart 5. Concentration of Bureaucracy and Migration by Regions
70000
60000
50000
Net migration, persons
40000
30000
20000
10000
0
0
5
10
15
20
-10000
-20000
-30000
Employed in public administration per 1000 people
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It may also be the case that employment in the public administration is some form
of social support, or some sort of public works, in the regions where unemployment is
high to do some other reasons. Nevertheless the above charts show some average
picture and combination of those charts clearly points on that in the case of less
regulated regions business climate is better and people tend to migrate in those regions
from those where bureaucratic burden is too hard (recall Chart 5).
Charts 2-5 are based on the 2000 data. The 2001 figures are not available yet.
Although it is likely that in 2001 employment in public administration should have
grown even more given that as it follows from the budget execution figures, nominal
expenditures on public administration increased more than 52 percent relative to 2000.
Since both inflation and GDP deflator in 2001 were well below this figure (18 to 19
percent) it means that in real terms those expenditures grew roughly by one third. The
government has not yet started administrative reform and there were no signs of job
cuts and wage increases in the public administration sector. Thus one might expect
that the number of bureaucrats in 2001 grew more. This should have happened in the
majority of the regions. It is also notable that the number of public administration
employees grew mostly on the regional level, while of the federal level it remained
fairly stable.
No doubts Russia, as any other country, needs bureaucracy. It is important that it
needs clean and competent bureaucracy, but if it is not competent it is better to limit
its influence. Thus deregulation of the economy is crucial. Excessive number of corrupt
bureaucrats and thus poor quality of the institutions that developed in Russia may be
seen as a major impediment for sustainable economic growth. In fact, modern Russia
lives with bureaucratic traditions established in the early 1930-es under Stalin's
regime. Since at that time wrong decision could lead to jail or even execution, the
bureaucracy invented the procedure of multiple consensus. It means that one could not
release a document without approval by other bureaucrats, thus sharing responsibility
with others. This procedure was developed and polished more in later decades. So, in
modern Russia, as was also in the past decades, none is personally responsible for
decision making. As a result, in a great a number of laws and other regulations
prepared by reformers the essence was emasculated during debates in the government
and in the parliament. For instance, the essence of key elements of reforms, such as
Labor code, Tax code, and other regulations was changed dramatically after those
discussions. Initially Labor code was thought as an instrument aimed at developing
labor mobility and labor markets. Though its final version appeared to be rather
conservative in a sense that it is much more in favor of employees and is much more
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costly for the employers than previous Labor code adopted in 1971 in a completely
different economic system. There are some other examples witnessing that initial
drafts of liberal laws were replaced by some more "polished" ones.
In addition it should be mentioned that, evolving legal system appears to be rather
inconsistent and controversial. Some of the basic laws do contradict each other thus
creating uncertainty and leaving the room for the of-force structures to pursue rather
selective policies. This sends wrong signals to businesses and stays far from the "rule of
law" concept. Uncertainty varies across regions depending on additional regional
regulations. So, the above selected indicator - concentration of bureaucrats of various
levels per 1000 people inhabiting a region - may serve as some proxy of investment
climate. It suits well empirical evidence: in the regions with the lowest value of that
indicator, such as Moscow and Moscow obla st, St.Petersburg and Leningradskaya
oblast, Krasnodarski krai, Rostovskaya, Samarskaya and Cheliabinskaya oblasts the
number of small businesses per 1000 people is the highest among Russia's regions.
Unemployment is low there, and they are the major recipients of foreign direct
investment and human capital. Growth performance is better than in the other regions.
Conclusion
At present transformation of the state power should be considered as a key
element of the reform agenda. It appears that the number of low paid bureaucrats is
growing faster than GDP contributing to misallocation of resources, thus slowing down
economic growth. Strong trans-Russia's vertically integrated companies feeding local
authorities can find the ways of dealing with them. At the same time new powerful and
corrupt bureaucracy is a real constraint for new businesses and thus for sustainable
growth.
The government attempted to accelerate reforms in the past years. The
government
actively
launched
tax
reform,
pension
reform.
Laws
on
de-
bureaucratization were also approved by the parliament, as well as Labor code and
Land code. Although those regulations do not function well. Tax code suffers from
permanent amendments, tax burden remains high, and all that does not stimulate
legalization of the shadow businesses. Land code and Laws on de-bureaucratization do
not work since no supporting regulations have been introduced. Many other reforms
are also not yet accomplished.
Thus it is natural that the Russian authorities provide economic agents with very
poor services. High barrier to entry the market, corrupt judicial system, poor property
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right protection, lack of transparency in decision making, etc., result in that economic
agents largely avoid paying taxes. New businesses do not grow as fast as they could.
Although the government was able to stabilize the budget and the economy was able to
deliver rapid growth in recent years it does not mean yet that all problems are solved.
Russia still lacks efficient market institutions and thus growth is not sustainable.
Situation differs much by regions. The already established businesses tend to merge
with the authorities in order to be able to roll on. Weak and corrupt administration is a
result. Thus one comes back to the problem of low quality of the above mentioned
services which should be provided by the state. To break this vicious circle one should
urge comprehensive public sector reform. A number of recent cross-country studies
suggest that the economies perform better if they have strong ma rket institutions.
Russian regional data also prove that the better the institutions are the better the
economy is.
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