INSTITUTE  FOR  THE  ECONOMY   IN  TRANSITION

¹ 12 2003

IN THIS ISSUE:

Yegor Gaidar's visit to Iraq  

 

 

Research projects

Conferences

Publication

IET's guest
IET senatus academicus
IET dissertation council

 

YEGOR GAIDAR'S VISIT TO IRAQ

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      On September 20-21, 2003, Yegor Gaidar, Director of IET, visited Iraq on invitation of the Provisional Administration of Iraq and the US Department of State. The purpose of the visit was to attend a conference dedicated to such experience of the transition period in Eastern and Central European countries as Iraq could benefit by. That conference was also attended by leading experts from Eastern and Central European countries and by US and Iraqi economists, political analysts, statesmen and public figures.

   The purpose of the conference as seen by its organizers consisted not only in communication of experience, but also in animation of the dialogue between European and local experts on the more important problems faced by Iraq in transition from an authoritarian regime to a democratic market-economy society.

   Yegor Gaidar delivered a report on “Mobilization of Consensus in Society in Respect of Reforms”. He drew some parallels between Iraq of the Saddam Hussein era and the USSR underlining some common features of the two regimes. In his opinion, the most important of those features consisted in both the societies being shut-in, their economic systems being of a rigid, semi-military nature, presupposing among other things predominance of the public sector, rationing of staple foods, and a key role played by the ruling party and secret police. At the same time, in Iraq, market-economy relations and private property were permitted, though in a curtailed form.

   In Mr. Gaidar’s opinion, the situation in Russia in the early 1990s and the situation in Iraq in the post-war period share such a feature as weakness of the new basic public institutions. In conditions where the old system has collapsed and the new one is still in the process of formation, the government is unable to implement an effective policy aimed at a fast stabilization of the economic situation in the country and elimination of misrule and crime. For attainment of those objectives, long, painstaking work is required, which is at variance with over-optimistic expectations of the populace, who tend to believe that heaven on earth should set in immediately after dismantling of the pestersome totalitarian regime. That problem, which makes difficult consolidation of society in respect of performance of the basic reforms, gives rise to one of the principal challenges faced by any post-totalitarian government, Mr. Gaidar said.

   Another important issue is the policy to be pursued in respect of such members of the former authorities and the ruling party as had joined these out of purely pragmatic considerations, such as fear of reprisals or careerism. The speaker favored realistic, selective policy towards such persons, some of whom could be enlisted in the reformation effort in Iraq.

   Noting that recommendations by someone with insufficient knowledge of the present situation in Iraq may cause additional problems in a country heading towards democratic and market-economy reforms, Mr. Gaidar said that the people of Iraq should themselves make the difficult decisions in this respect, taking into account the experience of countries that have lived through similar situations.

RESEARCH PROJECTS

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RESEARCH UNDER THE USAID GRANT

   July 2003 saw completion of another, fifth, stage of IET’s cooperation with the US Agency for International Development (USAID). During that stage, IET researchers prepared research papers on the following themes: results of the tax reform and propositions on its furthering, issues related to long-term economic growth, enterprises’ investment policy, corporate management, credit and monetary policy and the ruble’s exchange rate, analysis of competition on the Russian market, social problems, the pension reform, political economics, problems facing the agrarian sector, the administrative reform, reformation of the customs legislation and demographic problems.

   As before, advising to various ministries and departments (especially the Ministry of Finance and the Ministry of Economic Development and Trade) was also an important line in IET activities. Under the USAID grant, a number of publications were issued, research papers were translated into English. Outputs of research carried out at IET were presented and discussed at various economic forums. As a result, IET has become more widely known to foreign economists. Another line in the Institute’s activity has consisted in preparation of teaching aids. In particular, V. P. Nosko has prepared the teaching aid Econometrics for Beginners. Principal Notions, Basic Methods, Area of Application, Interpretation of the Results.

   In June 2003, USAID extended its agreement on cooperation with IET for another four years. New lines of activity have been added: promotion of development of regional economic centers in Russia and perfection of the system of dissemination of outputs of economic studies.

   It is proposed that at the initial stage of IET’s cooperation with regional economic centers the potential partners will be selected from among the more advanced regional centers by means of competitive selection. For that purpose, an extensive database on regional economic centers needs to be established. Using such a database, potential partners for cooperation will be selected by a special commission. Once partners have been selected, a network of regional centers linked with the Institute will be established.

   Papers prepared by IET researchers at the fifth stage of cooperation with USAID are available at the Web site www.iet.ru.

NEW IET PROJECTS

   In 2003, IET started work on development of recommendations on economic policies of CIS countries. At the beginning of this year, Yegor Gaidar participated in a conference on “Low-Income CIS Countries: Progress and Objectives of the Transition Period” sponsored by international financial organizations within the framework of the 7th program of support of CIS counties.

   In June 2003, a delegation from the IET took part in the 4th Investment Summit held in the Kyrghyz Republic and attended by the President of the Kyrghyz Republic, representatives of the Kyrghyz Government and foreign investors. The principal issues discussed at the summit where attraction of foreign investments, macroeconomic policy and deregulation in the Kyrghyz Republic. At the summit, Yegor Gaidar delivered a report on experience amassed in the course of reforms carried out in Russia, in particular, the tax reform. Following the visit, experts of the IET were engaged for developing of recommendations on macroeconomic policy and tax policy of the Kyrghyz Republic. In October 2003, another visit by an IET delegation to Bishkek took place, in the course of which preliminary results of that work were discussed.

