Dr. Gaidar began his presentation by pointing out that Russia entered a long period of parliamentary and presidential elections. It is obvious that the 1999- 2000 pre-election cycle will have a strong inhibiting impact on the possibility of implementing any structural transformations in the national economy. However, regardless of any outcome of the ongoing political cycle, starting in 2000, Russia will be facing a new political reality. That may become a new window of opportunity for the implementation of economic reforms.

   The above consideration necessitates a serious discussion of the prospects of the next stage of Russian reforms. According to Dr. Gaidar, the domestic economists and reformers should be ready to propose a set of constructive measures on key issues related to the Russian economic development.

   At present, it can certainly be argued that the Russian economy functions as a market economy . At the same time there are very serious problems which undermine the possibility of sustainable economic growth. The author thinks that the program of reforms aimed at the period after 2000 is bound to contain the clear goals for the government’s monetary policy and foreign exchange policy.

   Recent changes in the monetary environment, particularly the introduction of the European currency and the Asian crisis, have seriously undermined the confidence in the mixed forms of foreign exchange and monetary policies, such as various types of managed floating rates and currency "corridors". It is likely that during the forthcoming years the situation will dictate a choice of one of the two basic options: either the introduction of an unconstrained floating exchange rate, under which the exchange rate policy is not used as an instrument for fighting inflation, or the currency board system based on the Euro or the US Dollar.

   Regardless of the chosen foreign exchange strategy , Russia’s access to external and domestic commercial borrowings will be restricted as a direct result of our prior history. Therefore, we have to pursue the policy of a substantial budgetary surplus and cannot allow ourselves either the monetary financing of deficit or financing by borrowing from the population. The presenter emphasized the necessity of restructuring the systems of the government’s financial obligations and tax collection.

   Dr. Gaidar stressed that the essence of proposals related to the fiscal reform is the ideology of expanding the tax base, decrease in the marginal tax rates, maximal simplification of the fiscal system, and maximal use of withholding at the source. These proposals are based on the flat rate income tax concept, accompanied by the appropriate changes in other elements of the tax system.

   The crucial part of the budgetary policy is expenditure policy. The tight constraints imposed by the amount of tax collections , on the one hand, and extremely limited possibilities of the external and domestic borrowing, on the other hand, force us to be rather strict in projecting the necessary reductions in the federal expenditure obligations.

   In order to enhance budgetary administration and improve budgetary procedures, it is proposed to introduce a number of amendments to the Budget Code. The presenter also considers it necessary to develop a program of the interbudgetary relations reform and a program aimed at enhancing the efficiency of expenditures on reforming the systems of funding for education, healthcare, social protection, and a number of other areas.

   One should not forget that the establishment of prerequisites for starting economic growth requires changes in the sphere of investments, savings, and the labor market. Obviously, it would be impossible to resolve the problem of attracting investments to the Russian economy without establishing the system of guarantees of proprietor’s rights, legitimization of his rights, including the property right for land.

   The author is convinced that the labor relations should be reformed. The current Russian system of regulation of the labor market is unconnected to the reality. it does not guarantee employees’ rights and it discourages legalization of labor relations. This inhibits the growth of the population’s incomes and reform of the pension system.

   The presenter emphasizes that the specific features of the Russian financial crisis had been determined by the credit and monetary expansion, and the growth of public debt and individuals’ debt denominated in Rubles and foreign currency, that had been accumulated during the second half of the ‘90s.

   The author singles out one of the processes which, in his opinion, was the backbone of the crisis.

   During recent years, the government has been accumulating liabilities at a rate which was intolerable from the viewpoint of the state of its budget and the state of the national economy. Thus, between 1997 to 1998 the amount of borrowing through GKO- OFZ’s exceeded 5 times the total monthly revenues and 10 times the monthly expenditures of the federal budget.

