The Federal government has approved legislation which led to
the previously discussed changes in expenditure assignment and also gave local
governments the power to formulate budgets and raise revenues without worrying
that their surpluses were going to be extracted by the central government. These
new assignments of expenditures are not efficient, in part because the federal
government has passed down" many of the expenditure assignments which were
formerly the responsibility of the Soviet state. Revenue autonomy has not been
reached partially due to the yearly changes in tax sharing rates. Disparities
between the rich and poor regions has also contributed to a problem budgetary
concern. Along with these disparities, the high rate of inflation has
significantly contributed to revenue unpredictability of the rayons and
oblasts. Revenue predictability and the subnational area's economic state due
is of the utmost importance when one is considering expenditure assignment of
the federation.
Social Welfare and Russia
The significance and
necessity of an efficient social safety net in the Russian Federation can only
be understood within the context of the Soviet experience of social security
and how today the ideological inclination toward a welfare state is affecting
Russian society. The state's pervasive role in Soviet society affected both
economic and social conditions. Economically, a state-caused inverse
relationship existed between GDP and the state's commitment to social safety
during the Brezhnev regime. Economic and political stagnation characterized the
latter years of the Brezhnev era. Economically, GNP growth declined
precipitously between 1961 and 1985 (see A1 and A2). Prior to 1960, the USSR
utilized extensive rather than intensive factors of production--specifically
labor, capital (stock), and natural resources. In essence, Soviet authorities
were able to take advantage of Imperial Russia's lack of a strong industrial
base by transferring much of the population from agriculture to industrial
production during Stalin rapid industrialization drive of the 1930s and 1940s.
The emphasis placed on heavy industry produced a correspondingly high rate of
consumer saving which allowed for increased capital growth, that when combined
with the natural resource abundance and intensive use of existing capital
helped sustain economic growth The USSR's ability to sustain economic growth in
the 1970s was fostered by its large reserve of oil that helped finance imports
of western technology.
The exhaustion of labor surplus, declining birth rates,
inefficient use of natural resources and other factors of production, the
growing expenditures needed to maintain military parity with the United States,
and the sudden drop in oil prices, and the mis-development of the economy all
were factors that contributed to the USSR's economic stagnation in the late
1970s and early 1980s. While economic efficiency decreased during the Brezhnev
period, the USSR's leadership demonstrated increased commitment to the Soviet
version of the social safety net. The party-state's pervasive role in society
had the effect of slowing economic growth through poor re-allocation of
resources and the social effect of retarding the development of a civic
society. As a result, Soviet society developed an enduring attachment to the
idea of an omnipotent state which provided for their basic needs regardless of
the economic costs.
From a Western perspective, the Soviet Union was
ideologically a hyper" welfare state in the sense that prior to the
Gorbachev era, the state attempted to provide a high level of social security
for every citizen, often to the point of harming economic efficiency.
Additionally, it heavily restricted the development of private sector in order
to prevent wide wage disparity. As mentioned above, the CPSU's monopoly on
power extended to every aspect of society and in exchange for party dominance
the working population received implicit social guarantees in the form of a
social contract." Linda J. Cook succinctly identifies each sides' basic
commitments and responsibilities:
Basically, the regime provided broad guarantees of full and
secure employment, state controlled and heavily subsidized prices for essential
goods, fully socialized human services, and egalitarian wage policies. In
exchange for such comprehensive state provision of economic and social
security, Soviet workers consented to the party's extensive and monopolistic
power, accepted state domination of the economy, and compiled with
authoritarian political norms. Maintenance of labor peace in this political
system thus required relatively little use of overt coercion.
The weakening of the party and other unintended consequences
of glasnost and perestroika such as the emergence of the Russian Republic, the
decision to release Eastern Europe from Soviet domination, and the attempt to
make state owned enterprises more efficient all had a direct impact on lowering
the standard living for the USSR's population. Gorbachev tried and failed to
cut the guarantees of the social contract. In contrast to earlier in the Soviet
period, the perestroika reforms had the effect of giving significance to
money" in the sense that inputs had developed value through the economic
decisions which constituted perestroika. From the center's perspective, the
problems caused by the inability to cut expenditures through revision of the
social guarantees were compounded by revenue loss in three key areas: vodka
sales, turnover tax, and republic contribution to the center--especially from
the Russian Republic.