CONFERENCES

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   On September 27-28, 2003 a conference was held in Sochi within the framework of the Russian-Canadian project CEPRA. The conference was attended by representatives of the Government of the Russian Federation, representatives of the administration of the city of Sochi, experts from IET and its partners, Canadian researchers and also representatives of the European Union and international financial organizations.

   The conference was dedicated to reformation of the system of public spending and municipal finance, which issues are currently of prime importance in Russia. Reports were delivered by Y. T. Gaidar (Director of IET), V. A. Mau (senior researcher at IET) and S. B. Batkibekov and I. V. Starodubovskaya (heads of IET’s divisions).

   In his report at the conference, Y. T. Gaidar discussed the principal problems currently faced by municipalities.

   I.V. Starodubovskaya dedicated her report to Russian municipalities’ ability to develop realistic financial policies of their own. That issue was also discussed by N. Y. Simakovskaya, vice-mayor of the City of Sochi. N. B. Kosareva, President of the Sochi Institute of Economics, spoke on interrelation and mutual influence of financial policies pursued at the municipal, regional and federal levels. A. A. Tatarinov, professor at the Sochi University of Tourism and Spa Management and member of the CEPRA Advisory Council, spoke about experience amassed by Sochi with its specifics as a seaside resort town in pursuit of its own financial policy.

   The program of the conference also included round-table discussions. At one of these, the issue of public spending was discussed; the principal speakers were S. B. Batkibekov, Ph.D. (Economics) and Dr. David Good, professor at the University of Victoria in Canada. At another round-table discussion, the successes attained in reformation of municipalities and problems incurred therein were the principal subjects. The principal speakers were I.V. Starodubovskaya, Ph.D. (Economics) and Professor H. Kitchen from Trent University, Canada. The results of both the discussions were presented at the closing plenary meeting.

   Within the framework of the Conference, a meeting of the CEPRA Advisory Council was held. (The Advisory Council is the governing body of the CEPRA Project; it is co-chaired by Y. Gaidar and G. Smith, representing the Russian side and the Canadian side, respectively). At that meeting, the principal lines in future research were determined, which included in particular, research in fiscal federalism, optimization of the structure of budgetary spending and reformation of the system of public-sector enterprises, reformation of municipal finance, formation of the institution of bankruptcy in Russian regions and the prospects of migration and ethnic development in Russia.

   Members of the Advisory Council also set the time and place of the next CEPRA conference, which is to be held in July 2004 in Kaliningrad.

PUBLICATIONS

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Papers prepared within the framework of the IET research project carried out under the USAID grant:

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   Comparative Analysis of Monetary and Credit Policies Pursued by Countries with Transition Economies
   S. Drobyshevski, A. Kozlovskaya, D. Levchenko, S. Ponomarenko, P. Trunin, S. Chetverikov.

   Empirical analysis of influence of monetary policy on the actual issue in 12 transition-economy countries (Bulgaria, Hungary, Kazakhstan, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, Croatia, Czechia and Estonia), verification of hypotheses on existence of individual transmission channels in monetary and credit policy in those countries. A separate section in the paper is dedicated to identification of hidden goals pursued by monetary authorities in transition economies and also analysis of the possible pros and contras of introduction of the Euro in Eastern and Central European countries.

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   Specifics of Formation of a National Model of Corporate Governance
   A. Radygin, R. Entov, I. Mezheraups

   The purpose of the study consisted in examination of theoretical approaches formed at analyzing of classical corporate governance, study of innovations in the sphere of corporate governance in Russia and development of policy recommendations in the sphere of corporate legislation.

   The first section of the paper presents a theoretical review of classical models of corporate governance. In the second section of the paper, the general trends in development of corporate governance in a post-socialist economy are discussed. The third section is dedicated to issues of further perfection of corporate legislation, especially the effective Law on Joint-Stock Companies. The concluding section of the paper contains policy recommendations in respect of medium- and long-term state regulation in the sphere of corporate legislation and corporate governance.

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   Analysis of Mechanisms of Public Financing in the Cultural Sphere
   B. Sorochkin and A. Rubinshtein

   The paper contains a brief characteristic of the branch known as “culture, art and cinematography” and its economic potential. It also presents the principal lines and specific measures for modernization of budgetary financing in the cultural sphere. Since budgetary support has been and will remain in future the sole guarantee of performance by culture and art of the social objectives they are expected to perform in any civilized society, it should be understood that the system of budgetary financing in the cultural sphere is in need of profound modernization. Also discussed in the paper are issues related to diversification of the sources of financing of cultural activities. The researchers made use of vast statistical material.

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   Analysis of Cash Flows in the System of Vocational Education
   T. Klyachko

   In the past few years, the problems existing in the sphere of financing of vocational training have been given somewhat less attention than before, being eclipsed by the problems observed in financing of higher education. The author discusses various models that can be used in financing of vocational training at different levels and the prospects of use of those models in the near future. He also analyses the possibility of creation of an integrated model, transformation of the initial models and the like. At the same time, it is noted that since at present financing of vocational training at different levels is based on different principles there are problems in assuring a continuous system of vocational education, upgrading of its efficiency at various levels of vocational training and creation of favorable conditions for optimization of the network of training facilities, length of courses offered at each level and diversification of training careers. Also discussed in the paper are various options for solution of the above problems on the basis of identification of such institutional factors as would assure development of each of the levels of the vocational training system.

