INSTITUTE FOR THE ECONOMY IN TRANSITION

8 2002

IN THE ISSUE:

Military reform

Research projects update

Seminars

New publications

IET in the Internet

Information

MILITARY REFORM

MEETING NEW GLOBAL CHALLENGES PROFESSIONAL MILITARY ORGANIZATION OF RUSSIA

   A group of IET experts has elaborated recommendations for the Russian Government on the military reform in Russia. In this issue of the Newsletter, we publish a brief version of this document.

   The tragic events of September 11 have radically changed the geopolitical and military political situation in the world. The terrorists have defied the humanity by showing unprecedented boldness, cynicism, and savagery. The civilized world, including Russia, must give an adequate answer to terrorism, including military means. The Russian military can not stay the same. The authorities of the Russian Federation must modernize the RF military to cope with new challenges of aggression and international terrorism by precisely targeted and inevitable retaliation.

   For this Russian needs a professional military.

   Uncompleted military reform considerably damages the preparedness of the Russian armed forces.

   The present system of conscription for the Army and the Navy inevitably results in the harassment of recruits (infamous bullying on the part of old timers) humiliating human dignity and bringing about crime among soldiers.

   At the same time, the public begins to take an aversion to the military service. Draft dodging acquires mass character, while the number of soldiers absent without leave grows.

   The composition of new conscripts is inferior in quality terms.

   The same is true about the reservists, the mobilization resource of armed forces personnel. In case of a war a professional military of peace time as a rule needs reinforcements, and therefore there arises the necessity to call up reservists. It is a general law for all large military powers of the modern world. Therefore, however impossible a new war seemed to us, the country needs a trained reserve.

   The necessity of a radical military reform has been widely discussed. However, there is no more time for contemplation. Without putting the RF military organization on a qualitatively new level and professional basis, it is impossible to ensure the military security of the nation.

   It is time to act.

   The RF military organization shall be reformed basing on the combination of two principles: voluntary military service and mandatory discharge by citizens of their constitutional duty to defend the Fatherland.

   The concept of changes in the recruitment system

   The decision on the implementation of reforms shall be taken urgently.

   1. As soon as possible (at the end of year 2001, or in the beginning of year 2002), there shall be taken a political decision, its importance shall be stressed by making it public as a part of the Presidential Address to the Federal Assembly. The essence of this decision is as follows:

   Armed Forces, other troops, military units and agencies responsible for the military and state security all structures currently included in the RF military organization shall immediately start the transition to professional organization principles (to be completed in 2 to 3 years);

   The autumn draft of year 2002 shall become the last instance of the two-year conscription implemented in accordance with the current RF legislation;

   * The leadership of the country shall issue a special address to the servicemen, drafted for a two-year term for the last time in the history of the Russian Armed Forces. The address shall emphasize the fact that they carry out the most important historic mission ensuring the transition to the new system, and, therefore, they deserve a special esteem, gratitude, and reward. The Russian state shall reward their service with a special badge of honor, money remuneration, and privileges to be granted to all servicemen upon completion of their contract service in the future.

   2. In the future, all types of military units and formations of the Army and the Navy, and other troops engaged in deterring aggression, preventing armed separatism and terrorism, being on combat duty or alert, those engaged in any combat mission shall be manned (reinforced) only with volunteers, including privates and non-commissioned officers (first of all, sergeants). Units and formations manned in this way are to be called regular troops.

   RF citizens belonging to trained military reserves or having served six and more months in the military organization upon examination of their attestation and class certification of their military training shall be entitled to be drafted as volunteers.

   After three years of faithful service contract servicemen shall be rewarded by opening a savings account. The savings may be spent either to pay a part of costs of higher education, or, after expiration of the service term over 20 years, to purchase a housing at a price typical for the central part of Russia.

   Civilians required non-military professions shall be recruited by regular troops and the Navy for discharging auxiliary and other duties, which may be performed by non-military personnel. Terms and conditions of service (employment), and mutual obligations of the parties shall be stipulated by contracts.

   3. At the same time, all draft-eligible citizens of Russia shall be trained to carry out their constitutional duty to defend the Fatherland against armed aggression.

   In order to achieve this goal, all draft-eligible RF citizens (except those exempted from conscription, granted deferment, or those who declared the wish to be drafted into an alternative military service) shall be drafted into military reserve training centers for 6 to 8 months depending on their abilities and the requirements of their military specialization. During training they shall:

   acquire a military profession in military reserve training centers,

   guard and maintain reserve armaments, military equipment, and property.

   Therefore, the country will regularly reproduce its military trained reserves. The availability of such reserves, and of the stockpile of well-guarded armaments, military equipment, and property in working condition will become a factor decreasing the possibility of aggression and terrorism.

   Potential draftees declaring that their beliefs prevent them from bearing arms shall be conscripted for an alternative civilian service to perform such duties, which will enable them to render non-military help to the armed defenders of the Fatherland in repelling aggression.

   4. The respective amendments to the law on military duty and military service, and to other laws and legal rules determining the principally new terms of military service in the RF shall be approved in the first six months of year 2002.

   In the process of elaboration of the new legislation, all rights of deferment currently in force for students shall be retained. There shall be introduced the right to choose from two service options (6 months or two 3-month periods of service). All citizens, who have acquired a military profession via RDSTO (Russian Defense Sports and Technical Organization) training courses, shall be eligible for one 3-month term of service in respective reserve training centers.

   The problem of draft dodging will become less urgent due to such a significant reduction of the term of service and radical changes in its essence and conditions.

   In case a political decision is taken to introduce the new recruitment system in the second half of year 2002, it will be possible to have no draft in the spring of year 2002, and the autumn draft of year 2003 will be carried out on the new legal basis as the first draft only into military reserve training centers.

   5. The network of military reserve training centers required for the whole military organization of the RF shall be established over two next years on the base of:

   existing military training units (training centers, detachments, schools, teams, navy crews, and navy training crews), and formations;

   combat and reserve military units, depots, and some redundant military education institutions subject to closure.

   At the same time, any infringement on the social and official status of the managers and educators working at existing military education institutions shall be prevented. Moreover, the educators and instructors shall be granted privileges, since they are responsible for education and training of the citizens both for reserves and for contract military service immediately after graduation from the reserve training centers.

   6. Simultaneously, over first two years after the political decision on the transition to the voluntary recruitment into the RF military organization is taken, there shall be implemented urgent modernization of the infrastructure in the military garrisons, where regular troops and the Navy shall be stationed on the permanent basis, and in reserve training centers.

   7. The military commissariats shall be reorganized in order to operate under the new recruitment system envisaging the end of the two-year conscription service and gradual (as new centers are established) increase in the number of draftees eligible for service in the military trained reserves over the period of the transformation of the recruitment system of the RF military organization.

   8. Salaries of professional soldiers shall be at the level of earnings of public employees, allowing for the specifics and dangers of the military service. According to estimates, the expenditures for the transition to the proposed recruitment system of the RF Armed Forces will be relatively small and affordable for the Russian economy. The distribution of expenditures across years of the reform permits to avoid expenditure peaks, in particular, in year 2003.

   The rate of growth in the money remuneration of professional servicemen may decelerate after the sharp increase in 2004 through 2005; later military salaries will change in line with salaries of all public employees. The accumulated reserve of funds will be transferred to the savings accounts.

   9. A respective program is required to successfully implement the political decision of the RF President.

   The operative elaboration of such a program may be vested with an inter-departmental working group, which is feasible to create at the RF Security Council.

   Urgent measures shall be taken as concerns:

   deployment of regular troops and forces, and of reserve training centers,

   more precise plans of development of the Armed Forces,

   amendment of service regulations, instructions, and other normative documents.

   The RF Ministry of Finance in cooperation with the Chief Financial and Economic Directorate of the RF Defense Ministry, the Directorate for Military and Economic Analysis and Expert Examination of the RF Defense Ministry, respective agencies of other departments within the RF military organizations shall be urgently charged with the task to elaborate a long term financial plan with regard to the implementation of this reform and to include respective expenditures in the draft federal budget for year 2003.

   10. Another important task is to explain and advocate the merits of the new recruitment system of the RF military organization and its advantages for different categories of the RF population.

   Proceeding from this fact, it is necessary to elaborate a special program for a PR campaign promoting the military reform.

     Transition to professional military organization: available options

     Option 1. The present legal base and the two-year conscription system persists. The transition to the recruitment into the RF Armed Forces only on the contract basis is delayed for the future. The number of privates and non-commissioned officers serving under contracts is kept at the current level. The number of conscript servicemen steadily reduced to the planned level. The number of new draftees decreases respectively. In fact, the Ministry of Defense has promoted this option until recently.

   Option 2. The conscription is eliminated in year 2002. Servicemen drafted earlier are demobilized in 2002 through 2003 after completing their respective terms of service. The number of privates and non-commissioned officers serving under contracts grows accordingly until year 2004. This option envisages the general dynamics of the total strength to be the same as for Option 1. Conditionally, this option may be referred to as a fragment of the Yabloko party political platform.

