Center for Social and Economic Research CASE Reports Russia: Political and Institutional Determinants of Economic Reforms Marek Dabrowski, ed. (CASE) Vladimir Mau (IET) Konstantin Yanovskiy (IET) Irina Sinicina (CASE) Rafal Antczak (CASE) Sergei Zhavoronkov (IET) Alexei Shapovalov (CASE) No. 56/2004 Moscow – Warsaw, March 2004 The views and opinions expressed here reflect the author(s) point of view and not necessarily those of the CASE. Country Study carried out under the GDN global research project on 'Understanding Reform'. Key words: economic reforms, transition, Russia, reform sequencing, political reforms, institutional reforms, political economy. Review by José María Fanelli, PhD © CASE – Center for Social and Economic Research, Warsaw 2004 Graphic Design: Agnieszka Natalia Bury DTP: CeDeWu Sp. z o.o. ISSN 1506-1647, ISBN: 83-7178-336-1 Publisher: CASE – Center for Social and Economic Research 12 Sienkiewicza, 00-944 Warsaw, Poland tel.: (48 22) 622 66 27, 828 61 33, fax: (48 22) 828 60 69 e-mail: [email protected] http://www.case.com.pl Contents List of Tables and Figures . 5 1. Introduction . 9 2. History of the Soviet/Russian political and economic reforms 1985-2002 . 14 2.1. The end of the communist 'economic miracle' . 14 2.2. The destabilizing effects of the 'Perestroika' period 1985-1991 . 16 2.3. 'Revolutionary' period of reforms, end of 1991-1994. 18 2.4. The fragile and illusory stabilization of 1995-1998 . 22 2.5. Post-crisis period (1999-2003) . 24 2.6. The overall record and list of unresolved problems. 25 Appendix 2.1. The Main Reform Events and Players, 1990-2003 . 27 Appendix 2.2. Main institutional changes in Russia, 1985-2003 . 30 The Gorbachev period, 1985-1991. 30 Period of 'revolutionary' reforms, 1991-1994 . 30 The period of fragile and illusory stabilization, 1994-1998 . 30 The post-crisis period, 1999-2003 . 31 Appendix 2.3. Professional and political debate on economic problems and economic reforms. Major government economic policy and economic reform programs. 31 3. Political economy of reform – an attempt at a quantitative analysis . 32 3.1. The importance of election statistics. 32 3.2. The basic model . 33 3.3. The International Analysis. 34 3.4. The Interregional Analysis. 35 3.4.1. The significance of the pro-reform coalition . 35 3.4.2. The significance of basic institutions and the pro-reform coalition for the investment climate . 37 3.5. Buying votes and pro-reform coalitions. 38 3.6. Some conclusions . 40 3 CASE Reports No. 56 – Russia: Political and Institutional Determinants of Economic Reforms 4. External leveraging of Russia's reforms: the role of the IMF, the World Bank and the G7 countries . 41 4.1. The overall picture . 41 4.2. Some motivation of lending to Russia . 42 4.3. The role of the IMF . 43 4.4. The role of the World Bank . 48 4.5. The role of the G7 . 50 5. The Effects of Economic Reform in Russia . 53 5.1. Macroeconomic developments . 53 5.2. Structural changes in the economy . 58 5.3. Social indicators . 59 5.4. Structural and institutional reforms . 64 5.5. Composite development indicators . 66 5.5.1. Freedom House indices . 66 5.5.2. Transparency International Corruption Perceptions Index . 67 5.5.3. The Heritage Foundation Index of Economic Freedom . 68 5.5.4. The Fraser Institute's Economic Freedom of the World (EFW) Index . 69 6. Main Hypotheses and Results of Their Testing. 71 6.1. Hypothesis 1: Domestic crises beget reforms. 71 6.2. Hypothesis 2: External factors shape reform. 72 6.2.1. Oil prices . 73 6.2.2. International financial markets. 74 6.2.3. Foreign aid . 74 6.2.4. The role of international organizations . 76 6.2.5. The experience of other countries . 77 6.3. Hypothesis 3: Reform success depends on the organization of winners. 77 6.4. Hypothesis 4: Sequencing matters virtuous vs. vicious cycle . 79 6.5. Hypothesis 5: Fast reforms are more effective than slow ones . 