INSTITUTE FOR THE ECONOMY IN TRANSITION

IET NEWSLETTER

IET NEWSLETTER #1-1999


IET Director - E.T.Gaidar

Dear readers,

I'm happy to introduce the first issue of "IET Newsletter". This event has been long overdue, for the interest in the Institute's research and activity has surpassed the narrow scientific boundaries, as a growing number of people - not only economists, but also political scientists, journalists, and public figures both in Russia and abroad - are constantly requesting to be informed of the Institute's work.

At the Institute we have experts conducting research in the fields of macroeconomics, political economy, social and economic life, and the real sector. The result of this research is of great importance for theoretical and practical purposes, yet in the past only those people who had an access to our special economic reviews could become familiar with our findings.

The new publication is designed to put more emphasis on the activities and events, which make up the life of our Institute. We intend to focus on the progress in new projects, on seminars and scientific conferences, on cooperation withour partners, on new books and materials published by our staff, on what is new.

At the first stage we plan to publish quarterly issues of "IET Newsletter" in Russian and in English. Later, we may arrange for the issues to go out every month.

It is my sincere wish that this publication should become a "business card", which will promote and facilitate our friendly contacts.

With best regards,
Yegor T. Gaidar

Gaidar Sig

 

ABOUT INSTITUTE

The Institute for the Economy in Transition is a leading Russian center of studies in the field of economic theory, in working out the strategy of the economic development of the country, and the recommendation on the economic programs.

The unique feature of the Institute's profile lies in combining purely academic studies with the working out of specific practical recommendations for various governmental agencies at the federal, regional, and local levels.

The Institute was established in 1990 as an independent non-profit organization.

The founders of the Institute are the Academy of the National Economy under the Government of the Russian Federation, the fund "Center for Social and Economic Studies" ("CASE") (Poland), and Observatoire Francais Des Conjonctures Economiques (OFCE)(France).

The Institute comprises 10 laboratories incorporated in four principal research departments:

- Macroeconomics Research
- Social and Economic Studies
- Real Sector
- Political Economy

There is a post graduate department at the Institute for full time and correspondence education specializing in "Political Economy" and "Economics and National Economy Management".

The Scientific Council is the supreme governing body of the Institute.

The Director of the Institute is Yegor T. Gaidar.

 

The Institute employs 60 scientists including 11 Doctors of Science and 26 Masters of Science who carry out studies in various fields of the present day economics. Some of these researchers are:

Doctor of Economics, Professor Ye. T. Gaidar (macroeconomics);
Doctor of Economics, Academician of the Russian Academy of Science, Professor R. M. Entov (macroeconomics and finance);
Doctor of Economics, V. A. Mau (political economy);
Doctor of Economics, S.G. Sinelnikov-Murylev (public finance and tax policy);
Doctor of Economics, A. V. Uliukaev (social economy);
Doctor of Economics, Professor Ye. V. Serova (agricultural economics);
Doctor of Economics, A. D. Radygin (problems of property and corporate management);
Doctor of Economics, I. A. Rozhdestvenskaya (problems of public health service);
Doctor of Economics, S. V. Shishkin (problems of education and culture);
Doctor of History, Professor L. S. Vasilyev (political economy);
Master of Economics, I. V. Kolosnitsyn (economy of social sphere);
Master of Economics, S. V. Prikhodko (foreign trade);
Master of Economics, G. Yu. Trofimov (monetary policy);
Master of Economics, O. I. Izryadnova (structural problems of Russian economy);
Master of Economics, S. V. Tsukhlo (development problems of the real sector);
Master of Economics, Yu. N. Bobylev (industrial economy);
Master of Economics, V. Ye. Tsapelik (antitrust policy)

The Scientific and research activity of the IET's staff goes hand in hand with the basic mission of the Institute - the development of the theoretical foundation and practical implementation of the liberal economic policy, analysis and consultations on these issues.

From the outset of the economic reforms many researchers of the Institute have held various posts at the executive and legislative branches of the Russian Federation, and were instrumental in implementing the economic policy.

The Institute's studies and findings are of practical importance. In the eight years of its activity the Institute has attracted a variety of customers: the Russian Government and Administration of the President, the State Duma and the Council of Federation, numerous federal ministries, including the Ministries of Finance and Economics, RF Central Bank, the administrations of the Subjects of Federation etc. The Institute also enjoys good relations with a number of international organizations - the World Bank, the International Monetary Fund, the Organization of Economic Cooperation and Development. Thus, in the past four years the Institute has provided them with more that 400 scientific reports, analytical memos, proposals, draft documents, expert appraisals, references, reviews, and comments on the current and perspective economic policy.