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   Political and Economic Analysis of Transformation of the Mechanisms of Financing of Health Care and Education.
   S. Shishkin, V. Chernets, A. Chirikova

   The paper offers an analysis of the interests and stances of the parties to financing of the health care and education systems in respect of reformation thereof. The information used in the study was gained by means of interviews with personnel of health care and educational establishments, authorities in charge thereof, regional and municipal authorities and the like.

   The authors analyzed from the political and economic points of view such widely discussed options of reformation of the systems of medical care and education as revision of the government guarantees in respect of health services, restructuring of the health care system, modernization of the system of compulsory medical insurance, introduction of entrance to colleges on the results of the single secondary school examination and switchover to financing of institutions of higher learning on the basis of personal public financial bonds. Recommendations in respect of realistic strategies and specific institutional mechanisms for transformation of the financing systems in the above spheres are also offered.

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   Analysis of Potentialities for Establishment of a System of Voluntary Medical and Social Insurance
   S. Shishkin, L. Popovich, Y. Potapchuk, S. Surkov

   As a means to overcome of the faults of the systems of compulsory medical insurance and compulsory social insurance which have taken shape in Russia, the authors suggest that gainfully employed persons should be permitted to withdraw from the compulsory medical insurance and compulsory social insurance systems, draw voluntary risk insurance policies from private insurers and use part of the funds from the single social tax for payment of the appropriate premiums.

   The paper also contains quantitative analysis of the acceptable limits of the portion of the single social tax that can be channeled to payment of contributions under voluntary medical and social insurance contracts. Different options for organization of the proposed voluntary medical and social insurance system are analyzed from the point of view of their organizational and technical practicability, in particular, from the point of view of feasibility of insurance of the risk of catastrophic expenses which may be incurred in treatment for certain diseases.

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   Public Pension Provision: Maintenance of a Fixed Level
   S. Smirnov, M. Turuntseva and N. Leonova

   After market reforms were launched in Russia in 1992, beneficiaries of public labor and social pensions as persons with fixed incomes have more than once fallen victim to political demagogy. A number of erroneous notions have emerged that have had a most unfortunate influence both on public opinion and actions undertaken by Russian legislators and the Government of the Russian Federation in respect of reformation of the pension system. Those notions have also been extensively used in the so-called “political” social policy.

   The authors note that one of the advantages of the Federal Law on Public Pension Provision in the Russian Federation, the Federal Law on Labor Pensions in the Russian Federation and the Federal Law on Mandatory Pension Insurance in the Russian Federation consists in their containing clear provisions on quanititative and calendar aspects of indexing of pensions. However, up till now, at least two major problems have remained unresolved. The currently adopted mechanism of pension indexing primarily relies on dynamics of the principal macroeconomic indices with the situation as of the end of the Year 2001 (which was far from ideal) taken as the starting point. In this way, the state’s obligation to maintain a fixed level of public pensions was subrogated with other obligations related to indexing of various portions of pensions depending on such factors as growth in consumer prices, the state of the Pension Fund’s budget and change in the national average wage amount. While such a situation is acceptable in case of working pensioners, for those who have to live on labor and social pensions alone, such a subrogation makes a lot of difference.

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   Competition in the Russian Industrial Sector (1995-2002)
   S. Tsukhlo

   The paper is dedicated to study of competition on Russian industrial enterprises’ sales markets in the 1995-2002 period. The study is based on outputs of interviews with enterprises’ CEOs. Such an approach precludes the shortcomings typical of the traditional methods. Assessment of the rate of competition on the basis of interviews with industries: CEOs has given the researcher an opportunity to gain generalized data on the level of competition in sub-branches, branches and the industrial sector as a whole without any significant financial inputs. The competition monitoring was done on the basis of monthly conjuncture surveys of enterprises, which have been carried out by IET since 1992.

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   A Survey of Budgetary Spending on Agriculture: The Regional Aspect
   E. Serova, Nkarlova, T. Tikhonova, I. Khramova and O. Shik.

   The purpose of the study consisted in preparation of recommendations on perfection of financing of the agro-industrial complex (AIC) on the regional level. For the purpose of studying of the typical problems observed in budgetary financing of the agro-industrial complex on the regional level, analysis was carried out in three Russian regions: Chuvashia, the Volgograd Region and the Chelyabinsk Region. In addition to that, analytical materials collected by the authors in some other regions (in particular, the Nizhni Novgorod Region, the Perm Region and the Rostov Region) were used.

   Calculations of the integral level of support of the agro-industrial complexes in particular regions were done using OECD methodologies. Such assessments, which were never done on the regional level before, permit to compare the levels of support given to agro-industrial complexes in different regions, assess the dynamics of AIC support in different years and determine the structure of such supports (budgetary transfers or the pricing factor).

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   Market of Purchased Resources in Russian Agriculture
   E. Serova, N. Karlova,T. Tikhonova, I. Khramova, O. Shick, M. Grazhdaninova, M. Usoltsev.