81 6.6. Hypothesis 6: Democratization helps market reforms. 93 References . 85 4 List of Tables and Figures Table 2.1: Spot crude oil prices, 1972-1998, USD/bbl . 15 Table 3.1: International model: results of a simple regression analysis . 34 Table 3.2. Summary Data on Regressions from the Principal Components . 35 Table 3.3: Interregional model: Summary Data on Simple Linear Regressions. 36 Table 3.4: Interregional model: Description of variables. 37 Table 3.5. Investment climate determinants: results of regression analysis . 38 Table 3.6: Federal transfers and support for Yeltsin in the 1996 elections. 39 Table 3.7: Federal transfers and support for the government, 1999 compared to 1995 39 Table 4.2: IMF facilities for Russia, 1992-2000 . 43 Table 4.3: World Bank lending to Russia, 1992-2002 (millions of USD). 48 Table 4.4: The G-7 commitments to Russia . 50 Table 4.1: Gross financial flows into Russia, 1992-1998 (millions of USD). 52 Table 4.5: Gross official flows from the G7 into Russia, 1992-1998 (in USD millions and as a % of total financing). 52 Table 5.1. FDI in transition countries, 2002 (cumulative, USD M) . 56 Table 5.2. Changes in economic structure (value added, % of GDP) . 58 Table 5.3. Changes in economy structure (% of total employment). 58 Table 5.4. Real incomes of Russian society, 1992-2002, as a % of the previous year. 59 Table 5.5. Share of the 'Social Policy' item in total federal budget expenditures, % . 60 Table 5.6. Budget expenditures on health care and education, 1992-2000, as a % of GDP . 60 Table 5.7: Transition countries: Gini coefficient of income per capita . 62 Table 5.8. Coefficients of differentiation and concentration of income, 1991-2000 (total money income = 100) . 63 Table 5.9. Population with money incomes below minimum subsistence level . 63 Table 5.10. Human Development Index Trends 1985-2001 . 64 Table 5.11. Privatization results in selected CEE and CIS countries . 64 Table 5.12. EBRD indices of structural reform and institution building in Russia . 65 Table 5.13. Russia's 'Freedom in the World' Ratings, 1991-2002 . 66 Table 5.14. 'Nations in Transit' Scores, 1997-2003 . 67 Table 5.15. The Corruption Perceptions Index, 1998-2002 . 67 Table 5.16. The HF Index of Economic Freedom, 1995-2003 . 68 Table 5.17. EFW Index , 1990-2001. 69 Table 6.1: What can be done gradually? . 81 5 CASE Reports No. 56 – Russia: Political and Institutional Determinants of Economic Reforms Figure 2.1: General Government Budget Balance. 22 Figure 4.1: Russia's compliance with IMF quantitative monetary, fiscal, and exchange rate targets in 1993-1999 (in %) . 44 Figure 4.2: IMF net disbursements to Russia in 1992-2001 (millions of USD) . 45 Figure 5.1. GDP (constant 1995 USD), annual % change. 54 Figure 5.2. Inflation, consumer prices (annual %) . 54 Figure 5.3. Volume indices of investments in fixed capital in Russia (1990=100). 55 Figure 5.4. The CBR's gold and foreign exchange reserves, 1997-2003 (million USD) . 57 Figure 5.5: Money and quasi money (M2) as a % of GDP . 57 Figure 5.6. Total (ILO definition) and registered unemployment in Russia, as a % of the labor force . 61 Figure 6.1. Oil and Non-oil Fiscal Balances . 74 Figure 6.2: Support to reformers and financial aid of major donors, 1991-1999 . 75 Figure 6.3: Political and economic dynamics of the transition process . 82 6 Contributors Marek Dabrowski Professor of Economics, Chairman and one of the founders of the CASE - Center for Social and Economic Research in Warsaw. From 1991 involved in policy advising for governments and central banks of Russia, Ukraine, Kyrgyzstan, Kazakhstan, Georgia, Uzbekistan, Mongolia, and Romania; 1989-1990 First Deputy Minister of Finance of Poland; 1991-1993 Member of the Sejm (lower house of the Polish Parliament); 1991-1996 Chairman of the Council of Ownership Changes, the advisory body to the Prime Minister of.