   Option 3 recommended. Servicemen conscripted earlier complete their terms of service. The draft for short-term service and training at reserve centers starts in year 2002; gradually the number of trainees increases to meet the capacity of existing training military units (about 100 thousand), there are established new centers. Further all these centers shall be referred as reserve training centers.

   Since the Ministry of Defense under the pretext of organizational problems excludes the possibility to start these reforms in year 2002, another option was estimated (the only difference from Option 3 is the starting year of the reform 2003).

   Therefore,

   first option sets the transition to the volunteer recruitment for an indefinite future;

   second option envisages the immediate start of the reform along all avenues;

   third and fourth options, differing by the starting year of the transformation of the recruitment system of the military organization are a compromise.

   The feasibility of Option 3 as concerns privates and non-commissioned officers greatly depends on the minimal threshold amounts of salaries sufficient to attract young people to contract service. The preliminary multi-aspect estimate of these parameters was carried out by IET experts; a more thorough analysis was carried out by VTsIOM experts along the traditional methods of public opinion polls. The polls were to estimate the amount of remuneration above roughly Rub. 1,400 per month currently expended for a conscript serviceman, i.e. food, uniforms, barracks living costs, etc.

   As a result, it was established that out of about 12 million of Russian citizens (age 18 to 28) the number of potential volunteers (contract servicemen) was:

   106 thousand (salary at Rub. 2,000 a month the level of year 2000),

   425 thousand (salary at Rub. 3,000 a month),

   910 thousand (salary at Rub. 4,000 a month),

   2,174 thousand (salary at Rub. 5,000 a month, etc.).

   The results of other public opinion polls are also of interest. In spite of the fact that accroding to VTsIOM estimates almost 5 million people (40 per cent) have a negative attitude to the service in the RF military organization in the peace time, notwithstanding the amount of salary, the majority of respondents (67 per cent) approve the concept of reducing conscript service to 6 8 months, while 83 per cent support the transition of regular troops (forces) to the exclusively professional service.

   Proceeding form the necessity to guarantee the recruitment of the required number of privates and non-commissioned officers to troops (forces) being in the state of constant combat preparedness and taking into account the feasibility of having not less than 2 applicants per a vacancy, it is recommended to gradually increase average salaries by Rub. 500 a year (in prices of year 2001).

   Besides, it seems feasible to conclude contracts in a way guaranteeing the recruits this annual increase in salaries until year 2004, so that later the level of payment was adjusted to the salaries of RF public employees. It goes without saying that future increases in salaries shall be stipulated not only in contracts concluded in 2003 through 2004, but also in contracts of earlier recruits in order to prevent their demobilization.

   Comparing options: an analysis of economic indicators

   By analyzing the results of calculations it was established the following:

   1) Option 1 maintains the amount of expenditures for privates and non-commissioned officers at practically the same level, since the increase in salaries of contract servicemen is compensated by the decrease in number of new draftees, while Options 2 and 3 (envisaging the reform of the present recruitment system) require a considerable increase in expenditures.

   2) The amount of additional funds required for the transition to the new recruitment system by Options 2 and 3 differs significantly, both in aggregate terms (over the whole period under observation), and in annual terms, especially in year 2003, which, as it is generally known, is a critical year for the Russian economy. This difference persists across both systems of initial data.

   3) The amount of expenditures required to implement Option 3 increases insignificantly up to year 2004 in comparison with Option 1, which maintains conscription. This fact may be explained by the presence of two-year conscripts in the composition of the RF Armed Forces, what makes more feasible the transition to volunteer recruitment system in a two-year period.

   4) In year 2004, additional expenditures caused by transition from conscript to volunteer recruitment of privates and non-commissioned officers will increase in comparison with preceding years. However, this increase is not very significant as compared with the total defense expenditure in the current year. Additional expenditures will make 8.1 per cent for the second option and 5.3 per cent for the third option.

   Comparing options: general conclusions

   First option: although the cheapest, it does not settle the problem of transition to a professional military organization in near future;

   Second option: it is most expensive, however, it does not settle the problem of maintaining the mobilization reserve at the necessary level;

   Third option (recommended): it solves both problems at a moderate cost.

   The conclusions remain practically the same, notwithstanding what data on the strength of the RF Armed Forces are used for computation.

   Analyzing the relationship between economic characteristics and terms of the recruitment system reform

   The problem of the terms required to reform the system of recruitment of privates and non-commissioned officers in the RF military organization is a difficult and multi-aspect one. As concerns its economic aspect, the arguments can base on the quantitative evaluation.

   However, the discussion of this problem shall start not with economic, but organizational aspects. Opponents constantly argue that the military is unprepared to implement the reform, that the reform requires a thorough preparation. However, it shall be noted that this problem is not new at all. The discussion has been carried out for almost ten years. The Ministry of Defense has maintained the special Directorate for the Military Reform since 1992. There were conducted numerous studies. The RF President (not present, but the former one) set exact terms for transition to contract method of recruitment. These terms have expired long ago, and it is reasonable to inquire: what the time and money were spent for, were the plans are, why no feasible option to settle this problem was elaborated, and why it seems that the reform starts from the scratch again.

   It shall be mentioned that responses to the recommendation to reform the recruitment system on the base of Option 3 lack quantitative estimates with regard to preliminary operations and the time they require.

   For instance, as concerns the legislative base, as experience shows, the passing of traditional steps of the legislative process may be accelerated and urgent laws (amendments to laws in force) may be passed in less than six moths. However, is it necessary to wait for the completion of this process, when the results of VTsIOM public opinion polls demonstrate that 83 per cent of Russian citizens think it feasible to start the transition to the professional armed forces immediately? Moreover, there is a sufficient number of RF citizens, who are ready to serve in the RF military organization under contracts in case salaries of this category of servicemen somewhat increase.

   The reform can be started in the framework of the legislation currently in force. Shall there be the conscription? This question is in the jurisdiction of the RF President. He may announce the start of reforms and stop two-year conscription since the spring of year 2002. A similar precedent has been recently set in Ukraine.

   End-2001 through first half-year of 2002 may be used to prepare the transition to the new recruitment system:

   elaboration of the legislative base;

   adjustment of the structure of the military organization;

   establishment of reserve training centers.

   A special problem is the financing of the reform. Bearing this question in mind and using more precise initial data, it is possible to work out the program of reforms for year 2002 in such a way (it was done in the process of elaborating Option 3) that only minor adjustments will be necessary in terms of financing. Even additional payments to servicemen to be demobilized in year 2002 may be provided without radical revision of the budget, at the expense of funds saved due to the abolition of the traditional conscription. These payments are substantially below the expenditures for a traditional draft campaign.

   The recruitment of draft-eligible citizens for a six-month training in military reserve training centers may be started since the second half-year of 2002, when the present legislative base is amended and the capacities of existing training units to train required specialists become more clear.

   In fact, Option 3 permits to use the whole year 2002 for comprehensive preparation of all agencies and services for the complete transition to the new recruitment system for the RF military organization without additional spending as compared to the military expenditures targeted by the federal budget for year 2002.

   Young people: tentative response to the recommended option

   In order to elaborate further certain components of the recommended reform, there was conducted a study of the attitude young people have towards the recommended transformations. IET experts carried out a questionnaire poll among students attending Moscow and provincial institutions of higher education (both having and not having military departments).

   This study was considerably developed and convincingly substantiated in the course of a public opinion poll carried out by VTsIOM experts. The representative character of the VTsIOM sampling (1,602 respondents) permitted to draw the conclusions about the attitude of the whole RF male population (age 18 28), which according to Goskomstat estimates makes at present 11,815 thousand. It shall be noted that persons not eligible for military service made 13 per cent of this segment of VTsIOM respondents.

   For the answers given by men in response to the question about the reasonable and at the same time attractive increase in salaries of contracted servicemen, see above.

   The processing of respondents answers to other entries of the questionnaire permitted to arrive to the following conclusions:

   a) the majority of respondents gave unequivocally positive answers to the deliberately varying question about their support for the transformation of the military organization into a professional one. For more detailed information, see below:

   nine tenths (90 per cent) of respondents answered yes and probably yes to the question if Russia needs professional armed forces recruited on the voluntary basis;

   four fifths (83 per cent) of respondents supported the proposal to carry out the transition to a professional military organization, that meaning that regular troops shall recruit volunteers; –

   three fourths (76 per cent) of male respondents (age 18 to 28) expressed the opinion that regular troops and other forces ensuring the security of the country in the time of peace should be reformed in a way permitting exclusively volunteer recruitment (contract service);

   b) the majority of respondents prefer short-term service at reserve training centers to other methods of preparing citizens for discharge of their constitutional duty to defend the Fatherland against aggression (71 per cent according to IET and 75 per cent according to VTsIOM). Only six per cent are for retaining the present two-year conscript service; 67 per cent of the youngest respondents (age 18 to 19) would prefer short time (six months) service to the present two-year conscription.

   c) respondents mentioned the following incentives making contract service more attractive:

   privileges concerning higher education (49 per cent of student respondents according to IET and 75 per cent of all respondents according to VTsIOM);

   licenses to work as security guards; this incentive was mentioned by 35 per cent of students and about 75 per cent of all respondents.