In the past few years the Institute has carried out a number of regional study projects in Vologodsky, Kaliningradsky, Nizhegorodsky, Tverskoy, Yaroslavsky and other oblasts of the Russian Federation, and in the Republics of Altai, Dagestan, Kabardino-Balkariya, Komi, and Tyva.

The Institute renders consulting services to major Russian businesses and financial institutes, including Moscow Interbank Stock Exchange, RAO Norilsk Nickel, JSC "Uralmash", JSC "Exportles", "AGROprodintorg", JSC "Machinostroitelny Zavod" (Electrostal), PO "Polyot" (Omsk), Verkhnesaldinsky Metallurgical Production Association ((Verkhnyay Salda), Corporation "Energiya", JSC "Russky Sakhar), and many others.

Dr. Ye. Gaidar, the director of the Institute for the Economy in Transition, has published a new article: Ò The Legacy of the Socialist Economy: the Macro- and Microeconomic Consequences of Soft Budget Constraints" The article analyzes the causes of protracted recession in a number of transitional economies, first of all in Russia.

The article pays a special attention to the analysis of interrelation between the implementation of tough monetary policy, rate of finance and monetary stabilization and enterprises' adaptation to the market environment.

The author reviews problems of tough budgetary constraints the enterprises experience in the context of consistent radical economic transformation. A sharp downfall of production and shrinkage of real monetary supply have brought about different responses of authorities in post-socialist countries.

Where governments were able to withstand populism and implemented the course towards financial stabilization, inflation rates slowed down, demand for national currency increased, production grew.

In countries allowing softer monetary policies where governments tried to support the production by increasing monetary supply de-inflation processes were more protracted, restructuring more difficult, enterprises slowly adapted to the market environment. As a result, these countries experience the crisis of payment arrears, "barterization" of economy, falling tax revenues.

The full text of Ye. Gaidar's article may be found at the IET web-site http://www.iet.ru/

A new book by Dr. A. Ulukayev, deputy director of the Institute for the Economy in Transition was published by "Strelets" Publishers in Moscow in 1999.

Intended for general public, the "Expecting the Crisis: Progress and Inconsistency of Economic Reform in Russia" reviews the theory and practice of economic reform in Russia. The analysis of money circulation, budgetary policies and their influence on the situation of the real sector is based on a broad data array.

The author reviews the history of the current economic transformation: pre-reform political and economic situation, which determined the nature and succession of major elements of the economic liberalization, institutional reforms of the financial stabilization.

The author pays much attention to the cross-country analysis, which allows finding out general laws governing the development of economies in transition, including Russia.

The book reveals that numerous difficulties experienced by the Russian economy today result from the incompleteness of the reform process. A separate section reviews the nature and causes of the current sharp financial crisis and possible ways to overcome it.

Dr. A. Ulukayev makes well-founded proposals on ways to accelerate economic reforms, which are necessary in order to get the country out of the crisis and to generate economic growth.

 

TRENDS AND PROSPECTIVES

A new analytical report "Russia's Economy in 1998. Trends and Perspectives" (Issue 20) by the Institute for the Economy in Transition came out in March. It examines the causes and effects of the economic crisis in Russia in 1998.

The foundation of the basic economic trends of the 1998 crisis was laid last year, during the large-scale economic crisis. Therefore, in order to analyze and forecast the economic and political developments in the country it is expedient to consider the situation of the national economy at its lowest point.

Section 1, "The Crisis of the Russian Financial System: Main Factors, Economic Policy, and the First Results" is devoted to the economic and political prerequisites of the emerging crisis and the way it was developing. The measures to overcome the crisis undertaken by the Cabinet headed by Prime Minister Primakov and their effectiveness have also been considered.

Section 2, "The Real Sector of the Economy", looks at the situation in various industries of the economy, such as oil and gas, agro-industrial sector, construction, and foreign trade. The changing nature of the investment climate both in the real sector and the economy as a whole has been analyzed.

The social sphere and its problems during the post-crisis period also feature prominently in the newsletter.

Section 3, "The Social Sphere", deals with the conditions of the consumer market, and socio-cultural sector.

The 1998 financial crisis brought radical changes into the structure of money and stock exchange markets. That is why Section 4, "The Financial Crisis and Certain Institutional Problems of the Russian Economy", examines the consequences of the crisis for the major players of the stock exchange market. It also focuses on the participation of the state in corporate governance and in stabilizing the banking system of the country.