   The paper represents the second study on this particular theme and contains intermediary results of three years of surveys of the markets of purchased resources used in agriculture. At the previous stage of the study, the authors described the current state of the market of agricultural equipment, fertilizer, fuel and lubricants and also devised a methodology for further study of those markets.

   The principal theoretical output of that work consisted in description of production functions of the principal agricultural products on the basis of panel data. At the same time, the study permitted formulation of some economic and political recommendations. Firstly, the study confirmed the earlier-drawn conclusion on the need for a state policy for expansion of non-agrarian employment in rural areas for the purpose of enhancement of efficiency of agricultural production. Secondly, in devising an agrarian policy one should proceed from the understanding that the principal factors limiting agricultural production are fertilizers, seeds and the like, rather than agricultural equipment (which has been seen as a predominant factor in current support measures). Thirdly, if consumption of fertilizer in this country is to be increased, non-market measures for expansion of supply of fertilizer on the domestic market are required.

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   Vertical Integration in Food Production in Russia
   I. Khramova

   The study is dedicated to checking of a hypothesis explaining motivation for formation of agricultural holdings and quantitative assessment of parameters related to the forms of organization of production and the outputs of such activities. For the purpose of the study, a questionnaire survey of a number of agricultural holdings in the Rostov Region was carried out, whose outputs showed that the principal motive for establishment of agricultural holdings was the desire to overcome imperfection of the market in conditions where the responsible structures and institutions are underdeveloped. The hypothesis to the effect that the principal purpose of establishment of agricultural holdings consisted in diversification of risks was not corroborated.

   The paper also offers some conclusions and recommendations on the principal lines of rendering on the regional level of support to the agricultural sector in the light of the programs for financial recovery of agricultural enterprises and bankruptcy procedure for agricultural enterprises, which are currently being developed. As regional administrations and such non-agricultural companies as are the principal buyers of bankrupt farms have common interests on the medium-term plane, the latter’s help can be enlisted in certain programs for support of the agricultural sector and development of rural areas.

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   Problems Observed in the Sphere of Intellectual Property Rights
   I. Dezhina

The paper contains analysis of transformation of the economic and legal basis of regulation in the sphere of rights to such intellectual property as has been obtained at the expense of public finance. The role played by the state in that process is discussed. For the sake of comparison, some such elements of the mechanisms of commercialization of intellectual property as are widely used internationally are also identified. In conclusion, the author offers some propositions in respect of perfection of state measures to stimulate commercialization of intellectual property in Russia.

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A paper prepared and published by IET under the CEPRA (Russian-Canadian Consortium for Economic Policy Research and Advice)Project financed by the Canadian International Development Agency (CIDA):

   Enhancement of Efficiency of Budgetary Financing of Public Institutions and Management of State Unitary Enterprises
   Volume I. Perfection of the System of Management and Financing of Public Institutions
   S. Batkibekov, L. Grebeshkova, I. Dezhina, A. Zolotaryova, G. Kitova, E. Kostina, T. Kuznetsova, I. Rozhdestvenskaya, S. Sinelnikov-Murylyov, S. Shishkin.

   Volume II. Management and Regulation of State Unitary Enterprises
   A. Kokorev, M. Kuzyk, G. Malginov, A. Radygin, Y. Simachev, A. Tatarinov

   The first volume of the study contains detailed analysis of the existing legal regulation of activities by public institutions and the legal framework of financing of such institutions; specifics of those issues in the social spheres are also examined. The authors offer some recommendations on reformation of the system of management and financing of public institutions and of the legal and organizational framework of functioning of such institutions.

   The principal objectives of the study contained in the second volume consisted in analysis of the existing organizational and legal forms and specific instruments of management of state unitary enterprises, the mechanisms of financing of state unitary enterprises and problems observed therein, as well as development of appropriate recommendations taking into account the current situation in Russia.

   The outputs of the study can be used in development of a new legal framework for state regulation (including amendment of the existing statutory acts and preparation of new ones), preparation of long-, medium- and short-term programs for development of Russia’s national economy and, as a specific component, in devising of a concept for long-term development of the national model of the corporate sector.

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   Analysis of Municipalities’ Sources of Income and Liabilities
   I. Starodubovskaya, S. Zhavoronkov, E. Korovin, K. Milentyeva, M. Slavgorodskaya, A. Yudin. Scientific consultant, I. Trunin.

   The paper contains analysis of the existing mechanism of regulation of municipal finance and propositions on its reformation. The study is different from all other research carried out in that sphere so far in that it uses a vast array of information on administration of budgets at specific municipalities, so the research outputs and practical recommendations based on them reflect calculations made using concrete budget information rather than merely the authors’ theoretical views and ideological preferences.

   On the basis of actual data, some scenarios were modeled, which permitted to forecast financial consequences of various measures involving alteration of municipal authorities’ jurisdiction, assignment to municipalities of various sources of revenues and application of inter-budgetary leveling. The paper offers a methodology permitting assessment of the possible results of adoption of various currently discussed propositions on municipality reformation.

   One of the sections of the paper is dedicated to analysis of international experience in functioning of municipalities and regulation of local finance.

IET GUEST

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   In the September 2-25 period, Professor Arnold Harberger and Professor Sebastian Edwards delivered lectures at IET on macroeconomic issues, particularly, the real exchange rate.

   Arnold Harberger has been professor of economics at the University of California (Los Angeles) since 1984 and emeritus professor of the Chicago University since 1991. Prof. Harberger’s professional interests are wide-ranging. In 38 years he worked at the Chicago University, Prof. Harberger carried out research in such fields as public finance, international economy, inflation and economic policies of developing countries.

   Sebastian Edwards is currently professor of the Anderson Graduate School of Management at the University of California (Los Angeles). In the 1993-1996 period, Prof. Edwards was a leading economist at the Latin America and Caribbean Department of the World Bank. He is also an active in research associations and professional associations, such as the National Bureau of Economic Research (NBER), Transnational Research Corporation, Inter American Seminar on Economics (IASE) and Latin American and Caribbean Economic Association (LACEA). Prof. Edwards has also been permanently engaged observer for the Wall Street Journal and is the author of numerous works on international economy, macroeconomics and economic development.

   On many occasions, Professor A. Harberger and Professor S. Edwards have advised to US government institutions, governments of foreign countries, international financial institutions, particularly, the International Monetary Fund, the World Bank, the Asian Development Bank, the Organization for Economic Cooperation and Development (OECD) and the Organization of American States (OAS).

   The above-mentioned lectures dealt with such issues as inflation, real exchange rate and economic growth. Discussion of the above issues was comprehensive; both theoretical and practical aspects thereof were discussed. Prof. A. Harberger and Prof. S. Edwards sought not only to share their experience and knowledge with the audience, but also teach them such methods of conceptualization of economic issues as can be applied both to the themes of the above discussions and other economic issues and help them gain an understanding of present-day economic processes. For that reason, particular importance was attached to practical monitoring and interrelations between different economic phenomena.

   Of particular interest, were Prof. A. Harberger’s lectures on economic growth (those lectures were dedicated to the memory of S. Kuznets). Those lectures dealt with methods of measurement and decomposition of economic growth by different factors; particular importance was attached to methods of calculations in conditions where only limited statistical data was available, which caused such a problem as variance in estimations of aggregate factor productivity (AFP). In his lectures, Prof. Sebastian Edwards discussed advanced research (including his own) in foreign exchange theory. Of particular importance in his lecturers was the theme of economics of the real exchange rate. The most important issue in studies of the real exchange rate is calculation of the equilibrium value of such a rate. Prof. S. Edwards presented different methods of evaluation of deviation of the real exchange rate from the equilibrium value. Such evaluations can be widely used in analysis of efficiency of the policy pursued, particularly, in forecasting of foreign-exchange crises. In his lectures, Prof. S. Edwards touched upon such issues as efficiency of fixation of a foreign exchange rate and the extent to which such a fixation can be used as a nominal anchor of economic stabilization in combating inflation. Also discussed was the pension reform.

   A separate issue, which was touched upon by both the lecturers was the ‘Dutch Disease’. Prof. A.Harberger and Prof. S. Edwards presented theoretical methods of studying of the effects of
de-industrialization caused by a boom in the primary materials sector.

   In Prof. A. Harberger’s opinion, after the 1998 devaluation of the ruble Russia had a chance to tread the same way as two other countries (which were highly successful in terms of economic growth) had done before, namely, Brazil (the Brazilian miracle in the 1968-1979 period) and Chile (industrial recovery in the 1985-1998 period). However, in case of Russia the tendency towards long-term economic growth was disrupted by growth in crude oil prices in the 1999-2000 period, which growth (though it afforded Russia opportunities for long-term prosperity) was not utilized to a full extent and, most importantly, caused revaluation of the national currency’ exchange rate. The latter factor dramatically reduced motivation for further growth in manufacturing industries (high-technology products with high degree of processing). Also discussed in those lectures were such economic policy instruments as could be used by the government to influence the equilibrium value of the exchange rate.

   At Prof. S. Edwards’s lectures, extensive discussions were held of the present-day actual regime of setting of the exchange rate in Russia’s national economy. In Prof. S. Edwards’ opinion, the exchange rate regime in Russia’s national economy should not be regarded as a floating one, at least, not in theoretical models. Prof. Edwards noted that there was a difference between the exchange-rate regime declared by the authorities and the actual one. The actual dynamics of the present-day exchange rate of the ruble is close to that under a fixed regime. Researchers are free to decide themselves which type of foreign exchange rate regime suits Russia best.

   In the audience’s opinion, the most important thing about those lectures was that lecturers were not only world-renowned experts, but also active researchers. In the lectures, they shared their knowledge and their invaluable experience in carrying out of studies, identification of research problems and selection of research methodology. The audience showed much interest in practical recommendations and lectures were followed by animated discussions. The professors answered to listeners’ numerous questions and comments.

   IET researchers are profoundly grateful to Prof. A. Harberger and Prof. S. Edwards for the knowledge they gained at the lectures, which knowledge they will be able to use in their current and future studies.