  Will the proposed plan be supported by the public? 

   Yes, the majority of the population will support this plan. It concerns young people (both showing positive and negative attitude to the service in the RF military organization); the commanding officers of the Army and the Navy, who will be able to spend more time performing genuine military tasks, officers working at military commissariats, and many other RF citizens, not to mention soldiers mothers.

   Since it is proposed to increase salaries of officers, warrant officers, and ensigns (and therefore, military pensions) simultaneously with the transition to the volunteer contract service, their support is assured.

   From our viewpoint, the merits of this plan ensuring the professionalism of regular military units and simultaneous training of military reserves, practically excluding such a phenomenon as bullying (all this at a reasonable cost!) are obvious for the majority of Russian citizens and will be supported by them.

   Will there be objections against the proposed concept and resistance to its implementation?

   There is no doubt that it will happen. Those lobbying interests of other budget recipients will openly oppose any increase in military spending, even for reasonable reforms.

   Among less apparent opponents there will be those used to dispose of submissive and undemanding subordinates ready to execute any order in exchange for timely demobilization. Those loosing free labor force to build their dachas (it will be difficult to assign such a task to a professional soldier) and opportunity to write off material and financial resources at the expense of conscripts not knowing their rights.

   As a matter of fact, the concept has been already publicly criticized, even if critics more and more often have to admit usefulness of key principles of the concept in the course of stating their own views about rational transformation of the recruitment system. In the end, there remain only two objections: no money and no hurry.

   On the whole, speaking of the position taken by persons who object and can resist the reform, let us note that in critical periods of its history Russia relied on quite different people. The people and the state need the reform. And since there is an opportunity to carry it out, the reform shall not be delayed!

RESEARCH PROJECTS UPDATE

THE FOURTH STAGE OF RESEARCH CONDUCTED IN THE FRAMEWORK OF THE USAID GRANT

   In September 2001, the Institute launched the fourth stage of research conducted under the auspices of USAID. At this stage research focuses on the following academic and applied problems: analysis of effects of the tax reform, corporate governance and managing shares of public property in Russian enterprises, credit and monetary policy and exchange rate of the Ruble, political and economic research, agrarian sector, reforming customs law.

   The Institute research staff proceed such a major direction of their work as consulting services rendered to various ministries and agencies, specifically, the RF Ministry of Finance and the RF Ministry of Economic Development and Trade. The grant resources also allow an intense publication of the research outputs, both in Russian and in English, as well as their promotion and dissemination among foreign economists by the means of participation in economic forums held abroad.

   Some main items of the Institutes research agenda are presented below.

   Internal and external aspects of Russias monetary and credit policy.

   This paper deals with generalization of theoretical approaches towards studying into inflationary processes (change in demand for money) and evaluation of their significance for explanation of the situation in the national economy over different stages of reform. The authors of the paper deal with modeling of inflationary processes in the national economy prior to and in the wake of the 1998 crisis on the basis of econometric modeling of demand for money and money supply with account of exogenous factors suggested in theoretical models. As well, the authors review main regimes (the targeting of interest rate, money supply, exchange rate, and inflation) and regulations (Friedman rule, Taylor rule) in the area of monetary and credit policy. The authors also conduct the analysis of empirical approaches to an ex post identification of objectives that the monetary authorities follow while pursuing monetary and credit policy. The paper contains an empirical research of internal specifics of the monetary and credit policy conducted by the Central Bank of RF: identification of actual intermediary objectives of the monetary and credit policy, identification of monetary shocks and evaluation of the roles played by single mechanisms of monetary transmission in the Russian economy on the basis of evaluation of structural econometric models and vector autoregression models. The authors deal with a correct calculation of real exchange rate of the Ruble, identification and calculation of equilibrium real rate and impact on economic growth in Russia, trade balance and import substitution processes, selection of guidelines for real exchange rate and chances for targeting real exchange rate in the present conditions.

   Improvement of taxation of the mineral sector

   The paper deals with the problem of improvement of taxation in the mineral sector by introducing a special tax on superprofit- that is, the tax imposed on additional revenues generated by the hydrocarbon output (TAR). The tax can be introduced for new deposits, to substitute for a part of the tax on mineral output (for example, should TAR be imposed, the tax on mineral output is paid using the coefficient of 0.2).

   TAR takes into account geological and economic conditions for the hydrocarbon output and encourages investment in development of new deposits. As far as highly efficient projects are considered, the use of TAR secures progressive withdrawal of resource rent in favor of the government along with improvement of conditions of implementation of projects with lower efficiency.

   Introduction of TAR implies transition towards a tax system based upon three components: royalty, tax on additional income, and corporate profit tax. Such a system is more modern, as it to a greater extent appears based on income taxation.

   Problems of building production functions in the Russian transitional economy.

   This paper deals with research into aggregate model of economic growth whose element is production function that relates output to volumes of capital assets, labor costs, and, possibly, other production functions. Single sector models of this type are used as a vehicle employed both for building economic forecasts for the forecasting horizons that exceed reachable with the use of time series models based upon extrapolation of current tends and for conduct of retrospective analysis of processes at macrolevel. The production function apparatus is fairly well developed, as far as mature market economies are concerned, and there are a lot of publications on this issues. At the same time the conditions of transitional economy (and earlier- the conditions of planned economy) introduce substantial specifics to the area of building production functions. For example even an acquisition of any trustworthy data on costs related to production factors assets and labor- in the conditions of transitional economy appears problematic. To a great extent such problems are caused by principle complications, rather than technical ones. In fact, under transitional economy it is complicated- and often impossible- to ensure market estimation of production assets. Similar problems arise whenever one attempts to estimate labor costs under labor hoarding effect, when employers are considered using a formal sign- that is, their official job, rather than their actual labor costs. With intense structural shifts inherent of transitional economy in place, aggregate economic indices used to develop production functions may not contain some essential information on the dynamics of the integrity of individual indexes. That may cause unambiguous effects. The question also is to what extent these very factors (assets and labor) and the very functional form of a regular production function are suitable for their use in transitional (and prior to that in planned) economy.

   Under market economy, this choice is not at all arbitrary and appears based on some theoretical grounds. That, in turn, allows a certain way of interpretation of characteristics of production functions (say, to compare a particular output derivative with salaries and wages). However the question as to what extent this theoretical basis is adequate to a more general case of transitional economy is subject to discussion. As long as transitional economy is concerned, this allow justification for the use of a more general concept of production dependence instead of the concept of production function, provided that under the former we understand functional dependence of a more general type, which, for instance, can take into account both absolute values and growth rates, or it can employ non-traditional set of production factors, say, investment instead of assets.

   Research into the area of forecasting the Russian macroeconomic series.

   The paper deals with research into prognostic features of time series models built upon actual statistical data for some Russian economic and social series reflecting dynamics of change in GNP, industrial output, employment of population, budget revenues and expenditures, inflation, money supply, export and import. The authors also consider prognostic capacity of the models built within the framework of vector autoregressions, with co-integration between the series concerned in place. With the co-integration between DC=series in place, there is a possibility of building a combination of short- and long term dynamic regression models in a form of so-called error adjustment model. The application of the model selected makes it possible to built both short- and long-term forecasts.

   Specifics of formation of production and price plans (forecasts) of Russian industrial enterprises between 1992 through 2001.

   The paper deals with research into models of short-term forecasting of volumes of output and prices in the national industrial sector on the basis of results of monthly business surveys of heads of enterprises IET conducted since 1992. The composition of items of the questionnaire and the panel organization of surveys allow fulfillment of in principle new tasks under the present project. First, the existence of questions on actual and planned (forecasted) changes in all the indices makes it possible to evaluate accuracy of forecasts made by enterprises themselves and, consequently, to evaluate the value of such forecasts. Whereas the data on forecasts and actual changes has been collected since 1992, there is an unparalleled opportunity to follow the evolution of accuracy of enterprises forecasts as well as to study into factors determining it. Secondly, the possibility of comparison of forecasts with their consequent actual realization is used to study speed and types of enterprises reaction to unexpected (non-forecasted) changes of demand. Thirdly, the main part of the paper constitutes the research into factors whose values are available from the surveys at t moment and determining actual state of forecasted variables at the moments t+1, t+2, t+3. The composition of independent variables comprises any indicators of business surveys: actual and/or/ forecasted changes in output, price, production costs, demand (effective, barter, other non-monetary ones), stock of finished products, stock of raw materials, employment, estimates of competition and competitiveness. The major part of the noted indicators are used for the first time for the purpose of model evaluation, as they do not (and may not) be included in enterprises official reports, though they are in broad use in economic theory. This primarily concerns enterprises expectations and estimates of their stocks of finished products. A special attention is paid to demand variables. They appear of greatest interest for transitional economies, however, they practically are not employed in economic analysis.

   Research into corporate sector

   The paper contains a fundamental review of modern theoretical approaches towards enforcement problems. Enforcement is considered the weakest link in the system of property rights protection in Russia. The paper also tackles such problems as public and private enforcement of contracts, the problem of imbalances, and applied problems of enforcement.