Gorbachev began perestroika with an attack on worker
efficiency. One measure adopted to combat this perceived evil was restriction
on the sale of alcohol. The consequence was a loss in revenue which was further
compounded by expenditures related to the Chernoybl disaster and the massive
Armernian earthquake in 1987. In 1990, the center granted state owned
enterprise (SOEs) greater leeway in the setting of prices--between 50 percent
and 100 percent of state mandated prices. Since retail prices were unaltered,
the state lost a huge amount of revenue from the turnover tax. In addition,
Russia offered to lower the profit tax for those enterprises willing to
pledge" allegiance to the Russian Republic. Finally, the dissolution of
the Soviet Union was hastened by the rise of Russian nationalism and populism both
of which had economic implications. The Russian Republic provided 80 percent of
the revenue to the USSR's budget. Yeltsin, using his powerful position within
the Russian parliament, declared in October of 1989 that the Republic would
halt all payment to Union institutions. He followed this devastating maneuver
by nationalizing" the USSR Ministry of Finance and seizing its mints. In
October of that year, Russia seized her share of the USSR'S precious metals.
Faced with such tremendous loss of revenue which created a budget deficit that
equaled 10 percent of GNP, the Soviet government elected to increase the amount
of money in circulation without a corresponding increase in the production of
consumer goods and services. The decision to increase money circulation,
through wage increases, had a jarring effect on Soviet society. The first
impact, characterized by the indelible image of long bread lines and the
stereotype that a large profit could be made on a pair of Levis familiar to
many Westerner was the result of the disruption of goods and services to the
general population.
Price stability began to go by the wayside in the fall of
1988 with an estimated inflation rate of 7 percent which mushroomed to 10
percent in 1990. As Table A3 and A4 indicate, the state increased both the
level of wages and subsidies in the other which constituted the component parts
of the Soviet safety net. Real wages, however did not compensate for inflation.
The decline in social welfare from a monetary angle was compounded by quality
decline in social consumption areas. Although the state increase subsides to
social consumption areas, the collapse of the Council on Mutual Economic
Assistance (CMEA) which provided much of the USSR's medicine and medical
supplies and a growing environmental movement which forced the closure of many
chemical plant that supplied the limited domestic market. Gorbachev's attempts
at reforms destroyed not only the social contract which existed between the
state and its citizens but the USSR as well. The late Soviet period thus
provides the starting point for examining poverty and the Russian Federations
response to it in the form of the social safety net.
The Soviet social welfare system was effective in that
absolute poverty, i. e. wide spread hunger or inadequate diet, was avoided in
the latter years of the Soviet period since the state could supply the basic
needs of the population through its control of USSR's resources and society as
a whole. Research into question of poverty and therefore poverty alleviation
policy (specifically the question of income inequality and distribution) was
hindered by the imposition of political rather than economic explanations. In
1965, the Soviet Labor Research Institute adopted a social minimum income norm
which was derived from the estimated costs of human consumption. Goskomstat
revised the income level based on the prices reported by state-owned stores.
The price consumers were faced with, however, due to their shopping habits, the
existence of a black market," and inflationary pressures dramatically
reduced their purchasing power. The Russian Federation revised the poverty line
in 1992 to encompass the age and gender of individual households. The six
categories are: children under six years of age children between the ages of 6
and 17, men between the ages of 18 and 59, women between the ages of 18 and 54,
men age 60 and above, and women age 55 and older
Closer to the U.S poverty line definition, the Russian
poverty level is established by first collecting low-cost cost food baskets for
each demographic group... [and] after pricing each market food basket at
national prices, age, and gender-specific multipliers yield individual poverty
line for each demographic group. The definition of poverty is critically
important to social welfare of Russia because, in theory, it sets pension,
minimum wage level, and welfare payments. The USSR's dissolution has altered
the scope, source and method of financing of social welfare programs. The
Soviet state provided a broad range of social services, through state owned
enterprise. From a public finance perspective, the transition to a more market
oriented system has meant the diversification of social spending responsibility
through the creation of off-budgetary funds (OBF) and passing down the bulk of
public social spending mandates to sub-national governments. The following are
the major OBFs: Pension Fund, Social Insurance Fund, Employment Fund, and the
Fund for Social Support.