   The government’s efforts to stop the process were fruitless. The situation was exacerbated by the slow pace of production growth which then was followed by production decline; inefficient federal fiscal system; accelerated growth of interest rate; and, though paradoxically, by the success in curbing inflation.

   Inflation is generally bad for the economy. The single so-called ‘advantage’ of inflation is that it helps to reduce the real value of accumulated debt. The success in curbing inflation has led to the situation where the growth of the real interest rate was imposing an increasingly heavy burden on the Russian economy.

   The pressure experienced by the Russian financial system clearly manifested itself in 1997. In addition to the growth in the federal indebtedness, the local authorities’ debts grew significantly. The local budgets’ deficits amounted to 1.15% of GDP.

   The presenter argues that one of the reasons for the destabilization and impossibility for the government to fulfill its debt obligations was a very low level of savings. Despite all the optimistic figures published by Goskomstat, the real savings ratehas been very low and it still tends to fall.

   With the domestic savings being clearly insufficient, foreign capital has been intensively attracted during recent years. The significant inflow of capital borrowed from the international market has destroyed the government credit system, Ruble’s position as a currency, and the weak banking system.

   The presenter also identifies another reason for the crisis. Each year the federal budget has managed to raise successively smaller amounts of revenues as a share of the gross domestic product. Between 1992 (?) and 1998, the federal government revenue as a share of GDP fell from 17- 18% to 10%.

   Concluding his presentation, Dr. Entov noted that the 1997- 1998 crisis had been determined by the development of the Russian financial system which had been taking place in the inadequate economic and institutional conditions. To overcome the consequences of the financial crisis quickly, Russia needs to implement an institutional reform . Such a reform could radically change the Russian economy.

   The presenter stressed that a significant part of the research conducted by the IET during the last year and supported by the USAID dealt with the fiscal policy. This was not accidental. The irrationality of the fiscal system, along with many institutional and macroeconomic problems, forms the basis of the current crisis in the Russian economy.

   Overcoming the fiscal crisis and starting economic growth require reforms that will make the fiscal system just, neutral and capable of raising budget revenues in an efficient manner. The General Part of the Tax Code of RF became effective as of the beginning of 1999. This General Part covers such issues as the structure of the fiscal system and tax administration. The author argues, however, that the adopted version of the Code contains too many compromises. That is why it is necessary to introduce a number of important amendments to it.

   The author is convinced that, of the measures aimed at improving tax administration, one should single out those related to the fulfillment of tax obligations, including the specification of the rules for paying taxes by enterprises’ affiliates.

   One should also extend the list of cases in which the tax authorities are granted the right to use market prices to assess additional tax liability to the parties in a transaction. Also, the Law ‘On Government Control Over the Correspondence of Large Expenditures on Consumption to Actual Income of Physical Persons" should be revoked, because of its ineffectiveness, and alternative methods of tax control should be used.

   The presenter thinks that in order to facilitate the tax system’s neutrality, it is necessary to prohibit the introduction of individual tax exemptions and to simplify the accounting system, adjusting it to a maximum possible extent to the international accounting standards.

   The measures for improvement of the tax system must include the reduction in the number of current taxes by eliminating (in a short period of time, and not in stages, as it is currently provided) taxes based on enterprise turnover.

   The presenter stressed that the research into specific taxes focused on the main taxes, namely: corporate profit tax, VAT, personal income tax, excises, real estate tax, tax on extra profit in the extraction of hydrocarbons , single agricultural tax, and tax on small business.

   In order to make personal income tax a tax on income, and not only on wages, the author considers it necessary to introduce a single tax rate that will flatten tax obligations imposed upon taxpayers. The presence of a significant zero bracket will assure progressivity of the tax.

   Interest income must be taxed at the source. The rate of the tax on interest income denominated in Rubles should be set depending on the projection of inflation for the forthcoming year.

   The presenter points out that the corporate profit tax must be as neutral as possible. To accomplish this task, it is necessary to eliminate the double taxation of dividends, to allow the deduction of interest, to bring the accounting depreciation rate close to the actual economic depreciation rate, and to eliminate most of the benefits and regulations that allow camouflage of personal expenditures as corporate ones allegedly needed to do business.