   Important direction of the paper appears consideration of tiers of the national judicial system, public courts, non-public judicial structures (such as arbitration court, professional associations, etc.), international courts (international arbitration court). The paper addresses the problem of balance between them (currently and in perspective). The paper focuses on the mist typical problems facing legal entities (joint stock companies (AO) and private individuals, should they appeal to each of the noted structures. As concerns international arbitration courts, the paper also refers to the problem of Russia non-complying with the respective verdicts, despite the New York convention. The authors evaluate kinds of sues and kinds of courts deciding on contract-related disputes between AO=s or an AO and a private individual. While considering the most obvious and significant problems of courts activities, the paper also provide a review of the existing plans to reform judiciary system in Russia and evaluation, specifically economic one, of the reforms trends .

   The paper also suggests a fundamental review of modern theoretical approaches to problems of mergers and absorptions as well as the market for corporate control in Russia as external corporate governance mechanism, including practical examples of mergers and absorptions in the country and the national law on these particular problems.

   Vertical coordination in Russias agri-food complex

   The paper deals with analysis of various forms of vertical coordination in the food market, including vertical integration, as alternative solutions to market transactions. The main hypothesis considered in the present research is that a deficiency of the market for food in transitional economy manifests itself through emergence and a substantial development of forms of vertical coordination. The wider vertical coordination spreads, the greater the level of imperfection of the food market is. In other words, the level of costs of sales (purchases) on free market is so high that it forces market operators to opt for different kinds of integration. The other hypothesis deals with testing for accuracy of the statement that there is a further shift from vertical coordination towards vertical integration underway. This shift is explained by the lack of mature institutions that ensure fulfillment of contract obligations (public institutions- to protect from risks, while private ones- implying business ethics). Market agents makes their further choice in favor of their own production. The latter takes different forms (acquisition of a stake of enterprises of the previous or consequent production stages, acquisition of enterprises, renting land and organization of agrarian production, creation of financial and industrial groups). In the course of the work the authors identify forms of vertical integration in food chains, specific factors of vertical integration in Russias agri-food complex, evaluate effects of vertical integration with regard to formation of markets in AFC, and develop recommendations for Russias agri-food policy in respect to vertical integration over the forthcoming years.

   Review of budget support of AFC between 1994 to 2001

   The paper deals with surveying the budget policy with regard to AFC, considers expenditures on provision of budget services and evaluates their efficiency. This particular part of expenditures may be rationed, and at this point the problem of rationalizing the correlation between public and private sectors indeed appears very relevant.

   Evaluation of the other part of budget expenditures- the funding of programs- is based upon testing for two main hypotheses. First, inefficiency of programs designated for support of producers: to test for this hypothesis, the authors analyze the structure of budget spending on AFC, provide description of main programs of support of AFC along with identification of the share of budget support in the overall level of support extended to agrarian producers. It is also intended to evaluate single programs from the perspective of reaching each concrete programs objectives.

   The other hypothesis is based on the assumption that the budget support of AFC is often exercised at the expense of consumers. To test for this assumption, the authors calculate consumer subsidy equivalents, identification of consumer transfers to carry out single programs of support of AFC.

   The present research implies outputs, as follows: development of a number of measures to improve the budget support of the national AFC for the purpose of enhancement the sectors efficiency, and development of recommendations on change or termination of the funding of various support programs, optimization of the structure of budget support.

   Forecast of consumption of main groups of food stuffs in Russia for medium term perspective

   Post-crisis development of agri-food complex in Russia showed a great dependence of this sector on the populations effective demand. Moreover, the consumption of main food stuffs by the nation has a great elasticity in terms of the nations incomes. For example, in 2000 roughly as much as 3/4 of the increment Rb. of the populations real incomes fell on 1 Rb. of increment in retail trade with food stuffs. That is why, as far as the short run development is concerned, growth in real incomes would still be leading to growth in demand for agri-food products. So, to build forecasts of development of the national agri-food complex for the medium term perspective, one needs scenario-based estimates of changes in consumer demand for basic food stuffs.

   The paper deals with the forecasting of consumer demand, with the emphasis put on the following main tasks: identification of factors influencing consumer demand; identification of regional specifics in consumer demand; building prognostic model, development of medium term scenario-based forecast of consumer demand between 2002 to 2004; development of recommendations for formation of agrarian policy in connection with medium-term forecast of consumer demand.

   The authors evaluate the experiences of medium-term forecasting of consumer demand for food in market economies worldwide as well as dynamics of food demand in Russia over past 10 years.

   In the course of Implementation of this work, the authors were collecting the data characterizing consumer demand for food of the country on the whole and across single regions. On the basis of the data collected the authors build an econometric model of food consumption on the whole and by basic food groups (bread, milk and meat products, sugar, vegetable oil, eggs) and show specificity of models of consumer demand across groups of Russian regions.

   On the basis of the models built the authors hold imitation calculations allowing scenario-based forecasts of consumer demand for basic food stuffs in Russia and across its single regions for medium term perspective. The noted forecasts also allow certain assumptions on development of the whole agri-food complex and recommendations on formation of agri-food policy.

   Evaluation of efficiency of consumption of purchased resources in Russias agrarian sector

   The Soviet Union was one of the largest producers of resources for agrarian sector, however the level of sufficiency of the national agrarian sector with technical means was very low. The quality of machinery and equipment was low, while mechanisms of their provision to kolkhozes and sovkhozes as well as the ways of their use were extremely inefficient. The price correlation between resources and agrarian products set by the state would demonstrate to agrarian producers cheap costs of resources supplied to them which also used to result in their waste. Price liberalization has led price proportions to the correlations noted worldwide. In the course of economic reform, price rise for resources for the agrarian sector along with other processes made the resources unavailable for agrarian producers, which in turn led to decapitalization of the sector and fall in its capacity for renewal.

   Since the beginning of the reform the state support was aimed at compensation for the price rise fir the agrarian sector. The federal and regional budgets spent considerable funds on numerous programs of compensation for costs of fuel and lubricants, fertilizers, machinery, heating and feeders for single kinds of producers. The costs for electricity and transport services were decreased thanks to the cross-subsidizing of the agrarian sector. However the effectiveness of the noted measures chiefly proved to be very low over the past decade: the sector decapitalization has not been discontinued.

   That formed the background against which the sectors producing resources for the agrarian sector, primarily agrarian machinery engineering, began to degrade. The production of fertilizers became exclusively export-oriented and found itself not to be strongly dependent on domestic demand.

   The growth in output in the agrarian sector that started in 1999 also caused growth in demand for resources. That in turn led to rather a rapid growth in production of agrarian machinery in the country. The growing production is confronted by institutional underdevelopment of the market for resources, along with a number of other problems. This market is poorly studied into, and the present papers chiefly appear descriptive. The purpose of the present paper is a description of the current state of the market for agrarian machinery and equipment, fertilizers, and fuel and lubricants, as well as development of methodology of further research into these markets.

   The research tackles three main issues: constraints facing an efficient use of purchased resources in the agrarian sector; conditions for material and technical provision of the agrarian sector; and agrarian policy as a factor of material and technical provision of the agrarian sector.

   Prospects for combination of voluntarily and compulsory medical and social insurance in Russia.

   The paper identifies perspective directions and institutional mechanisms of patterns of transformation of system of compulsory medical and social insurance that secure resolution of problems of financial sufficiency and social equity of the current concrete kinds of compulsory social insurance. The authors evaluate the current combination and interaction between voluntarily and compulsory medical insurance, analyze expenditure mechanisms within the system of compulsory social insurance. The paper generalizes foreign experiences of combining voluntarily and compulsory medical and social insurance. The authors develop and conduct comparative analysis of optional solutions to of the government policy towards emergence of voluntarily and collective forms of medical and social insurance, develop institutional mechanisms of Implementation of promising patterns of combining voluntarily and compulsory medical and social insurance.

   Deregulation of Russian economy: the mechanism of reproduction of excessive regulation and institutional support of competition on commodity markets and civil servants loyalty.

   The purpose of this paper is to develop concepts for legal acts designated for blocking reproduction of state control and encouraging solution of problems of limited rationality (high costs incurred by consumer to obtain trustworthy information in the conditions of a transitional economy) and information asymmetry at the expense of civil and private (including commercial) initiatives. As well the paper deals with development of recommendations on improvement of the legal base regulating operations, professional training and material remuneration of civil servants and securing their efficient interaction with citizens and private business.

   Evolution of regional elites between the early 90s until nowadays.

   Focusing on the overwhelming majority of Russian regions, the paper constitutes a study into the circle of their leaders, including governors, mayors of Oblasts centers and heads of regional legislature. The authors introduce additional data and facts related to the history of emergence and transformations of elites in contemporary Russia as well as develop an apparatus for formal analysis of single aspects of this problem. The research focus on origin, political orientation (for example, though evaluation of voting on key matters on the Federation Council), stability of position, and regularities of evolution of regional elites. The authors develop and test for the model Impact of electoral preferences of region on political orientation of regional elites. The paper also contains a detailed description and analysis of processes and regularities of emergence of new elites in the process of revolutionary transformations in the state and society over the 90s. As well, the paper allows identification of constraints to social mobility and contains practical recommendations on their elimination.

