Introduction

Abstract

Russia is the largest post-communist country. Since 1991, when it emerged from the disintegration of the Soviet Union, Russia has experienced a dramatic political, economic and social transition. The comprehensive scope of the transformation, the scale of changes, the controversial policies and policy reversals make Russia an important research subject. For virtually every question in transition economics Russia represents an exciting testing ground. After 17 years of transition, we have now accumulated the wealth of disaggregated datasets that allow the study of behaviour of Russian firms, households and regions in transition. The initial heterogeneity and the increase in inequality during the transition, the reversal of reforms and structural changes in many areas have created substantial variation to study virtually all the questions of interest. This symposium puts together five empirical papers that address most important issues in Russian transition. One paper focuses on Russians’ own evaluation of the transition experience. Two papers discuss the unprecedented rise in mortality that accompanied transition. The fourth paper studies the impact of one of the major reforms: the introduction of a flat income tax. The fifth paper studies the changing nature of Russian fiscal federalism. In this brief introduction, I will go through the five papers in more detail. The paper by Irina Denisova, Markus Eller and Ekaterina Zhuravskaya uses the data from a representative survey of Russian households to understand what Russians themselves think about transition. In short, a majority of Russians no longer support transition to market, believe that the transition has so far been a failure and are in favour of greater involvement of the government in the economy. According to a compatible survey conducted at the very same time in 28 transition countries (Life in Transition Survey, the European Bank for Reconstruction and Development and the World Bank), Russians now have the most negative attitudes towards the free market among all transition countries. This is quite a puzzle given that the Russian government is non-democratic and corrupt – and that Russians seem to be fully aware of this. The authors use individual characteristics to understand the variation in the perceptions. As in other countries, individual experiences during transition (including unemployment experience) do affect the attitude to transition. Yet, Russia’s economic performance has definitely not been the worst one. In order to explain this puzzle, the authors study the degree of social capital. Consistent with the theory in Aghion et al. (2010), social capital may explain the preference for state interventions even in the presence of high corruption. This happens as in the environments with poor social capital, private businesses impose negative externalities. The authors exploit the microeconomic data to show that individual perceptions of social capital and corruption are correlated with a higher demand for regulation, as predicted by the theory. The next two papers study the most important social phenomenon of the transition period – a huge increase in mortality, unprecedented in times of peace. During transition, mortality increased by 50 percent and middle-age male mortality has doubled. Male life expectancy decreased by almost 9 years (the decrease in female life expectancy was also substantial, but much smaller –‘only’ 4 years). What has caused the mortality crisis? Brainerd and Cutler (2005) point to alcohol and stress. The two papers in the symposium are the first ones to study this issue using disaggregated data. Dan Treisman explores the region-level panel data on alcohol prices. His argument is very simple: the overall surge in premature deaths was driven by a reduction in the real price of vodka in the early 1990s by a factor of four. To test this argument, Treisman uses the variation of vodka prices across Russia’s regions over time. Regions where vodka prices fell in real terms were also the ones that had the greatest increases in mortality. Treisman goes further and studies the determinants of the changes in vodka prices. He concludes that these were driven by populist regulation. Politicians effectively made vodka more available to mitigate the pain from the reforms – with great damage to Russians’ health. Irina Denisova’s paper looks at the individual-level panel data. She studies mortality in the Russian Longitudinal Monitoring Survey (a large representative survey of Russian households) over 14 years. Applying the duration analysis, Denisova shows that longevity is indeed adversely affected by excess consumption of alcohol, by smoking, and by career-related stress (in particular, by unemployment). While her results confirm the main hypotheses put forward by research based on aggregate data, the paper is the first one to quantify the substantial effect of smoking and binge drinking on mortality. Denisova shows that Russians who drink less frequently than once a day are not at risk. Only more frequent alcohol consumption is a significant determinant of reduced longevity. The fourth paper in the symposium is devoted to the effect of a major tax reform. In 2001, the Russian government replaced the progressive personal income tax with a 13 percent flat one. Denvil Duncan and Klara Sabirianova Peter study the effect of the reform on labour supply. This is a very important issue. As this was the first flat tax reform in a large country, understanding its impact is relevant beyond transition countries. We know now that tax revenues increased substantially following the reform. However, was the increase caused by the reform? It is not immediately clear. First, the increase in tax collections could be driven by other factors (for example, a stricter tax enforcement). Second, even if the lower rate resulted in better compliance, did the reform result in any real changes? The main advantage of Duncan and Sabirianova Peter’s paper is that they study the heterogeneous effect of the tax reform on individual labour supply decisions using difference-in-differences. They find, indeed, that the effect on labour supply is different across genders. Male labour supply does increase after the reform, while female work hours do not increase. The tax reform also raised the probability of both males and females finding a job. Still, the paper concludes that the aggregate effect of taxes on labour supply is small – both in the short and in the long run. Therefore, most of the impact of the reform on tax revenues is explained by improvement in compliance. The fifth paper by Elena Jarocinska studies one of the key new institutions that have emerged in Russia during transition – fiscal federalism, specifically, the transfers from the federal centre to Russian regions. Russia is a large federation created from scratch in 1992 after the disintegration of the Soviet Union. The federalism was created along with price liberalization (which brought about a dramatic change in relative prices) and the new tax system that determined which subnational units (regions) are net donors and which are net recipients from the federal budget. This has delayed the creation of stable federalism institutions. As shown in the seminal paper by Treisman (1996), in the early 1990s, the federal transfers were based on the political factors. The regions that were most likely to secede from the young federation were receiving larger transfers. Jarocinska studies the later periods – the late Yeltsin and early Putin years, 1995–1999 and 2000–2004, respectively. (In 2005, Russian cancelled gubernatorial elections and effectively turned its federal system into Chinese-style administrative federalism). The advantage of Jarocinska’s analysis is the ability to use panel data and control for fixed effects. Her results show that political factors remained important in 1995–1999 but changed their sign. More loyal regions were receiving higher transfers. How can one reconcile her results with Treisman’s? First, one can argue that in the second half of the 1990s the federation was already mature. Second, this may be an implication of her use of panel vs. cross-section methodology. The regions that were more likely to secede were still receiving higher transfers; but as the very same regions were becoming more loyal over time they were given even higher rewards. It is also interesting that the political variables lost their influence on federal transfers in 2000–2004. One can argue that this was a result of the effective introduction of the formula-based transfers in 2000, and enforcement of the formula-based approach ever since. Interestingly, Jarocinska also finds evidence of centralization and even personalization of political power in Russia: in 2000–2004, there was a correlation between Putin’s visits to the region and federal transfers. Transition economics has always suffered from having its research object in, well, continuous transition. It has been hard to analyse the transition countries as those were not in equilibrium, and the datasets were just being created. This symposium studies a major transition country, Russia, but the issues are already not transition specific. Nor are the methods: these five papers use large, solid datasets and modern econometrics; the quality of empirical results is very high. It is therefore especially exciting that these papers bring together new insights into the most important questions in Russian economy and society.