Created in 1991, the Pension Fund was designed to take pressure
of federal budget and is authorized to collect a mandatory payment from
employers in the form of a mandatory 28 percent contribution while from
agricultural enterprises the mandatory contribution is 20. 6 percent and 5
percent of the total income of self-employed individuals. Employees make a 1
percent contribution to the Fund. Labor pensions, financed from these
contribution, and social pension which are financed from the federal budget are
administered by an independent government agency. The former constitute the
majority (80 percent) of Russian pensioners and thus the level of labor
pensions affect the lives 19. 5 percent of the Russian population. To be
eligible for labor pensions, men must have made 25 years worth of contributions
while women must have made 20 years of contribution. Eligibility for labor
pensions can be lower depending on occupation--hazardous occupations such as
coal mining and military service are two examples. Social pensions are for
individual with less than 5 years of work experience and is equal two-thirds of
the minimum old-age pension or in the case of disability the amount varies but
does not exceed the minimum labor pension.
Payroll contributions are the also the main source of
funding for the Social Insurance Fund (SIF) and the Employment Fund. Created in
August 1992, the SIF is funded by a 5.4 percent payroll deduction from every
worker. The SIF is intended to fund child care, maternal care benefits, and
sick care. Generally, 74 percent of revenue collected from the SIF
contributions remains with the enterprise while the remainder is sent to the
center to finance federal responsibilities. Workers who have accrued eight or
more years of experience receive their entire salary as do Chernobyl victims,
parents with three or more children, and war victims. Workers with less that
five years experience receive 60 percent of their salaries while those with
between five and eight years experience receive 80 percent of their salaries.
It is accepted practice that benefits are paid until the worker recovers or is
granted a disability pension.
Mothers receive support through a maternity grant which
equals five times the amount of the present minimum wage. Additionally, working
mothers receive a maternity allowance, over the span of 126 days, which is
equivalent to her entire salary. When this time has elapsed, the mother can
receive a payments that equals the minimum wage for up to a year and half.
The expenditure responsibility for family benefits, which
generally are divided into the following broad categories: payment made to all
families with children without regard to income or prerequisites, cash
transfers to disadvantaged families, and payments made to working mothers, is
unequally shared among all three levels of government. Although the national
level contributes, it mandates the levels of benefits while often leaving it to
the sub-national governments to finance the increase.
Unemployment in the region in a relatively new phenomena due
to the general nature of the Soviet system. The Employment Fund was created in
1992 to pay unemployment benefits to those affected by the transition to a
market economy. Contribution to the fund comes from a mandatory two percent
payroll deduction and budget transfers. Revenue collected from the payroll tax
is shared between the raion and oblast governments on a 45 percent to 55
percent ratio. The former then remits 10 percent to the center for federal
responsibilities. Benefits, from Western perspective, are considered generous.
Individuals just entering the work force receive the minimum wage. Workers who
have been laid of receive in the first three months receive a cash benefit
equal to 75 percent of their previous salary. The benefits level drops to 60
percent for the following six months and 45 percent for the remainder of the
year.
The Fund for Social Support ( FFS) is a limited national
source for sub-national funding of social programs. In 1992, the FFS accounted
for only .01 percent of GDP. The stated purpose of this fund is to aid rayons
that have been particularly hard hit in the transition from a command economy.
The FFS began operations in 1992 with revenue from seized Party assets and tax
from re-appraised inventories. It is also supposed to receive revenue form the
privatization process (although it did not receive the ten percent assigned in
1992) and "receipts from the revaluation of commodities in state stores
and ruble receipts from sale of food aid."
Although inflation increases revenue to the Russian
government, it naturally impoverishes the population when adjustments are not
made (or insufficient to deal adequately with inflation) to monetary benefits
such as the minimum wage and pensions which provides the basis for the social
safety net. Inflation was one of the primary causes of poverty in Russia. As
chart A5 shows, social subsidies and transfers have also been ineffective
because they do not reach the truly needy. The primary reason for this economic
waste is the lack of means based testing.
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