   Development of program of support of social reforms.

   The paper presents vision of social reform in Russia and contains an additional analysis and selection of such directions of the reform of the system of social support of the population, which, being justified as far as finance and economic challenges are concerned, have real chances to be implemented. The result would become development of a draft Concept for reforming social support of the population in the course of implementation of social reform. The Concept should include long-, medium, and short-term components and the respective measures. The research contains an overall financial evaluation of the Program of support of social reforms and analysis of the current and perspective state of the sources for financial security of its measures. Should the programs budget appear suffering a substantial deficit, the paper contains proposals on attraction as financial sources of currently not used or insufficiently used sources and on mobilization of additional revenues or traditional sources of funding social programs. The paper also deal with evaluation of the legal basis of the Program of support of social reforms and identification of existing legal lacunas. On the basis of the results of the noted evaluation the paper further deals with development of in principle new and with amendments to the effective legal acts of the federal level - both fundamental and particular ones. The present research should result in the list of such acts and in their conceptual contents available for further drafting of legal documents by lawyers. The paper also evaluate economic and social effects from implementation of the noted Program of support of social reform in Russia. The emphasis is put on studies into possible decline in the poverty level, scope of income re-distribution between different groups of households, changes in volumes and directions of financial flows of the enlarged government, and on envisaged reaction of the population to implementation of concrete measure under the Program. The paper also studies into the problem of adequacy of the current institutional structures dealing with problems of social support to the respective functions intended for them as per the Program.

   The banking system in the post-crisis stabilization period.

   The paper deals with identification of directions of shifts taking place in the banking sector in the period of economic growth that began in the national economy. A special attention is paid to sources for credit resources in the post-crisis period. As early studies showed, it was credits extended by banks non-residents that to a significant extent formed the pool for loans denominated in foreign exchange issued to enterprises residents in the pre-crisis period. The 1998 financial crisis that was accompanied by the outflow of non-residents capital and substantial amounts of outstanding obligations to them made this particular source of funding no longer available for many commercial research focus on analysis of relation between the volume of loans denominated in foreign exchange to enterprises residents and such factors as non-residents interbank credits; budget accounts and accounts of off budget funds; enterprises accounts; enterprises deposits; deposits held by budgets and off-budget funds, deposits held by private individuals. For this purpose the authors built a range of regression models that reveal correlations between the volume of loans denominated in foreign exchange disbursed to enterprises-residents and different kinds of obligations.. To identify regularities, the regression analysis is held as of several dates, including the pre-crisis level, the period of its sharp phase, and stabilization period. As well, while building regression models on the basis of the data of different samples of banks, the authors trace changes in significant factors. The work analyzes dynamics of major profitability indices in the post - crisis period both across the banking sector on the whole and in single groups of banks that were formed suing such indicators, as volume of assets, their structure, structure of liabilities, the shares of interest and non-interest revenues in net operational income.

RESEARCH PROJECT ON DEVELOPMENTOF THE FEDERAL AND REGIONAL LAW ON INTERBUDGETARY RELATIONS AND SUB-NATIONAL FINANCE

   IET has launched a research project on development of the federal and regional law on interbudgetary relations and sub-national finance. This large scale project will last for three years and is carried out in the frame of the IBRD loan.

   IET is a principal participant in the projects, while other contributors to it are experts of the Russian center for fiscal policy and of the US research foundation of the University of Georgia.

   Under the project framework of the project it is intended to carry out a comprehensive research into problems of reforming budget and fiscal law, interbudgetary relations and sub-national public finance in the frame of Program of Development of Budget Federalism until 2005 and development of new federal and model regional legal acts securing implementation of a new stage of reform in this area.

   To reach the project objectives, it is envisaged that the research efforts will be focusing on:

   1. Diagnostics of the effective legal base and currently available draft statutes on interbudgetary relations and sub-national finance, development of concepts for and recommendations of reforming interbudgetary relations and sub-national public finance.

   2. Development of programs (action plans) of the RF government with respect to reforming interbudgetary relations and sub-national public finance.

   3. Development and evaluation of federal legal acts on interbudgetary relations and sub-national public finance.

   4. Development of model (standard)legal statutes drafted by the Subjects of the Federation and local self-governance authorities.

   5. Contribution to operations of the RF Ministry of Finance related to development of legislative innovations in the course of development of draft federal budgets for 2002-04 and draft legal statutes appended to them (in the part of regulation of interbudgetary relations and sub-national public finance).

   6. Conducting seminars to present research outputs of the project and their discussions.

   The main output of the initial stage of the project became draft law On introduction of amendments to Art. 135 of the Budget Code of RF that introduced substantial changes to methodology and procedures of allocation of resources of the Fund for Financial Support of RF Subjects.

  As well, the draft Agreement on improvement of regional finance was developed. The document fixes obligations of the Subject of the Federation and the RF government with respect to allocation of resources falling within the category of additional financial assistance. The Agreement covers exclusively terms and conditions of allocation of additional financial support from the federal budgets to RF Subjects that received a special highly subsidized status.

   In the meantime, in the frame of the project experts have developed a working paper on problems of budget status of municipal entities. The paper contains a detailed analysis of the effective law that regulates municipalities budget status and main guidelines for its reforming.

   In addition, there is another working paper Allocation of powers in the area of taxation between authorities of different tiers. The document presents structure of powers in the taxation area exercised by federal, regional and municipal authorities in compliance with the effective law as well as problems of division of powers related to setting and introduction of taxes, tax rates and benefits; powers exercised by authorities of the RF Subjects with respect to tax revenues to local budgets.

   The research activities have resulted in development of a comprehensive Concept for amendments to the tax and budget law aimed at enhancement of efficiency of the system of allocation of fiscal powers and tax revenues between the budgets of different tiers.

   In the frame of the project the expert team has drafted a memorandum on a possibility of application of minimal social standards in the budget process and conclusions as to the work on the system of minimal social standards should be centered on revision of the whole system of social guarantees implying elimination of unfunded federal mandates through bringing expenditures on social policy in line with the current capacity of Russias budget system.

   The implementation of the project in questions would allow a considerable improvement of the system of interbudgetary relations and regional finance and help overcome barriers to carrying out the financial reform in Russia on the whole.

SEMINARS

SEMINAR ON IMPROVEMENT OF THE SYSTEM OF EVALUATION OF FISCAL CAPACITY OF PROVINCES AND TERRITORIES OF CANADA

   In the framework of CEPRA project, IET researcher Mr. I. Trounin attended a seminar on improvement of the system of evaluation of regional fiscal capacity for the purpose of interbudgetary equalization held on August 27-28, 2001 in Sharlottetown, Prince Edward Island, Canada The seminar was attended by representatives of the Federal Treasury of Canada, Treasuries of Canadian provinces and territories, and academic community that deal with research into the area of fiscal federalism.

   One of the main issues discussed at the seminar became prospects of transition towards evaluation of indicators of Canadian provinces and territories fiscal capacity. Such indicators are employed to calculate federal equalizing transfers on the basis of the method of macroeconomic indicators. At present, the evaluation of fiscal capacity is carried out according to the representative fiscal system methodology, however, the Treasury has put forward proposals on a transition from this technically more sophisticated method towards the method of macroeconomic indicators (for a greater detail regarding the essence of both methods and their advantages and deficiencies, please refer to: P. Kadochnikov, O. Lugovoy, S. Sinelnikov-Murylev, I. Trounin : Evaluation of the fiscal capacity and expenditure needs of the Subjects of the Russian Federation. Consortium for Economic Policy, Research and Advice. Moscow, 2001). To complement Mr. Trounins research findings some other participants in CEPRA R. Boadway and P. Hobson also made their presentations.

   Participants in the discussion expressed their opinion as to despite existence of theoretical advantages of the approach towards evaluation of regional fiscal capacity with the use of macroeconomic indicators compared with the representative fiscal system methodology, meanwhile introduction of such an approach to the budgetary equalization system did not appear expedient. It was argued that despite the current complexity of techniques of calculation of fiscal capacity indicators, such an approach was accepted by all the participants in the system of interbudgetary relations, i.e. there was a certain political consensus in this respect, while the system of calculations was fairly well elaborated and was practiced during a long time. In such a situation possible advantages of the employment of the approach towards evaluation of regional fiscal capacity that would be based upon macroeconomic indicators did not appear evident.

   As long as the Russian practice of interbudgetary relations were concerned, the discussion showed that in the course of development and introduction of a system of evaluation of fiscal capacity for the purpose of budgetary equalization one should focus both on a balance of advantages and drawbacks of either method and on considering political and practical aspects of employment of different evaluation methodologies. The discussion at the seminal also allowed conclusion that apart from other advantages, an efficient methodology of evaluation of fiscal capacity should have such characteristics as universal nature of calculations for all regions without exceptions, support on the part of all the parties involved in interbudgetary relations, and stability of its application over a certain period of time.

   On September 20, 2001, IET received Arnold Harberger, Professor in Economics, University of California, Los Angeles. A renowned expert in economics, Mr. Harberger first visited IET in spring 2000 and our cooperation has expanded greatly since then.