Also of interest is the analysis of the informational and statistical data which is presented in the appendices "Inter-budgetary Relations in Russia in 1998", "Industry: Business Conditions", "Certain Food Markets: Business Conditions", "Construction Industry: Business Conditions".

As a result of the intensive research into the economic development in Russia in the post-crisis period the authors of the report have come to the conclusion that the country is steadily approaching a new stage of the economic and social crisis. The economists predict that the new severe economic and social downturn will be much more acute and painful than the one experienced in mid-1998.

This forecast and other conclusions arrived at by the analysts may be of interest to many experts. They are also very important to all Russians. It is the analysis of the mistakes that helps to avoid making them again.

The importance of these studies increases in the light of the new government starting its functioning. Its timely and correct economic policy will have a great impact on whether the country will face a new rise in consumer prices, on whether the national currency depreciates, and on whether the macroeconomic indicators of the country's economy will be improved.

 

UNITED STATES AGENCY FOR
INTERNATIONAL DEVELOPMENT

Established by President John Kennedy in 1961, the United States Agency for International Development (USAID) is an independent governmental organization, which renders economic assistance and humanitarian aid to 60 countries worldwide.

It has been in Russia since 1992 rendering technical assistance in transition of the country to the market economy and democratic society. USAID's programs in Russia are aimed primarily on facilitating the changes vital for the reforms of the system and on cultivating reform proponents among the various strata of the society. The key directions include restructuring the economy, establishing democracy and improving social welfare.

Since 1992 USAID has granted US$ 1.7 billion for technical assistance and training, which should help Russia speedily and successfully implement the political and economic changes during the transition period.

In order to reach these ends USAID cooperates with private voluntary organizations, private businesses, and governmental and non-governmental agencies both in Russia and the United States.

For further information on USAID's programs in Russia please contact:

USA Embassy
19/23 Novinsky Boulevard
Moscow 121099
United States Agency for International Development
Program Development Department
Tel: (7-095) 956-42-81
Fax: (7-095) 960-21-40
Internet:
http://www.usaid.gov/

Cooperation between IET and USAID

In October 1998 the Institute for the Economy in Transition signed an agreement on cooperation with the United States Agency for International Development. The Institute received a grant for its institutional support. Under the grant it is planned to cover the following areas:

- conducting scientific research on the subjects of interest to the Institute
- establishing state-of-the-art computer base
- translating the IET's transactions into foreign languages and publishing them in Russia and abroad
- making use of foreign expertise to carry out scientific analysis

Scientific research will cover the following areas: macroeconomics and budgetary policy; international trade and tariffs; investment policy; taxation at microeconomics level, and financial policy; capital market development; political problems of economic reforms.

The abstracts prepared within the framework of the program of cooperation between the IET and the USAID are presented below.

 

THE PROBLEM OF CORPORATE
SECURITIES MARKET REGULATION

The main purpose of this paper is to find out "key zones" of prospective market development for purposes of governmental regulation tasks and for working out a number of recommendations and legislative amendments.

The authors analyze stages and special features of corporate securities market development in the nineties (primarily shares issued by privatized enterprises). The paper focuses on some general trends common for securities markets development and regulation in transition countries. The paper examines the system of corporate securities market regulation in Russia (institutions, levels, the regulation coordination problem), governmental agencies' authority, enforcement, and adequate legislative changes. The authors analyze the market infrastructure and professional market operators in the context of assessing current governmental regulation mechanisms and of working out the concept of medium-term measures in the sphere of governmental regulation.

The paper also introduces some recommendations, which, if implemented, would allow restoration of Russia's investment attractiveness and investors' confidence in the context of the financial integration into the world finance market system.

 

PROTECTION OF SHAREHOLDERS (INVESTORS) RIGHTS:
ANALYSIS AND RECOMMENDATIONS

The paper presents an analysis of the corporate governance system currently forming in Russia and some practical recommendations on its improvement in the context of shareholders' (investors') rights protection.

The authors review privatization models as a factor in the formation of a corporate governance model. Much attention is paid to the study of the national model of corporate governance formation in the context of shareholders (investors) rights protection. The following major issues are considered: major trends in formation of corporate legislation in transition economies; the development of the legal base for corporate governance in Russia; shareholders' rights protection in the context of formation of legal mechanisms for governmental regulation; appraisal of various applied models for long-term corporate governance system in Russia.