   The presenter proposes to introduce a single VAT rate and fix that rate at 20%. The zero VAT rate must be applied only to export transactions.

   The presenter emphasizes that the excise stamps should constitute the payment of the full amount of tax payment due, instead of the current practice of advanced payment.

   The combination of payment for land and taxes on real estate will allow the substantial reduction in expenditures on tax administration. In addition, combined with the methods of estimation of the market value of the real estate as a whole ( land plus the respective facilities), they will result in a tax burden that would make an inefficient use of real estate unprofitable. An important role in the real estate taxation reform belongs to the creation of the Cadastre.

   In the current situation , the reform of taxation of small businesses has became especially important. The presenter suggests to distinguish three groups of enterprises: large-scale, small , and ‘ micro’ firms. The latter group includes the firms that are sufficiently small to be exempted from VAT. The threshold in this case is based on the sales revenue . For such micro firms, only presumptive tax should be used. For small enterprises, the author proposes to adopt one of the forms of a cash flow tax. In all cases, both small and micro firms may opt for a regular fiscal regime.

   The author argues that in establishing a single tax on agricultural producers one should follow several principles: first, it must be compulsory throughout the country; second, the base for calculating single tax must be land, not revenue; third, single tax should not replace VAT, excises, contributions to social security fund, payments for the use of natural resources, and licensing fees. Of course, personal income tax is not replaced by the single tax, either. Fourth, single tax must be paid only in the monetary form.

   The presenter points out that during recent years the national pension system has not been able to fulfill its financial obligations. Despite some stabilization of the situation with respect to paying pensions, the delay with the indexation of pension payments has led to the fall of real pensions, unprecedented in the entire history of reforms.

   The presenter argues that such sharp deterioration of the pension system’s financial state makes the current pension legislation practically non-implementable, especially in the part of indexation of pensions.

   The presenter’s calculations show that in the new economic conditions, it will be difficult to maintain for long a significant differentiation of pensions funded from the distributions out of the current contributions (a distributional system) because of the insufficient level of contributions to the Russian Pension Fund. In the presenter’s opinion, that will create additional obstacles for the transition to a pension insurance system based upon personal founder accounts starting in 2001.

   As the author emphasizes, the new system would imply a de-facto elimination of the ‘maximum pension’ concept. At the same time, the maximum pension amount should be limited indirectly. It should result from the limit on the salaries and wages from which the pension contributions can be made into registered personal founder accounts .

   The presenter thinks that it is the miserable state of the domestic financial markets that impedes the introduction of the funded pension system elements envisaged by the Pension Reform Program.

   The Program also provides the stage- by- stage transition to the principles of funded pension benefits through professional pension systems (PPS).

   The compulsory element of the tax-favored funded pension system requires government guarantee and control over the contributions to and distributions out of the pension system. As a result, some functions of the PPS may be duplicated by the Pension Fund of Russia, and this may lead to an unjustified growth in administrative costs.

   The presenter also identifies the following priorities of the adjustment of the Pension Reform Program: revision of the approaches towards the reform of state pensions, the funding of which is based on the distributive principles; change in the timing of introduction of the funded pension system elements ; revision of the adjustment mechanisms for the standard retirement age and consideration of alternative approaches to the reform of the early retirement system.

   Among other modifications of the Pension Reform Program, the presenter proposes to consider the alternative options for the funding of early retirement through the system of disability insurance at the age that qualifies for early retirement. The author thinks that such a decision would result in a substantial simplification of the funding mechanism for the early retirement pensions. It would also permit to reduce sharply the amount of insurance reserves and the rate of additional contributions required to fund these pensions.

   The presenter emphasizes that the analysis of the role of Constitutions in the economic transformations in the post-communist states showed that the adoption of a new Constitution, or the temporary use of an old one, does not have a crucial or even strong impact on these states’ economic development.