   While visiting IET last time, Dr. Harberger contributed to a seminar at which two problems were discussed: Impact of interbudgetary transfers on regional authorities behavior in Russia and Prospects for establishment of stabilization fund in Russia. The seminar was also attended by Yegor Gaidar and Andrei Illarionov, Economic Adviser to President Putin.

   The abstract of the presentation on stabilization fund made by Iet research fellow Mr. Pavel Kadochnikov is given below.

PROSPECTS FOR ESTABLISHING A STABILIZATION FUND IN RUSSIA

   The characteristic feature of the Russian economy is a strong dependence on world markets for metals and energy sources. Changes in oil prices lead to intense fluctuations in budget revenue. This fluctuation creates certain problems for government authorities in pursuing economic policy.

   In the meantime, high oil prices, along with compulsory sales of a part of export receipts denominated in foreign exchange and the lack of suitable apparatus for open market operations, lead to a situation in which the Central Bank cannot target nominal and real exchange rates simultaneously. The demand for foreign exchange on the part of the CBR in order to complete its foreign reserves and prevent devaluation of the national currency, leads to growth in the money supply. This results in real exchange rate appreciation. The compulsory growth of the monetary base, due to the lack of sterilization instruments, may be partly required. This may be the case because of the increase in the transaction demand for money during times of economic growth. However, such a counter-effect is too loose.

   The problem may be facilitated if government authorities accumulate a part of hard currency receipts in a special reserve. The experiences of a number of countries (Chile, Norway, Venezuela, and others.), whose exports mostly consist of minerals, show that states susceptible to world price fluctuations can use periods of high prices in order to accumulate temporary excessive revenues to establish stabilization funds for future uses. With such funds, the savings may be used to support a real level of budget expenditures and foreign debt repayment in unfavorable periods or upon the exhaustion of their mineral stock.

   In addition to the review of international experiences of establishment of stabilization funds, the present paper also presents theoretical analysis of several approaches. Namely, this analysis includes an establishment of the fund via insurance reserves and the formation of regular savings in order to smooth down the expenses at their constant level under random revenues stationary and non-stationary time series cases. In addition, the paper also tackles some practical issues, such as the mechanism of the fund formation, the type of formula used to calculate the amount of contributions, the possibilities of advanced payments to use resources over the year, the account of payments to and from the fund in the budget statistics, the forwarding of money to repay foreign debt, etc.

   The analysis concludes that in the current situation in Russia, indeed, it is worthwhile to create a stabilization fund for the purpose of smoothing expenditures. At the same time it would be expedient to have the fund formation formula linked to the world oil price only and not to complicate the procedure by linking it to the commodity basket (oil, gas, ferrous and non-ferrous metals, and their finished products). The fund should serve as a pool for additional budgetary tax revenues available during periods when the world oil price (UK Brent or Urals) is above the average level noted over recent years (5 to 10 years). Accordingly, should the world price fall below its average level, the money from the fund should be used to smooth expenditures. Apart from that, considering the forthcoming substantial volumes of foreign debt repayment, the money from the fund can be used for this particular purpose as well. The analysis conducted and the respective output have allowed development of several economic policy proposals. From these proposals, the main practical outcome became the development of the draft federal law On stabilization fund in RF, which incorporates all the main findings of this research project.

PUBLICATIONS

   IET experts have participated in project CEPRA (joint Russian and Canadian Consortium for Economic Policy Research and Advice) sponsored by Canadian International Development Agency(CIDA). The project resulted in the following publications (in Russian and English):

   - . The book aims to study the impact of regional business specifics (policy pursued by regional authorities, local governments, regional policies of the federal authorities, regional specifics of political and legal culture and institutes on the dynamics of economic development of the regions, as well as determine key factors behind the direction and pace of the economic development of regions; and also to evaluate in formal terms the impact of political and legal factors on the economic development (regional component of investment risks, etc.).

   The major result of the study is that various social institutions have a significant impact on economic development. Guarantees of the basic human rights are found to be the most significant factor. The project bases on information published by regional press, database of regional legislation, and for the first time uses court statistics for an analysis of these problems.

   An individual chapter reviews the history of regional development in Canada focusing on types of economic and social integration, as well as the evolution of Canadas external trade models and trade policies.

   Authors: Yanovski K. E., Zhavoronkov S. V., Kochetkova O. V., Mazhuga A. Yu., Cherny D. A., - , Paul Hobson, .

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   . This study aimed to find out major regularities of the privatization processes in the environment of the Russian economy in transition at large and some individual regions in particular (basing on the analysis of privatization models employed in 1990s), to determine the key problems of theoretical and practical (from the standpoint of operative state regulation) nature, to elaborate relevant practical recommendations aimed to improve the economic policies at the federal and regional levels.

   The empirical analysis concentrated on the problems of comparative study of dynamics of the non-state sector across Russias regions and of relationship between the degree of development of the non-state sector and the economic standing of regions.

   The book focused on the following problems:

   a concise analysis of theoretical approaches to and general problems of the realization of ownership rights in Russia;

   the outline of the Russian privatization model and preliminary recommendations on the economic policy;

   calculations in the framework of the cluster analysis of Russias regions by the degree of the non-state sector dominance;

   regression analysis of relationship between the degree of development of the non-state sector and the economic standing of regions (qualitative and statistical analysis);

   a comparative analysis of Russias regions by the degree of transition to private ownership (both qualitative and statistical analyses);

   recommendations on respective institutional problems (at the federal level and concerning the improvement of regional policies pertaining to the protection of property rights);

   an overview of privatization process in Canada.

   Authors: A. Radygin, R. Entov, G. Malginov, Yu. Gritsun, V. Bondarev, O. Predeina, H. Swain, T. Goodfellow.

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   At present, a key problem of reforming the social sphere is the persistence of a large amount of social mandates imposed by the federal legislation currently in force, which are not financed from the state budget. In other words, numerous federal legal acts (from laws to agencies instructions) making subnational authorities responsible for additional expenditure obligations, which are not covered, or only partially covered by available sources of financing.

   In this situation an important element contributing to increasing effectiveness of social assistance is the transformation of the system of social benefits formed in the framework of socialist distribution relations, which is inadequate to the present social and economic situation. There arise the objective necessity to elaborate new mechanisms controlling the system of state social benefits. These problems are studied in - by I. Kolosnitsyn, E. Kitova, A. Surinov, T. Chizhelikova, S. Shashnov, ., . .

   The authors formulate the principle guidelines of the transformation of the social protection system; besides, the book includes an overview of the Canadian system of social security outlining its merits and shortcomings.

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   The implementation of the budgetary reform and transformation of interbudgetary relations currently underway in Russia lend special importance to the adequate evaluation of budgets of all levels in terms of mobilization of taxes and other payments to the budgetary system and objective expenditure requirements of subnational budgets. This evaluation is vital to optimize the interregional structure of distribution of federal financial aid to RF subjects budgets and the effectiveness of this system. This problem is reviewed by P. A. Kadochnikov, O. V. Lugovoi, S. G. Sinelnikov-Murylev, I. V. Trunin in -. The study focuses on the comparative analysis of different evaluation methods with regard to tax potential and expenditure requirements of subnational administrative and territorial entities in a state with the multi-tiered budget and tax system. The study includes the estimate of tax potential and expenditure requirements of RF subjects basing on methods of econometric modeling and comparison of evaluations obtained by different methods.

   The book contains some recommendations on the practical implementation of certain results obtained in the course of the study. Most feasible areas of implementation are the substantiation of formulae used to calculate tax potentials and expenditure requirements, as well as sets of factors for differentiating these amounts, used for the distribution of transfers from the Fund for Financial Aid to Regions and other types of federal financial aid to RF subjects.

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   Many East European and former Soviet Union economies in the process of transition to the market economy encountered the problem of enterprise insolvency and a massive growth of inter-enterprise payment arrears. However, while a number of countries could settle the problem of payment arrears, diminish amounts and check the growth of outstanding debts, in Russia this problem persists.

   Factors behind changes in the indebtedness dynamics and the persistence of rather high levels of payment arrears require a more detailed research of both the theoretical and empirical aspects of the process of indebtedness generation.

   by A. Zolotareva, L. Lederman,
O. Lugovoi, R. Entov
aims to review main characteristics of payment arrears in a transition economy. The study focuses on the analysis of different aspects of generation and accumulation of payment arrears, major factors explaining generation and spreading of payment arrears and non-monetary inter-enterprise payments in the Russian economy. An important merit of this work is that it analyzes the regional aspect of payment arrears. The study offers a system of theoretical models, each model describing the process of payment arrears originating due to specific features of development of the transition economy. There is also presented a classification of major factors behind the generation of non-payments and a pattern of interaction between these factors.

The author present an overview of legislative and practical aspects with regard to the functioning of the Canadian payment system and enforcement mechanism. It includes the analysis of the legal environment for economic agents in Canada, description of the functioning of the payment system and guarantees ensuring proper payments, appraisal of the role played by the banking system in inter-enterprise payments.