Privatization did not bring any considerable (including foreign) investment into enterprises in the overwhelming majority of economies. It renders even more importance to forming corporate governance models; however, the majority of countries still lacks necessary mechanisms (in areas of additional issuances, transparency, protection of different shareholders categories, etc.).

At present no country has working "external" corporate governance mechanisms (control over financial markets and mergers, bankruptcy). It means that the shareholders' active control (voting) shall become a dominant form (in relation to the passive control via shares sales). This also creates a specific burden for "external" legislative and "internal" (Board of directors) corporate governance mechanisms.

Problems of the legislative regulation of joint stock companies' operational procedures and the securities market infrastructure per se also gain great importance in the context of ownership redistribution. A progress in overcoming many of these problems to a great extent depends on the amount and intensity of the governmental market regulation.

 

OWNERSHIP STRUCTURE AND PROBLEMS OF CORPORATE
GOVERNANCE IN THE RUSSIAN ECONOMY

This paper evaluates existing theoretical approaches to ownership problems and presents a preliminary analysis of trends within the emerging ownership structures of Russian corporations (privatized enterprises), property markets and controls.

The authors analyze current theoretical approaches to ownership problems, consider general problems of ownership rights realization in Russia as a factor hindering the formation of efficient property markets and controls.

The paper examines major stages of ownership redistribution in the post-privatization period, gives a short description of property markets and controls in Russia, examines trends in the struggle for control and typical cases of the infringement upon shareholders' rights in Russian corporations. The paper generalizes the available data on the forming shareholding structure at privatized enterprises (basing on available alternative sources, including the data for 1997 and estimates for 1999), describes shifts in the ownership structure and qualitative estimates of the ownership structure dynamics and stabilization prospects of ownership rights system in Russia.

Even in the countries where mass rivatization resulted in concentrated ownership its effect is still undermined by acute and unregulated (in legal terms) conflicts of interests; "absenteeism" of many outsiders (including even some large ones) in relation to the long-term management of corporations; resistance of managers who as a rule represent all insiders; inadequate legal protection means for outsiders (large and especially small ones). It is possible that the disregard of small shareholders' interest in the majority of countries is a consequence of concentrated ownership ideology.

This is evidence that at this stage no direct relation between highly concentrated ownership and efficient corporate governance can be found. It also means that an early effort to find "actual responsible owners" failed in the majority of transition countries. The direct consequence of the intensifying struggle for control is a more protracted process of a clear corporate control model formation.

 

TAX REVENUES MODELING,
EVALUATION OF TERRITORIES'
TAX POTENTIAL

The paper demonstrates that the major factors explaining the tax liabilities are the tax base, rate dynamics and legislatively set tax payment terms. Finding out the best tax base evaluation allows describing of the tax burden distribution among tax payers (for instance, for income tax the fact that wages and salaries are the better evaluation of the tax base as compared to household monetary incomes reflects the unfairness of taxation as concerns individuals with non-wage incomes). The profit tax payment terms analysis has allowed an interpretation of sharp payment peaks in months when the aggregate quarter amount of tax is recalculated.

In addition to the tax base the influence of various macro-economic factors, like inflation rates, real dollar exchange rates, reciprocal payment arrears of enterprises (overdue debtors' and purchasers' indebtedness), the share of unprofitable enterprises, the share of cash in the economy on tax liabilities.

The factors mentioned above have different impacts on different tax liabilities; therefore the study of dependencies was carried out individually for profit tax, value added tax and income tax on individuals.

Econometric calculations allowed the confirmation of a number of working hypotheses. Negative dependency of tax liabilities for different taxes on the share of cash, share of unprofitable enterprises, reciprocal payment arrears shows the ways to improve the tax system in order to eliminate the influence of the above mentioned macro-economic factors.

The second section of the paper analyzes regional aspects of taxation, examine a number of approaches to the determination of territories' tax potential, lists evaluations of regional gross tax resources.

Regions differ by revenues (in per capita terms) what is related, in particular, to differences in tax bases, i.e. different economic development levels, sector structures. However, levels of revenue by region also depend on fiscal efforts of local governments. In other words, tax revenues depend on ax rates in the framework of local taxes and charges, the ratio of collected to imputed taxes, and the intensity of the effort in combating tax evasion. In relation to this there arises the necessity to evaluate correctly regional tax potentials, which would allow implementing of an economic policy aimed at the intensification of local authorities' efforts to collect taxes.

 

INTRODUCTION OF THE FIXED RATE INCOME TAX IN RUSSIA

The study presents an analysis of income tax theory, international experience of income tax application, changes in income tax legislation and income tax revenues dynamics allowing the following recommendations on income tax reform aimed at an increase in the efficiency of the budgetary system in the Russian Federation.