   The presenter notes that the 1993 Constitution of the Russian Federation was adopted at the time of a sharp weakening of the conservative part of the Soviet elite. At that time, the President was surrounded by numerous proponents of liberal and democratic values. It was that balance of forces which determined the contents of the Constitution. Nevertheless, the Constitution is not completely consistent, i.e. it contains a number of Articles that proclaim social guarantees that were typical for the Soviet constitutions.

   The presenter argues that, at present, there is an urgent need to develop proposals for a liberal constitutional reform. The author thinks that amendments should be introduced to the Articles of the Constitution that are related to private property, relationship between political and economic sectors, relationship between the federal center and the regions, budget, social guarantees, stability of the national currency, and electoral procedures for the parliament.

   In addition to the introduction of the amendments, it may be possible to use some other, softer methods to adjust the Constitution to the current realities. The federal constitutional law can include not only the legislation directly stipulated as the laws in the text of the 1993 Constitution (such as the decisions of the Constitutional Court of the Russian Federation) but also, according to a number of prominent lawyers, the decisions of the Constitutional Court of the Russian Federation.

   The presenter notes that the choice of an ‘array’ of amendments, as well as of mechanisms for amending the Constitution will be only weakly connected to the people’s or legislators’ conscious choice. In the presenter’s opinion, these choices will depend on specifics of the development of real social groups’ (interest groups) and on the dynamics of socio- political struggle in the post- communist Russia.

   The presenter states that he is inclined to share the view of those who advocate the protection of the Constitution from the excessive arbitrary interference rather than being in favor of amendments to it.

   A new publication by Professor Ye. Gaidar "The Legacy of the Socialist Economy: the Macro- and Microeconomic Consequences of Soft Budget Constraints" (Treatises 13P, the Institute for the Economy in Transition, Moscow, 1999, 53 pages) analyzes the causes of protracted recession in many transition economies, first of all in Russia.

   It focuses on the analysis of interrelationship between the rigid monetary policy, the speed of financial and monetary stabilization, and the adjustment of enterprises to market conditions.

   The author considers the issues of rigidity of enterprise budget constraints in context of consistent implementation of radical economic reforms. A dramatic downturn in the volume of production, and a drop in real money supply have caused inadequate reaction from the authorities in the post-socialist countries.

   Wherever governments could counter populism with monetarist policies, inflation rates went down, the demand for the national currency firmed, and output began to grow.

   In those countries, however, where softer monetary policy was pursued, and governments sought to support production , the reduction in inflation took longer , the structural changes were difficult, and enterprises were slow to adjust to market conditions. Consequently, the countries suffered payment arrears, the barterization of economy, and the downfall in tax collection.

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   S. Drobyshevskiy in his "Review of Modern Theory of Time Structure of Interest Rates. Basic Hypothesis and Models" (Treatises 14P, the Institute for the Economy in Transition, Moscow, 1999, 107 pages) surveys a modern theory of time structure of interest rates.

   The paper contains some basic hypotheses explaining the time structure (the hypotheses of expectation and liquidity preference, and the hypotheses of time premium change, of market segmentation, and of "preferable" environment). A short review of empirical evidence is also given. [This sentence was not in my Russian original – Michael]

   The author distinguishes four types of time structure models :

   · macroeconomic approaches;

   · stochastic factor models;

   · stochastic models;

   · no-arbitration models.

   The appendix contains the fundamental statements [or even better probably "propositions" – Michael] of the stochastic process theory used for the stochastic models of time structure.

   The subject under consideration includes a multitude of the research methods widely applied both to the theoretical analysis of financial markets, and to the practice of the futures and derivatives markets.

   A. Radygin and R. Entov in their "Institutional Issues of Corporate Sector Development: Property, Control, Securities Market" (Treatises 12P, the Institute for the Economy in Transition, Moscow, 1999, 271 pages) look into the impact of the emerging system of property rights and corporate management [I would ask Radygin if it should be "management" or "governance" here. – Michael] models on the development of privatized entities and the economy as a whole.