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   S. Sinelnikov-Murylev, P. Kadochnikov, I. Trunin, and E. Shkrebela focused their on problems related to the impact the system of interbudgetary relations have on the fiscal policies implemented by regional authorities. The book pays special attention to the rules governing the granting of financial aid to regions needing assistance and such aspects of interbudgetary relations as sharing of revenue and expenditure mandates of the Federal Center and regions and their influence on fiscal behavior of regions. The authors present the description of approaches to formalization of methods applied to the granting of financial aid to regions and the model of fiscal behavior of regional authorities. Statistics methods are used to test the hypotheses advanced in the course of building theoretical models.

   Basing on the analysis of theoretical models and empirical studies there were obtained results showing how changing the methods governing the granting of financial aid the Federal Center can create and in fact creates certain fiscal incentives for regional authorities.

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   The authors of note that as the radical transformation of the Russian national economy progressed, the problems of the development and functioning of the social and economic complexes of the Northern territories aggravated. This fact has actualized the study of general and specific features of the structural changes in the regional economy and the mechanism of interaction between the federal and territorial levels of the government.

   The authors believe that taking into account the specifics of the economic functioning of the Russias Northern regions the study shall focus on the financial relations between the Federal Center and Northern regions. Accordingly, they pay special attention to the following problems:

   The problem of Northern regions typology, including its legal aspects;

   A brief overview of social and economic development of Northern regions by year 2000;

   An analysis of Northern benefits and compensations in the context of the financial consequences brought about in case they cease to be compulsory;

   Draft laws necessary to modify the economic policy in regard to Northern benefits and compensations (recommendations);

   An analysis of specifics of financial relations between the Federal Center and Northern regions;

   The problems of supplying goods to the Northern regions (the seasonal deliveries to the North), an analysis of the financial problems faced in the process of the seasonal deliveries to the North;

   A special analysis of the legislative basis of seasonal deliveries to the North;

   An analysis of possible consequences and estimate of budgetary effect of migration from Northern regions.

   A section of the book presents an overview of fiscal relations between the federal and territorial governments in Canada.

   Authors: A. Zolotareva, O. Izryadnova, P. Kadochnikov, E. Kitova, A. Radygin, S. Sinelnikov, I. Trunin, T. Chizhelikova, S. Shatalov, A. Yudin, J. Rayner, Sh. McLarnon.

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     : , , . This comprehensive study by I. Trunin, A. Zolotarerva, S. Sinelnikov,
S. Dneprovskaya, S. Chetverikov, R. Watts, P. Hobson, . , R. Boadway
generalizes the historical development of interbudgetary relations in Russia singling out the following stages: in 1992 through 1994 formation of interbudgetary relations; 1994 the reform of interbudgetary relations; a new stage of reform of interbudgetary relations in 1998 through 2000.

   The authors analyze the legislative aspects of interbudgetary relations aiming to reflect major trends of development of interbudgetary relations in the RF basing on a comparative analysis of laws on federal budget for several last years and analytical materials the RF Government supplemented to draft budgets submitted to the Federal Assembly.

   Financial aid granted to the subjects of the Russian Federation from the federal budget is a key element of the system of interbudgetary relations. The book presents an overview and analysis of major trends in distributing federal financial aid to regional budgets in 1992 through 2001.

   A chapter of the book focuses on an overview of theoretical aspects of sharing expenditure obligations and taxation powers between the government levels.

   The authors formulate recommendations on more effective sharing of tax revenues and tax powers in the Russian Federation for a short-term perspective. The following studies were carried out in order to settle this problem: an analysis of the state of the RF subjects consolidated budgets; an analysis of gaps between regional revenues potentials and expenditures; an analysis of tax potentials and expenditure obligations of the RF subjects. The book evaluates the impact of recommendations on the reform of the tax and budgetary systems on the budgetary standing of RF subjects.

   The study also gives an overview of West German, US, and Canadian experience in developing systems of interbudgetary relations.

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   Eight new studies of IET experts have been published in the Working Papers series. The publications are based on the materials of the research project sponsored by the United States Agency for International Development.

   In The prospects for establishment of stabilization fund in Russia S. Drobyshevski,
A. Zolotareva, P. Kadochnikov, S. Sinelnikov
analyze the international experience in creating and running different funds formed at the expense of revenues derived from export of natural resources. The experience of a number of countries oriented towards export of raw materials reveals that governments of countries affected by volatility on world markets can use periods of high prices of raw materials to accumulate temporary excess revenues in stabilization (future generations) funds. The financial resources accumulated in such funds may be used to maintain the real level of budgetary expenditures and repayment of external debt in unfavorable periods, or after depletion of mineral resources. The study reviews key goals, mechanisms, principles of accumulation of financial resources, and management of assets in the framework of funds of various types.

   The study analyzes the problem of creating and running a stabilization fund in Russia. The most important section focuses on the elaboration of a draft Federal Law On Stabilization Fund and preparation of amendments to the RF legislation related to the budget and budgetary processes with regard to the creation of such a fund. The study presents estimates of possible RF stabilization fund revenues in 1993 through 2000.

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   Some problems of monetary policy in the transitional economy. This collection edited by S. Sinelnikov and R. Entov comprises three articles focusing on the analysis of different aspects of monetary policy implemented in the transitional economy.

   Monetary policy in the post-crisis period by S. Drobyshevski aims to analyze the problems encountered by the Russian monetary authorities in the post-crisis period (1999 and 2000) and to determine optimal monetary policy under the present conditions in the framework of existing theoretical approaches.

   G. Trofimov in External Debt and Monetary Policy analyzes the problems of financing of external debt at the expense of new borrowing and issue of money focusing on the optimal strategy for managing the external debt and estimates for different scenarios.

The consequences of an introduction of stabilization measures based upon the fixation of nominal exchange rate. In this article P. Kadochnikov analyzes theoretical and empirical aspects of stabilization programs aimed to curb inflation focusing on programs using exchange rate as a controlled nominal anchor.

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   The evaluation of the effectiveness of the budget financing of the federal healthcare institutions by S. V. Shishkin, Ye. G. Potapchik,
S. K. Salakhutdinova
is the first effort to analyze the revenue and expenditure structure of federal healthcare institutions belonging to different authorities, particularly federal clinics within the RF Ministry of Healthcare network.

   The paper considers possibilities of using the current system of statistical and financial reporting for the quantitative evaluation of the effectiveness of the budget funding of federal healthcare institutions.

   The work is focused on institutional characteristics of the mechanism of funding the federal clinics, including recent attempts to change that. The paper shows that the applied mechanism ensures a multi-layer funding of federal clinics operations, reproduces a costly economic type, that is not consistent with the requirement of an efficient use of resources.

   The paper comprises recommendations on changing the procedures of the budget funding of the clinical operations of the federal healthcare institutions.

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   In the course of transition the Russian economy experienced a protracted transformational slump having no analogies in the history of large economies. The apparent specific feature of the Russian transformational slump is the scale of structural shifts: output of different products varied very unevenly over the years of reform. While output of some products decreased ten times and more, output of others remained at practically the same level. Such an apparent unevenness of the transformational slump is an evidence of massive transformational structural shifts.

   Transformational slump and structural changes in Russian industrial production. This book by V. A. Bessonov focuses on the analysis of the transformational slump of the Russian industrial production and related structural shifts. The measurement problems related to changes in the dynamics of production in the Russian transition economy were analyzed. There was designed a family of indicators allowing to analyze structural shifts in the industrial production. The paper analyzed the course of the transformational slump, its specifics and factors behind it. There were also studied the intensity, progress and direction of structural shifts, and analyzed the interrelation between structural shifts and the dynamics of production. The study revealed some regularities and discussed their possible causes. There was described a number of new transformational effects. The paper formulated certain recommendations concerning economic policies.

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   The problems of emerging new institutional structures in transitional economies edited by V. Mau comprises two articles focused on the study of regional elites and the impact of elections on the economic situation.

   O. Golant and S. Zhavoronkov in Economic and Political Elites analyze how much the elites changed in the course of economic and political reforms carried out in the 1990s and present some methods permitting to evaluate the transformation of regional political and business elites. The transformation and present situation of regional elites were analyzed basing on the data from a number of Russias regions.

   In Election outcomes as an indicator of demand for institutions: voting in economies in transition and new democracies over the first post-revolutionary decade S. Zhavoronkov,
D. Cherny, and K. Yankovski
focus on the impact elections have on economic situation in democracies in transition. The study based on the hypothesis that constituents preferences significantly affect the type and specifics of emerging institutional structure and consequently the dynamics of macroeconomic indicators. The available input information (first of all, electoral statistics and data obtained in the course of political and economic survey of Russias regions) permitted to build and describe both an international (across democracies in transition), and an interregional models.

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   S. Zhavoronkov, V. Mau, D. Cherny, K. Yanovski in Deregulation of the Russian Economy study the problem of deregulation of the Russian economy. The authors define deregulation of economy as the elimination of excessive barriers set by the state on the way of development of free entrepreneurship. The research tackles the area that remained poorly studied as yet: general conditions for economic agents operations on the market.

   The study focuses on the identification of a comprehensive notion of general (non-specific) mechanisms of the government regulation of economic agents operations in the country and analyzes the legislative and legal bases to identify the provisions that actually block normal entrepreneurship activity. For instance, there is carried out the critical evaluation of the legislative and legal bases of the controlling agencies, such as: the State Sanitary-Epidemiological Service of RF; the State Fire Inspection of RF; The Ministry of Interior of RF; The Ministry of Labor; trade unions. The authors also analyze the approval procedures for design plans and specifications and price regulation.

   The authors formulate recommendations on amending the national legislative and legal base aimed to improve the investment climate in RF.

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   In An Analysis of Factors Behind the Real Financial and Economic Standing of Russian Industrial Enterprises S. Tsukhlo focused on the study of factors determining the real financial and economic standing of Russian industrial enterprises in 1995 through 2000. Over this period the Russian industry experienced both the peak of barterization and (for two last years) the growth in the share of money payments for products.

   The study is based on regular business situation surveys of Russian enterprises, which permit to find out if industrial enterprises base their wellbeing on barter and money surrogates, or normal effective demand.

   Further the paper turns to the problem of monopolistic behavior of the Russian industrial enterprises. High levels of concentration inherited from the planned economy creates the grounds for setting monopoly prices and restraint on production. The study rebuts the prevailing belief that Russian enterprises use these factors to behave as monopolies.

   There is analyzed the impact of competition on sales markets on the standing of Russian industrial enterprises. The disciplining effect competition should produce on enterprises (especially when competing with imports and especially in economies in transition) may have been neutralized under Russias conditions due to two factors: high concentration and lobbyist efforts.

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   A rather large number of studies focusing on various econometric aspects of development of the Russian economy has been published recently. However, these publications fail to pay attention to statistical characteristics of the time series determining the input data of models.

   Econometric Analysis of Time Series of Key Macroeconomic Indicators by S. Drobyshevski, V. Nosko, R. Entov, A. Yudin, edited by
S. Sinelnikov-Murylev
, focuses on the econometric analysis of time series reflecting the dynamics of development of key macroeconomic indicators characterizing the state of the Russian economy.

   The book studies the global statistical qualities of some economic and social time series (money aggregates, exports and imports, federal budget revenues, inflation rates, industrial production intensity index, gross domestic product, unemployment rates, Ruble exchange rate, stock exchange index RTS-1).

   The annexes include brief outlines of statistical procedures used to distinguish between TS and DS series and major sections of the analysis of time series, as well as initial statistical information used in the book.

   For more detailed annotations of studies underlying the announced publications in the Working Papers series see the preceding issue of the IET Newsletter.

IET IN THE INTERNET

WWW.IET.RU - SCIENCE SOURCE FOR ECONOMISTS

   The task of popularization of the role the Institute plays in the area of shaping Russias economic policy dictated a need in development a new concept for the Institute Homepage and a substantial renewal of its content. Since January 2001 practically all publications of our researchers have become available on our renewed Homepage. Publications are posted therein either simultaneously, or even prior to publicizing their hard copies. Due to nascent computerization in Russia and the practical absence of dissemination networks ensuring availability of professional quick-look data, the Board of Directors of the IET ruled out two key decisions: first, all the publications should be accessible gratis, and, secondly the internal code of web-pages should be as simple as possible, so that to ensure their compatibility with any configuration and browser software.

   On our Homepage one can easily find any periodicals the Institute publishes, be that monthly issues of Russian Economy: Trends and Perspectives, Industrial Surveys or occasional publications, such as Working papers series, various publications on special projects of the Institute, keynote addresses of our researchers cited by in mass-media, articles in Russian and foreign scientific journals.

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  On the Institute domain one can find not only the Institutes research output, but the Web page has also become a forum for economists worldwide. Numerous addresses and presentations of famous analysts from made at different conferences, articles by Nobel laureates in economics can be found at the IET Web-pages too. We urge representatives of the World Bank, the International Monetary Fund and our colleagues from Russia, Ukraine, France, Canada, Great Britain, and Sweden to share their views with general public through our Homepage. The IET also host independent research centers, such as The center for legal and parliamentary works and The Analytical Center for Agri-food Economy on our Homepage, IET is ready to provide our server space to other outside research entities, such as The Academy for the military economy and finance problems.

   Such a large amount of economic information attracts a broad professional audience interested in the updated statistical data, representatives of governmental, social and political organizations, and students from higher schools.. To facilitate searching over the site, we provide different navigation tools. Several hundreds of search requests are made over 5000 pages of our site daily. Their analysis shows us that our visitors have various and targeted interests, and we try to provide additional information to meet their most frequent requests. We also value uniqueness of our visitors and provide billboards and guest book in an attempt to encourage contacts between our guests and with us.

   With our firm belief that a serious economic research has to be personalized, the IET experts maintain their personal pages on the server. There one can find information on research interests, profile, biographical and bibliographical data, last publications available on-line, and contact information. Specifically, the personal page of the Director of IET is noteworthy. This page contains background information on Mr. Gaidar, with the full archive of his interviews and articles, as well as his stand and views with respect to different socio-political and economic problems evolving over time. Dr. Gaidar especially cares of maintenance of communication with our visitors and ensuring their feedback, and visitors are welcome to send their messages and questions to Dr. Gaidar at natarov@iet.ru.

   Roughly as much as one-fourth r of our visitors origins from abroad, that is why we both have our guests papers translated into Russian, and maintain then English version of our Homepage, particularly by the means of translating papers drafted by IET researchers and posting them there. So, we attempt to ensure a reliable and qualified data source on the Russian economy. The Charts below show that it is our compatriots that clearly dominate over other visitors (70%), followed by the US and Canadian visitors (7%), Ukraine (6%), and other countries roughly equally supplying smaller numbers of visitors. As far as the Russian visitors are concerned, roughly one third of them are Muscovites, while St. Petersburg ensures 6% of visits. Nevertheless, a detailed list of visitors shows that all the RF regions look for reliable economic information on the IET Homepage.

   The audience looking for our resources increasingly grows, and statistics shows that by late 2001 about 15 thousand people visit the site monthly. Each day about 10 thousand files are viewed on the server. Table 1 provides the data on the most popular directories.

   Table 1. Popular section on www.iet.ru

Position Section Popularity
1 Other documents 51,4%
2 Russian economy: trends and perspectives 19,7%
3 Special projects (USAID, CEPRA etc.) 17,5%
4 Personal 4,9%
5 Archives 4,2%
6 Conference papers 1,0%
7 Dr. Ye. Gaidar 0,4%

   While comparing www.iet.ru with other sources of economic information, suffice it to mention statistics. IET is ranked among top 20 most popular research centers, and the Institute always finds itself among the 3 most cited economic sources in Russia..

   IET collaborates with leading economic resources, such as AK&M, student portals (AllBest.ru) and research institutions (Groupe Transition and Developpment). We are always open for our colleagues proposals on cooperation in the area of development of economic and liberal resources in the Internet and we would be grateful for your comments to be forwarded at webmaster@iet.ru.

INFORMATION

IET DOCTORATE COUNCIL

   On March 23, 2001, the Higher Attestation Commission of the RF Education Ministry acting upon the decision of the HAC Presidium No. 893-v approved the membership of the Doctorate Council authorized to review dissertations for candidate of science degree in economics at the Institute for Economy in Transition.

   The Doctorate Council of the Institute shall review dissertations on Economics (specialization 08.00.01), and Economy and National Economy Management (Macroeconomics) (specialization 08.00.05). The Council is authorized to function for the term the nomenclature of research specialties as approved by the RF Ministry of Science on 31.01.01 is in effect.

   The IET Doctorate Council comprises 10 Doctors and 8 Candidates of science. Dr. (Econ.) Ye. T. Gaidar, is the Chairman, Dr. (Econ.) A. D. Radygin is the Deputy Chairman, Candidate of Science in Economics (c.s.e.) A. I. Alexeyev is the Academic Secretary of the Council. Council members are: c.s.e. Yu. N. Bobylev, c.s.e. T. A. Drobyshevskaya, c.s.e. I. V. Kolosnitsyn, Dr. (Econ.) Prof. S. N. Lavrov, c.s.e. G. N. Malginov, Dr. (Econ.) V. A. Mau, c.s.e. S. V. Prikhodko, Dr. (Econ.) Ye. V. Serova, Dr. (Econ.) S. G. Sinelnikov-Murylev, c.s.e. G. Yu. Trofimov, Dr. (Econ.) A. V. Uliukayev, c.s.e. S. V. Tsukhlo, Dr. (Econ.) V. I. Tsymbal, Dr. (Econ.) S. V. Shishkin, Dr. (Econ) Prof. Full Member of RAS R. M. Entov.

   This membership of the Council is to form two blocs for both specialties (08.00.01 and 08.00.05). For each specialty there is the quorum necessary to review dissertations. Two blocs within the Council allow for a competent discussion of dissertations, what is especially important for both empirical and theoretical studies.

   As stipulated by the Regulations on the Doctorate Council, the Institute guarantees to create necessary conditions and assign necessary funds to ensure the proper functioning of the Council.


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