Major income tax payers are those receiving wages and salaries, i.e. persons with little evasion opportunities. At the same time, persons with high incomes use a wide range of evasion methods, like the transformation of wages into payments of interest and insurance payments, payments with unaccounted cash, etc. In order to transform the tax from a wage tax into a real income tax, a number of measures aimed at the equalization of tax burden shall be implemented: a flat tax scale reducing stimuli for the transformation of high incomes in non-wage forms, schedule taxation of all incomes at the source, improvement of taxation techniques (taxation of interest payments, dividends, insurance payments, etc.).

In relation to this, and important reform aspect shall be the harmonization of economic agents' incomes taxation, i.e. the setting of an equal maximum profit and income tax rates in combination with payments to the extra-budgetary social funds. In order to achieve this goal it is proposed to set a fixed income tax rate at 12 per cent and the aggregate amount of payments to the extra-budgetary social funds at 23 per cent; for employees at 35.4 per cent.

Substantial changes shall be made in taxation of interest payments, capital gains and dividends. The essence of these changes is as follows: interest payments shall be taxed at the source, Ruble incomes shall be taxed depending on inflation forecasts for a year. Dividends shall be taxed at the source at the profit tax rates. Later individuals receiving dividend incomes shall be entitled to income tax offsets.

The interaction of income tax with the social and pension insurance system shall be that contributions to non-compulsory medical, pension and social insurance funds are included into the taxable profit of enterprises making such contributions on behalf of their employees and into the taxable income of individual private entrepreneurs, at the same time the payments from these funds shall be exempted from the income tax. The income tax shall not be applicable to the payments from compulsory medical, pension, and social insurance funds; contributions to these funds shall be deducted from the taxable profits of enterprises and from the taxable income of individual private entrepreneurs.

A sharp increase in the tax exempt minimum will allow some degree of progressiveness of the income tax thus enabling a fairer taxation as the share of the payable tax in the income of wealthier population groups will increase.

 

THEORY AND PRACTICE OF EXCISE
TAXATION IN RUSSIA

The report on the theory and practice of excise taxation looks into the basics of excise taxation and its organizational principles, into world practices of excise collection and administration, into trends in excise collection practices in Russia, and into major excise tax reform guidelines.

The basic principles of the excise taxation reform are the setting of payment rules, which would maximally limit both legal and illegal tax evasion opportunities. The report substantiates the necessity to change the alcohol beverages excise taxation system, which is an important source of revenues for territorial budgets. For this purpose it is proposed to (1) change excise collection rules as concerns excise labels, i.e. to make them an instrument of the tax payment in full instead of currently applied advance method; (2) introduce taxation of domestically produced and imported ethyl alcohol at the liter rate equal to the tax rate of an ethyl alcohol liter contained in the end product with subsequent crediting during taxation of the end product, and, finally (3) introduce schedule taxation of the finished alcohol products using differentiated excise labels for each alcohol beverage group. Besides, it is necessary to develop a system of excise payments guarantees by authorized credit and insurance agencies in cases of tax deferment granting, use of give and take raw materials in alcohol production, and in cases ethyl alcohol is used for manufacturing of products exempt from excise taxation. It is proposed not to change current taxation of tobacco, fuel and lubricants, the only exception shall be the inclusion of motor oils and Diesel fuel in the number of excise taxable products. It is also proposed to change the term of excise tax payment for vehicles and to collect it at the moment of vehicle state registration procedure.

 

TAXATION OF HYDROCARBON PRODUCTION

One of the least elaborated elements of the hydrocarbon production taxation system in Russia is the oil excise. This tax is of a clearly regressive nature, it does not base on an objective mechanism allowing to take into account geological and economic conditions of oil extraction, thus allowing arbitrary tax rates and being inflexible relative to changes of external economic environment (world prices).

The paper substantiates the fact that for new deposits it would be practical to replace oil excise tax with a tax on extra income from hydrocarbon production (TEI), which has a number of considerable advantages. Since this tax can be calculated automatically, it considerably increases the objectivity of taxation. TEI takes into account geological and economic conditions of hydrocarbon production. TEI stimulates investment in the development of new deposits. TEI reacts to changes in external economic environment (world prices).

For old deposits (those already in the process of development) it would be expedient to replace excise tax with a special ad valorem tax on oil production. This tax should be calculated basing on the world oil prices and not on actual selling prices. This calculation method should be applied due to the following: (1) world prices are a major factor determining the financial situation of the oil industry; (2) domestic oil prices may be too low due to the possible use of transfer prices and underdeveloped mechanisms of exchange oil trading; (3) under this approach tax payments will be pegged to dollar, thus rendering tax amounts in dollar terms independent of Ruble exchange rate.

The paper's authors demonstrate that the oil production tax rate may be set on the base of existing excise and oil export taxes. The base tax rate may be set at about 4 to 5 per cent of the Brent oil price. The tax rates should be progressive; i.e. it must increase depending on world oil price rises. If this approach is taken, it will provide for (1) simplified and transparent calculation, thus allowing to exclude any possibility both for subjectivism and corruption during tax charging, and understatement of tax liabilities by producers; (2) to increase the flexibility of taxation since this tax in contradistinction to excise taxes directly responds to world price fluctuations; (3) the introduction of this tax will not decrease budgetary tax revenues.

The introduction of oil production tax must be coupled with the improvement of the royalty rates setting mechanism. Besides, it is practical to diminish assignments for the reproduction of the mineral and raw materials base from 10 to 2 - 4 per cent, i.e. to the part transferred to the state budget and at the same time to introduce internationally accepted mechanisms for the compensation of geological works and prospecting.

The oil production tax shall play the role of a federal tax, while subsurface resource use taxes shall be primarily directed to regional and local budgets, as it is being done currently.

 

VAT REFORM

The paper discusses theoretical principles of the value added tax and makes a comparative analysis of VAT systems functioning in different countries. Basing on this the authors propose a number of reforms in Russian value added tax system.

It is proposed to introduce a uniform value added tax rate at about 20 per cent. Zero VAT rates shall be applied to exports only.

In order to increase tax system neutrality, the authors propose to considerably broaden value added tax base by making a dramatic cut in the list of VAT exempted services (housing construction, tourist and excursion services, fire safety, printing, editing and publishing). Besides, it is necessary to allow deducting tax amounts paid for construction organizations' services rendered during capital construction from VAT.

A key problem of value added tax collection in Russia is the application of this tax for trading relations with the Commonwealth of Independent States member-countries and the customs union. At present the CIS countries' imports to Russia are taxed at country of origin rates. At the same time trade with the countries within the Customs Union (Byelorussia, Kazakhstan, Kirgizia and recently joined Tadzhikistan) is tax and duty exempt (VAT including). It shall be noted that customs regulations of these countries are not unified, while Kirgizstan is already a member of the World Trade Organization and its additional obligation arising from this fact are not in conformity with the Customs Union regulations.

In these conditions the Russian Federation budget suffers considerable losses in customs revenues due to duty free imports from the Customs Union member countries having low import rates. It is obvious that the introduction of a customs border and of charging compensation for the difference between Russian and importing countries import rates is mainly a political problem. Nevertheless, the authors find practical to amend documents on transfer of products and services within the Customs Union, which would allow elimination of customs borders between member countries only after the unification of customs laws.

One of the most important issues of value added tax in Russia is its distribution among budgets at different levels. It shall be noted that the current rules of VAT revenue distribution is advantageous for the RF subjects officially generating large amounts of added value either in fact, or due to transfer price formation, and in regions where export production concentrates. At the same time, the regions experiencing the outflow of added value via transfer prices (or where subsidiaries of largest taxpaying companies, which are exempt from paying VAT to regional budgets are situated), and depressed regions where a considerable portion of products and services is traded on shadow markets thus effectively evading tax control suffer losses.

The report substantiates that in this situation it would be practical to go over to a system of the two-stage VAT redistribution between the federal and regional budgets. The regional portion of tax revenues might be determined in proportion to the size of the population.

 

PRINCIPLES OF STATE AGRARIAN
PROTECTIONISM IN ECONOMIES
IN TRANSITION

Post-socialist economies required a new agricultural policy to be implemented for transition to a market economy. Whatever the reform tempo, this policy evolved via two stages.

Specific features of the first stage of agricultural reforms in countries from the former Socialist camp were produce prices liberalization, abolition or a considerable decrease in state procurement, rejection of output planning, foodstuffs subsidies, agricultural sector's privileges.

A sharp turn of the policy deteriorated the agricultural parity resulting in the loss of liquid capital for agricultural producers. High inflation rates brought about an increase in interest rates and shorter loan terms. The agricultural sector found itself in a grave crisis.