   The authors show that clearly defined property rights and a well functioning corporate control [Again, I would ask Radygin if they meant corporate control or corporate governance. – Michael] mechanism are vitally important for a market economy.

   A poor mechanism of corporate control, particularly in commercial banks, is a barrier to creating an efficient financial system, and to developing a full-fledged securities market. The absence of clear cut economic and legal boundaries between public and private property may paralyze corporate investment activities.

   The first part of the book analyzes some current theoretical approaches to property rights issues. It also reviews various privatization schemes as a factor in forming a corporate control model, and gives a short description of the markets for property rights and control in Russia.

   The second part surveys the problems of forming a national model of corporate governance to protect shareholders’ interests and rights.

   The third part examines the stages and specific features of the development of the corporate securities market in the 1990s. It focuses on the regulation system, and the infrastructure of this segment of the stock market; the impact of the financial crisis on the stock market is also considered.

   The results of the research may be of practical value for drafting legislative acts on state regulation to protect investors’ rights, and for developing programs for economic reform in Russia.

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   The collection of works by I. Kolosnitsyn, M. Dmitriev, A. Stoliarov and others "Reforming Certain Sectors of Social Sphere in Russia" (Treatises 11P, the Institute for the Economy in Transition, Moscow, 1999, 283 pages) considers the issues in and proposals for reform of the pension, education and medical insurance systems.

   Chapter 1 "Financial Social Obligation of the State at the Current Stage" examines the directions and mechanisms for reforming the system of the state social obligations, it also gives examples of evaluating the financial consequences of the state’s social obligations; some proposals to reform certain social guarantees are put forward.

   Chapter 2 "Reforming Russian Pension System" is devoted to the research of the current problems of the transformation in this sector of the social sphere. It contains specific proposals for adjusting the pension reform program, taking into account the consequences of the financial and economic crisis.

   The appendix to Chapter 2 presents a great wealth of statistics, which support the actuarial forecast of the financial state of the pension system in the course of implementing the suggested measures in the area of the pension reform.

   The necessity to reform the Russian educational system is evident. However, not all the suggested options are within the government’s means. Therefore, the theoretical foundations for evaluating the feasibility of the various measures, and for the analysis of the proposals to improve the educational system, which are stated in Chapter 3 "Reforming the Russian Educational System", are very important.

   The dynamics of the development of the vocational training system between 1995 and 1998 (see the Appendix to Chapter 3) shows that unless the system is properly financed in the near future, it will see a decline in the educational level of the population and a closure of the majority of educational establishments.

   The authors believe that the current law fails to strike an appropriate balance between the medical care guaranteed to the citizens under the mandatory medical insurance system and the financial resources needed for implementing these guarantees.

   It is for that reason that Chapter 4 "Development of Mandatory Medical Insurance in Russia" reviews the financial support of the state guarantees in providing the population with medical service; it also analyzes the institutional prerequisites for the efficiency of the insurers’ activity.

   Using the results of their research the authors propose introducing radical changes into the existing law "On Mandatory Medical Insurance of the RF Citizens" (see Appendix to Chapter 4).

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   The collection of works by V. Mau, O. Kochetkova, T. Khokhlova "Certain Issues of Political Economy in Modern Russia" (Treatises 15P, the Institute for the Economy in Transition, Moscow, 1999, 99 pages) presents the articles and research of the Institute’s experts.

   V. Mau in his "Economic Issues in the RF Constitution: Possible Directions for Clarification and Elaboration" analyzes prospective amendments to the country’s basic law, which are related to the legal support of the socio-economic processes in the Russian post-communist society.

   In the article "Stability of Economic Legislation," O. Kochetkova points out that the legal support of reforms cannot be possible unless a stable legislative basis is created. (The synopsis is given in the "Reports" section).