IET SENATUS ACADEMICUS

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   On June 19, 2003, a meeting of the senatus academicus of IET was held. The sole issue on the agenda was Some Results of the Tax Reform in the Russian Federation. At the meeting, two reports were delivered:

RESULTS OF THE INCOME TAX REFORM
(Speaker: S.G. Sinelnikov-Murylev, Doctor of Economics, Deputy Director of IET)

   In 2000, a reform of the income tax ( referred to as a ‘tax on individuals’ income’ in new edition of Chapter 23 of Part II of the Tax Code) was carried out. As a result of the above reform, a single flat rate of 13 percent was introduced. The reform was aimed at reduction of the nominal tax burden (the marginal income tax rate) for the purpose of reduction of the rate of tax evasion.

   As a result, in 2001 income tax revenues increased by over 45 percent (23 percent in real terms) on the 2000 figure. In 2002, income tax revenues grew by another 40 percent (about 20 percent in real terms). Such growth in tax revenues can be explained among other things by growth in individuals’ nominal income due to general growth in prices, increase in real income in conditions of economic growth, raising of the rate of taxation from 12 percent to 13 percent for low-income tax-payers, carrying forward to the year 2001 of some portion of the income received in 2000 so that it is taxed at a lower rate, charging of income tax from servicemen and other.

   However, according to the above hypothesis the increase in revenues can largely be explained by a growth in the taxation base; the rate of income tax evasion went down, while the volume of declared income increased.

   Estimations point to the fact that reduction of the marginal tax rate has resulted in growth in the tax base. Notional decomposition of changes in the income tax base by the factors in 2001, as compared to 2000, showed that growth in the average marginal income tax rate accounted for 39.7 percent of changes in the income tax base, real growth in consumers’ income, for 41.5 percent of changes in the tax base and the general growth in prices, for 18.8 percent.

   Also, dependence of income tax revenues on change in the average marginal tax rate and individuals’ actual incomes was studied. Estimations point to the fact that in regions where the average marginal rate was higher in 2000, more tax revenues were received in 2001 (that is, in 2001 growth in tax revenues was achieved among other things through reduction in tax evasion rate which was observed after the marginal tax rate was reduced). An additional factor behind the growth in tax revenues was raising of the tax rate from 12 percent to 13 percent for low-income taxpayers. That change accounted for 7.6 percent of the growth in income tax revenues. Among other factors behind growth in tax revenues are change in the average marginal rate (it ensured 52.1 percent of increase in income tax revenues), change in taxpayers’ real income (21.5 percent) and inflation (18.8 percent).

   Also, effect of the income tax reform on tax progressivity was analyzed. The obtained outputs point to the fact that introduction of a flat tax rate did not bring about any reduction in income tax progressivity. That can be explained by the fact that major growth in tax revenues was achieved through reduction in the rate of income tax evasion by high-income taxpayers. If we consider the pattern of dependence of aggregate tax revenues on wages and salaries as approximation of the pattern of redistribution of wages and salaries by means of the income tax levied on wages and salaries we shall see that the income tax has a more important role to play in redistribution of wages and salaries, than in distribution of taxable income.

   Analysis of the effect of the tax reform on the amount of income tax revenues and its progressivity in 2002 as compared to 2000 yielded similar results. Just like analysis of change in income tax revenues in 2001, as compared to that in 2000, it was established that reduction in the average marginal income tax rate resulted in growth in tax revenues with no reduction in income tax progressivity observed.

   In addition to analysis of the income tax reform, research of the social payments reform (single social tax) was carried out. The outputs of that research showed that with introduction of the descending scale of the single social tax no actual growth in tax regressivity was observed. In respect of social payments (single social tax), dependences of change in tax revenues on change in the average marginal rate of social payments (single social tax) and change in the average marginal rate of taxation of income (aggregate rate of income tax and single social tax) were plotted. The outputs of econometric estimations point to negative dependence of social payments revenues (single social tax) on the average marginal rate of social payments and the aggregate tax rate of income.

   The above study has permitted drawing of a number of practical recommendations on upgrading of the income taxation system.

   The existence of a positive relation between the dynamics of growth of the tax base and the marginal tax rate gives hope that the process of legalization of income which began in the 2001-2002 period, will continue. For that, two important preconditions need to be assured: firstly, the flat rate of income tax needs to be preserved for a long period of time and, secondly, efficiency in administration of the tax in question needs to be enhanced through introduction of legislative measures to reduce tax evasion and of more severe penalties.

   The former prerequisite is the key one, since it is evident that the tax evasion rate dramatically fell in the first years after the flat tax rate was introduced; however, far from being rare and exceptional tax evasion incidences are still observed on a mass scale. In conditions of a dramatic reduction in the marginal income tax rate, it is important to ensure a situation where taxpayers would prefer to pay income taxes, rather than run the risk of being penalized. That would enhance efficiency of the second prerequisite. Further reduction of social tax rates and less rigid conditions of entitlement of enterprises to taxation under the descending tax scale could also yield a positive effect. In addition to that, instead of exercising tougher control over individuals’ large spendings (which is not effective in terms of administration of the income tax) it would be expedient to create such legal instruments as would permit tax authorities to estimate the tax base of individuals on the basis of the so-called ‘obvious signs of wealth’. For that purpose, elaboration of the provisions of the Tax Code is required under which “a tax authority is in a position to determine the tax amount payable on the basis of the data on the taxpayer available to it or by analogy”. However, it needs to be remembered that such a norm should be applied to taxpayers, whose declared income does not match their ‘obvious signs of wealth’ and should not be applied on a mass scale.

   As the nature of the redistribution role played by the income tax in respect of the total households’ incomes is unclear, set of measures to enhance progressivity of the tax system as a whole needs to be devised and introduced. As regards income tax, it would be expedient, in particular, to abolish property tax deductions and tax deductions related to charitable contributions, develop a system of progressive taxation of interest income and upgrading of the methods of taxation of additional fringe benefits available to employees.

   Increase in social tax privileges may result in a reduction in income tax progressivity. Nevertheless, it can be justified by the fact that granting of tax privileges in respect of expenditure on education makes investment in human capital more attractive, while the principles of horizontal fairness justify provision of tax privileges in respect of medical expenditures, while in normal conditions mostly high-income taxpayers enjoy such tax privileges, in the situation in question (where under the effective law the maximum sum of the tax refund is small and the procedure for recollection of that sum, rather complicated) increase in the sum of the tax refund will have a stimulating effect on legalization of incomes.

   Also, it is important to upgrade the system of income taxation of pension schemes and insurance schemes, especially private ones. Enhancing of neutrality of the income tax levied from individuals will help upgrade the system of taxation of incomes received from pension and insurance payments and ensure harmonization of taxation of public and private pension schemes and insurance schemes (granting of tax privileges in respect of contributions made to specialized private institutions). Eventually, the above measures will help expand the market of private pension and insurance services.

   Increased income tax progressivity and single social tax progressivity can also be achieved through increase in the amount of the exemption limit. However, the above measure needs to be thoroughly analyzed from the point of view of budget loss and introduced step by step.

RESULTS OF PRIMARY INDUSTRIES TAXATION REFORM
(Speaker: S. B. Batkibekov, Doctor of Economics, Head of the Budget and Tax Policy Division at the IET.)

   Under Federal Law ¹ 126-FZ, Part II of the Tax Code of the Russian Federation was complemented with Chapter 26: Severance Tax. Also, other statutory acts of the Russian Federation, in particular, the Law on Mineral Wealth were amended accordingly. So, the system of taxation of primary industries was significantly changed. Starting from 2002, the new severance tax replaced the three payments that had been charged by that time for nearly ten years: charges for use of the mineral wealth (royalty), charges for rehabilitation of mineral resources and the excise tax on oil and gas condensate.

   The procedure for calculation and payment of the above tax is based on the formerly adopted procedure for calculation of charges for use of the mineral wealth in mining operations. Seen as payers of that tax are entities and enterprises, which engage in mining operations. Seen as the object of taxation are mineral products extracted; seen as the tax base is the cost of mineral products extracteds. Tax rates are differentiated by the type of mineral products as percentage of the cost of mineral products extracted. Tax rates are set on the basis of average actual rates of the royalty and 50 percent of the tax rates applied to charges for rehabilitation of mineral resources (the other 50 percent of the above tax rates as in conditions of the former tax system is at the disposal of mining industries, but use of those funds is no longer regulated). As regards oil production, the approved tax rate incorporates also the excise value.

   For taxation of the oil production, a significant exception has been made: under the new law, seen as the tax base was the volume of output in natural units and the tax rate was set in the amount of 340 rubles per ton. The specific tax rate set for oil production is subject to adjustment with the level of international prices on oil and fluctuations in the ruble exchange rate taken into account. A special adjustment ratio is applied, which ratio permits to considerably reduce regressivity of the tax in question.

   Replacement of the three formerly used payments (charges for use of the mineral wealth, charges for rehabilitation of mineral resources and excise tax on oil and gas condensate) with the single severance tax is fully justified both theoretically and practically. The new tax actually performs the functions of the royalty (payment to the owner of the mineral wealth for the right to develop deposits). Introduction of the severance tax has permitted to make the system of taxation less complicated and bring it in harmony with the international practice, while setting of a special tax rate on production of oil (for the period of adjustment of the mechanism of application of market prices for the purpose of calculation of taxes), to overcome negative taxation effects of transfer pricing.

   As a result of the reform, budget revenues have considerably increased:

  2000 2001 2002
   The sum of revenues received from excise tax on oil, charges for use of mineral wealth and charges for rehabilitation of mineral resources 1,6% 1,6%  
   Severance tax     2,5%

   In addition to amendments of the Tax Code and the Budget Code, it is proposed to amend some of other statutory acts, in particular, the Law of the Russian Federation on Customs Duties. For instance, under amendment of the above law, the ceiling of customs duties on export of hydrocarbon (which are adjusted depending on the level of international prices) has been set for the first time ever. Under the Law on Mineral Wealth as amended by Federal Law ¹ 126-FZ, a system of special non-tax payments for use of deposits has been established. That system includes lump sum payments for use of natural deposits at occurrence of such events as are specified in the license, regular payments for use of natural deposits (such payments are charged at prospecting and exploration, as well as at construction and exploitation of such underground structures as are not related to mining), charge for geological information on deposits, fees for participation in a tender (auction) and fees of issue of a license.

   The principal objective of the research consisted in building of a model for estimation of tax liabilities of the oil industry and analysis of the tax burden borne by it.

   For that purpose, a financial balance of the industry was calculated, which was based on estimation of 1) oil industry’s revenue base or the volume of funds oil companies received in the pricing conditions, which prevailed in 2002 with the actual volumes of sales of oil and petroleum products and taking into account of change in the volume of accounts receivable, and 2) oil industry’s expenditure base, or the volume of funds oil companies spent on production, transportation, refinery processing, sales and transportation of petroleum products, business administration, payment of taxes, investments, dividends and the like on the basis of transportation tariffs, tax rates and tax structure, the prevailing level of costs and other taking into account change in the volume of accounts payable.

   In performance of estimations, the following principles were adhered to:

   – data reliability (the data was verified with the use of different sources);

   – equivalence of revenues and expenditure (operational expenses were included in expenditures with revenues received from those operations shown in the composition of income);

   – assessment of expenditure on tax payments proceeding from internal model calculations done on the basis of parameters of the then effective tax system and other necessary data.

   It is to be noted that the analysis was somewhat notional, since due to a lack of the data required for correct calculation the authors had to proceed from rather rigid premises. To assess tax burden on the industry, various methods of evaluation can be used. However, it is to be remembered that those methods are not perfect and cannot be universally applied to answer different questions.

   In addition to the above, since information on different indices of oil industry is conflicting and insufficient assessments made in the present report are rather notional and calculations cannot be seen as absolutely accurate. For the reasons specified above, the authors did not set themselves the objective of drawing an accurate balance between revenues and expenditure in oil industry. At the same time, use of a number of sources and different expert evaluations of the outputs of the analysis, as well as comparison of those outputs with calculations carried with the use of other methods gives hope that the obtained outputs reflect the actual situation in oil industry accurately enough.

   Some of the calculations can be improved after additional information and the required data are obtained. This concerns, in particular, calculations of depreciation, costs of transportation of petroleum products at sales on Russia’s domestic market and dynamics of change in accounts payable and accounts receivable. However, it is to be noted that adjustment of the above indices will not have any significant effect on the overall results of calculations.

   Some concern has been caused by the value of the ‘other investments’ position, which can include not only capital costs of principal activities of oil companies, but also such funds as were spent on purchase of or received from sale of other assets.

   Calculation of tax burden on oil industry has shown that in 2002 (in conditions of the then system of taxation and the average annual price on the URALS brand of oil amounting to 23.95 USD per barrel) budget revenues from oil companies amounted to nearly 20 billion USD, that is, about 35 percent of oil companies’ foreign exchange revenues. It is to be noted that in our estimation the amount of special taxes (that is, taxes, which are applied to companies of oil industry) totaled 15.5 billion USD or 76 percent of the total amount of the taxes paid.

   Notional calculation of change in the tax burden at fluctuations of prices on oil has revealed that with oil prices falling to 15 USD per barrel the tax burden is reduced to 19 percent of the revenues if the relation between the dynamics of prices on petroleum products and prices on oil is taken into account and to 22 percent if that relation is not taken into account. With prices on oil falling to 18.5 percent per barrel, the tax burden is reduced to 27 percent and 28 percent, respectively.

   Estimation of consequences of changes in the tax system effected in 2003 (abolition of the road tax and raising of excise rates on petroleum products) has shown that tax liabilities of oil industry (in prices which prevailed in 2002) have increased by a mere 6.1 percent on the 2002 figure, while the tax burden on revenues of oil industry is going to amount to 36 percent. Should the average annual price on oil amount to 15 USD per barrel (by the 2003 results) the index of the tax burden will go down to 23 percent without taking into account the relation between the prices on oil products and prices on oil and to 26 percent if such a relation is taken into account. With prices on oil falling to 18.5 USD per barrel, those indices will amount to 29 percent and 30 percent, respectively.

   Calculations for 2004 (it is expected that the VAT rate will go down to 18 percent, while the rate of the severance tax will be raised up to 357 rubles per ton and the sales tax will be abolished) have revealed that in prices which prevailed in 2002 tax liabilities of oil industry would increase by 10.6 percent on the 2002 figure, while liabilities in respect of special taxes, by 8.7 percent. With the average annual price on oil amounting to 15 USD per barrel, the tax burden on the revenues will amount to 24 percent without taking into account the relation between prices on petroleum products and prices on oil and, to 26 percent if that relation is not taken into account, while with the average annual price on oil amounting to 18.5 USD per barrel the tax burden on the revenues will amount to 29 percent and 30 percent, respectively.

   The tax burden on Russia’s vertically-integrated oil industry is comparable to similar burdens on transnational oil companies, though in respect of individual parameters (taxes per unit of output, taxes per ton of oil and the like) the situation of Russia’s oil industry may be somewhat better or worse than that of some transnational companies depending on the structure of production and geography of production of the specific foreign oil company with which comparison is made.

   According to calculations of the IET experts, to increase oil output to 400-500 million tons in the year 2010, investment of 76 billion USD to 117.5 billion USD will be required in the period up to 2010 (that is, 9.5 billion USD to 14.7 billion USD a year), including 35-55 billion USD in investment in production proper.

IET DISSERTATION COUNCIL

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K. Yanovsky

   On June 25, 2003, K. Yanovsky defended a thesis on Import of Institutions by Countries with Transition Economies: Criteria for Selection, Conditions and Costs of Introduction.

The Dissertation Council voted in favor of conference upon K. Yanovsky of a PhD (Economics) degree.