Practically all post-socialist countries elaborated their own special governmental programs in order to get their respective agro-industrial complexes out of the crisis. The essence of the programs was the subsidizing of interest rates; governmental guarantees for banking loans; creation of specialized credit institutions for the agricultural sector; write-off or restructuring of debts.

During the second stage of reform the liberal euphoria gradually faded off to be replaced by agricultural protectionism. Central and East Europe (CEE) and Russia have been introducing guaranteed minimum prices, import tariffs and quotas, export subsidies since 1991 and 1993 respectively.

It shall be noted that this policy in transition economies is quite different from its analog in developed countries. It is forming in principally different environment and has a number of specific features.

First, elements of the old system are still in place. For instance, guaranteed minimum prices are seldom used for real intervention. These prices are viewed as prices for limited state procurement and guiding market prices. Many countries subsidize the expenditure for agricultural means of production.

Second, practically all measures in support of the agricultural sector were taken from the policy tool kit of developed countries, like EU and the U.S.A.

The agricultural protectionism in Russia developed along similar lines as in the CEE countries; however, it has some specific features. First of all, it is country's federal system and weak federal authorities. As a result, regional protectionism arises alongside with the national trade protectionism.

Another specific feature of protectionism in Russia is high paternalist expectations of the population and economic agents coupled with strong inclination of the bureaucracy to reproduce the traditional distribution methods. As a result, many programs when realized in practice turn out to be a form of administrative distribution of these or other production resources.

It shall be also noted that a number of CEE countries experienced a surge of protectionism at the time of financial stabilization and the completion of major reforms at the macro-level. In Russia this policy is implemented in the situation of macro-economic instability that creating objective difficulties for further progress of reforms.

In this situation governmental policies in the agricultural sector shall base on certain principles. First, the governmental support shall be aimed at the expansion of produce sales, not output maintenance. Second, governmental programs shall be aimed at the creation of new jobs in rural areas. Third, the governmental foreign trade policy shall be mildly protective.

 

SUBSTANTIATING EVALUATION
PRINCIPLES AND CRITERIA OF
FEASIBILITY OF ORGANIZATIONAL
AND ECONOMIC REFORMS IN EDUCATION

The reform process dynamics in education directly depends on the rapidly changing social, economic and political environment.

In order not to waste time and resources it would be practical to work out principles, criteria and methods allowing evaluation of suggestions on implementation of individual organizational and economic reforms in education.

Estimation of a reform's feasibility in a certain institutional environment shall include the analysis of alignment of political forces and special interests of affected groups.

From the viewpoint of a reform's advance and its feasibility in education the most effective organizational and economic suggestions are as follows:

The state shall retain key positions in the sphere of higher professional education via budgetary financing. It is suggested that for this the state order for professional education shall be introduced as the major tool. The state comission shall include three components: federal, regional, and municipal.

The federal state comission shall meet strategic requirements for economic and social development that being especially important in a crisis situation. Regional and municipal components shall be based on regional and municipal labor markets demand.

Each of the above mentioned components shall be financed at a respective budgetary level and be distributed among institutions of higher education through tender procedures.

The transition to these distribution and finance patterns for different components will require tighter licensing, attesting, and accrediting procedures for institutions of professional education seeking the commission.

Incentives for effective demand of enterprises, firms and families in the sphere of professional education shall be created via flexible fiscal policies.

All restrictions for paid admittance over the state comission shall be eliminated. First, it will allow the opening of social prospects for students of technical colleges who are mostly from low-income families in contradistinction to those studying in institutions of higher education.

Second, it will allow better academic control over the technical college students thus increasing the quality of education.

Third, the inclusion of technical colleges in higher education institution complexes will allow the prevention of "invisible" privatization of their property and its withdrawal from the educational sphere.

The creation of higher education institution complexes shall be accompanied by the restructuring of the elementary professional education system. This measure is aimed at the development of regional systems of technical colleges. These systems shall include a number of vocational training schools and institutions for specialized secondary education alongside with municipal polytechnic schools, i.e. the reformed part of vocational training schools.

This measure will allow a tighter linking of training in elementary professional education institutions with requirements of regional and local labor markets; the systems of elementary and secondary education may also cooperate with employment agencies for the occupational retraining of idle labor.

At the same time, training and retraining of managerial personnel for new types of educational institutions shall be developed. This measure will create new activity prospects for the network of regional Institutions for advanced training of specialists in education and pedagogical colleges' faculties.

In case the real social and political situation in the country remains the same in the nearest future, the government will fail to secure the stability of budgetary financing. In this case the educational reform will be more easily advanced along the following lines: transition to per capita normative financing the only alternative of which in the present situation is the axing of the network by tough administrative methods; development of paid school education; granting of independent economic agent status to general education schools; introduction of the system allowing multiple founders for educational institutions; more intensive use of all extra-budgetary sources for financing of the educational sphere.

A special attention shall be paid to the reformed organizational and economic mechanism in education in terms of regionalism. Since in the new situation the federal center will not be able to enter into commitments to finance per capita norms, the reform can be renewed and advanced within and at the level of individual territories only.

 

ELECTORAL BEHAVIOR: ECONOMIC FACTORS (RUSSIA IN 1995-96)

The practice demonstrates that election results are influenced not only by candidates' personalities, but by economic and political situation in the electoral territory as well. It shall be noted that while studying in detail the dependency of authorities' policies on pre-election cycles analysts paid practically no attention to the problem of electoral behavior's dependency on the economic situation.

The application of regional approach to the task of interpreting the federal election allows the formulation and preliminary verification of hypotheses for further work at the initial stage of studying the interdependency between economics and politics.

The selected case studies are limited by elections at the federal level in the timeframe from 1995 to 1996 and include the State Duma election in December of 1995 and presidential election in June of 1996. Although it took two rounds to elect the President, in the report the authors used the results of the first round only.

The study of electoral behavior patterns revealed that the major factors were tax rates, debtor's indebtedness, monetary incomes, wage and wage arrears levels, and demand for labor.

On the other hand, negative factors affect electoral behavior more strongly than positive ones: higher wage levels are less important for the population than wage arrears.

The inclusion of a non-economic factor (the percent of votes for the authorities during previous elections) allows accounting for the political situation in the country. It shall be noted that political sympathies, although not among major electoral factors, allow a more precise interpretation of election results.

It is interesting to note that electoral behavior or election results mainly depends on four groups of indicators: the level of economic development, economic potential, prospects of growth, level of social development. It is necessary to note a special importance of fiscal and Òwage" (wage levels and wage arrears) indicators.

Taking into account the fact that amounts of tax revenues determine the ability of regions to implement active social policies (0.84 correlation between these two indicators was registered), it may be concluded that the major factors affecting electoral behavior are income indicators and indicators of clearly social nature existing not at the time of elections, but long before. The financial support provided by the federal authorities does not necessarily bring about purely positive or negative results.

When applying multivariate analysis methods instead of the usual pair analysis (correlation and regressive), the economic potential indicator (i.e. debtor's indebtedness) shifts to the foreground.

Demographic data proved to be of no major importance for electoral behavior. The shares of urban and employable population are less important than purely economic factors.

On 17-18 April 1999.the Institute for the Economy in Transition together with the Center for Advanced International Studies, Social Market Foundation (London), and the Royal Institute of International Affairs (London) held a scientific conference on the analysis of the causes and effects of the financial crisis in Russia and worldwide

Representative selection of Russian and foreign experts taking part in the conference contributed to the high standards of the deliberations. The fruitfulness of the discussions resulted in a large measure from the multi-faceted approach to the problems of the financial crisis. In-depth economic analysis of the theoretical aspects by Ye. Gaidar, A. Aganbegian, Ye. Yasin, Giovanni Urga, S. Synnelnikov-Murilev, L. Grigoriev, G. James, K. Winograd , on the one hand, was supplemented by a historic and political approach on the part of R. Skidelsky, V.Mau, and M. Dubois, on the other hand, while A. Kenningham (Marryl Lynch), C. Granville (Fleming), and E. Kraus (Drezdner Bank) presented the views of investors and market makers.

The main theme of the conference featuring prominently in all reports was forming the conclusions to be drawn from the analysis of spreading and regulating the financial crisis in all countries, including Russia. The participants also pointed out that all parties to the financial market - state regulators, international financial institutes, and investors - should draw similar conclusions.

A distinctive feature of the conference was the consideration of the specific problems of the budgetary and financial crisis in Russia in the context of the spreading global crisis (South East Asia, Brazil etc). This approach helped to analyze not only the internal political and economic reasons, but also to assess both the adequacy, as well as the social and political conditionality of the undertaken measures.

Apart from a detailed discussion of the specific problems involved in resolving the financial crisis in Russia, the conference stressed the relevance of new theoretical aspects relating to diagnosing the financial crisis, the correlation between the fixed and floating currency rates, the currency regulation under the floating currency rate, and the loss of confidence in the national currency.

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IET NEWSLETTER #1-1999
E-mail: mailto:administrator@iet.ru
1999 IET