   On the eve of the 1999-2000 State Duma election and presidential election, O. Kochetkova’s "Electoral Behavior: Economic Factors (Russia in 1995-96)" is of particular importance. Basing her views on the thorough analysis of the previous State Duma election in December 1995 and presidential election in June 1995, the author concludes that the electorate behavior and, consequently, the election results depend on the level of and outlook for social and economic development of a particular region.

   This topic is continued by T. Khokhlova’s "Analysis of the Levels of Population Dissatisfaction by the Living Standards". She argues that the individuals take part in strikes mainly because of their pessimistic views of the future rather than because of their real financial situation.

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   The collection of works by V. Stupin, T. Khokhlova, A Shadrin, V. Novikov, and M. Davydovskaya "State Regulation of the Economy: Lessons from Five Countries" (Treatises 16P, the Institute for the Economy in Transition, Moscow, 1999, 199 pages). [Notice that this sentence doesn’t have a verb. It can be a heading for a subsection, but its format is different from the previous lead-in sentences. Those were real sentences. – Michael]

   It has always been of interest to understand such issues as what is the nature of the state, what it should and should not do , as well as where is the line between the society and state, and if there are any basic rules that could help separate the former from the latter.

   The past century has witnessed a dramatic expansion of the state functions. The growth of the regulating role of the state made it possible to create the so-called developed market economy. Yet, today the regulation increasingly fails to meet the requirements of the modern society. This has forced the elites in the majority of industrialized nations to recognize the necessity of reforming the regulation systems.

   The collection examines the main directions for restructuring of state regulation in the US, France, New Zealand, Chile, and Bulgaria.

   The authors emphasize the basic factors of and the main reasons for the changes in the regulation of national economies in the above countries.

   On the basis of their research, the authors have identified the following main directions for the change in the role of the state:

   · introduction of competitive mechanisms into the traditional sectors of the state regulation: the social sphere and infrastructure;

   · increasing the flexibility of the administration system by providing incentives for all parties concerned (the executive branch, public organizations, and business) to participate in the decision making, with the state reserving the right to set general regulations and norms;

   · increasing the role of the targeted public services by identifying the priority spheres of influence, including certain groups of population, industries, sectors and segments of the market.

   The above Collected Works have been prepared based on the IET research conducted within the framework of the grant awarded by the USAID.

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   The researchers of the Institute for the Economy in Transition have prepared for publication an English version of the book "The Economy in Transition. The Essays on the Economic Policy of the Post-Communist Russia", which was originally published in Russian in 1998.

   The authors focus on the essentially new class of issues that have been facing the world economic and political community at the end of the 20th century, - the post-communism transformation of the society.

   Among the issues that have become urgent after the collapse of communism, an emphasis can be made on the following three groups: the problems of liberalization and macroeconomic stabilization; the institutional issues, i.e. the creation of the developed system of private property rights; and, finally, the possibilities and outlook for the economic growth.

   Based on Russia’s experience in the 1990s, the study concentrates mostly on the first two groups of issues. It examines the inevitability of the stagnation, crisis, and fall of socialism. It also argues the necessity and explains the nature of [or perhaps "explains the reasons for". It is really somewhat unclear what they meant by "smysl" in Russian. – Michael] the market reforms in Russia after the demise of the USSR.

   The book considers the economic and political problems facing the country emerging from communism, the options for their solution, the reasons behind the selection of the transition path, and, finally, the consequences of its implementation.

   The authors base their conclusions on the analysis of the vast body of the statistical data.

   "The Economy in Transition" is intended for English-speaking readers, and is to somewhat different from its Russian version. The factual material has been slightly reduced, and a new chapter, analyzing the main factors and consequences of the financial crises that broke out in Russia in August 1998, has been added.

The Institute for the Economy in transition invites applications from qualified persons for the positions of junior research fellow, fellow, senior and leading research fellow for the following research departments: