Russia: Transition to inequality

Leonid Grigoryev,
Tenured Professor,
Higher School of Economics (HSE),
Moscow, Russia

Co-author of “500 days plan” in 1990

Most economists consider social inequality as the necessary aspect of prosperity and driving force for hedonists on the good vertical lifts in Anglo-Saxon countries. Sociologists normally complain about poverty and suffering. Specialists on Great Diversion and Catching up are seeking fast paths to development while accepting inequality as an unavoidable sin. What is about the path of transition from plan to market, from quasi-egalitarian to full-fledged capitalism in Russia? Now 30 years of transition are over – it is a good moment to make an assessment of results: bone by bone, so to say.

Needless to repeat – the USSR was not an all-equal society, as it was officially declared: “from each – by his/her talent, for each – by his/her labour (input)”. A minority of party and state officials had some privileges (housing, health care, recreation, access to durables), and a very tiny group had some food distributions service. Stagnation of economic growth, hidden inflation (useless money savings) and consumer goods supplies shortages had shaken the social and sociological stability of the society. At the end of the 1980s, the most important issue was that the families were ready to support market reforms for consumption improvement (accompanied by social and political transformation). The reforms were generally treated as a path to improve the lifestyle. Communist ideology was actually easy forgotten. Certainly, nobody expected the immediate – without any serious debates or deliberations – the collapse of the Soviet Union. Economic implications of the dissolving economic ties on the enterprise and market basis also were not foreseen. Mainly the GDP collapse for the Central and East Europe plus for few post-Soviet republics was contained within 25%, for Russia – more than 40%, for Georgia and Ukraine that was much worse (over 60% down) from the very beginning. The author commented on this development in the New York Times on the 12th of September 1991 (few weeks before Yegor Gaidar was appointed the Deputy Prime Minister): “No leader has yet had the courage to tell the peoples of the Soviet Union of the obvious: that the transition to a market economy will entail much hardship. Western living standards will not be achieved overnight.” (Grigoryev).

The key decline was concentrated in state services, durables and consumer goods of national production. By 1994 the crisis in CEE was over – in Russia minus 44% GDP (the US rate of GDP decline in 1933 to 1929) was reached in 1998. Manufacturing contracted by 64% with the huge unemployment and inflation, totally deflated savings etc.

At that time, the observers were expecting Russians to become democrats over the crush of expectations of better life. Western Prosperity was partially supported by exports to Russia as a substitution for the disappearing national production. Oil prices declined in August 1998 to $8 and started to recover only in 1999. Four-five years of transitional crisis in CEE (at minus 25%) appears to be much more sustainable by households, than nine years decline (at a peak of -44%) for Russian families. Branco Milanovich had registered half of the Russian population below the poverty level in 1994 (World Bank, 1998). Military expenditures – according to SIPRI – had declined from $250 billion (1988) to $14 billion (1998), depriving the whole military-industrial complex of employment and earnings. August debt crush of 1998 had brought the 4-times ruble devaluation and fixed 1998 as the lowest point in transitional crisis with no perspectives in the foreseeable future. High suicide and homicide rates, a surge in criminality were accompanying the life of ordinary people for decades after the political transformation (see Grigoryev and Popovets). Since the 1990s the poverty rate declined to about 11% in 2013, but shocks in 2015 – 2020 aggravated it again to 13-15%.

Personal consumption in the 2000s was growing after some adaptation to the new market conditions (and after the devaluation of 1998) partly due to the help of well-known oil exports incomes. In spite of the oil crushes of 2008, 2015 and 2020, personal consumption has experienced growth, including substantial housing gains – more than one-third of residential space had been built in the 21st century. During 2010-2014 Russia had renewed a good portion of its car stock and reached the coverage of Internet and computer access close to Spain or Poland by now. Most educated Russians have access to open social media and Western TV and have a rather practically usable level of English, which makes them much better informed than it is usually presumed in the West.

Russian oligarchs were welcomed on the West at the time of privatization as a token of success in departing from communism. Obviously, the social inequality has come as a result of a particular redistribution of property, approved by the Bretton-Woods institutions and Western political societies. By 2009 the special study of Evgeny Yasin had shown, that the 5th quintile has got two times more real cash income than in the 1980s; the 4th quarter got 125% of it; the 3rd – 100%; the 2nd – 79%; and 1st – only 55% (see Yasin). That was the result of the two decades of transition. Mainly relative inequality stays while GDP per capita in PPP (2017) is above $25,000 now.

To our knowledge social inequality around the world and in Russia is pretty rigid. The main parameters are almost the same now after dramatic 1994-1996 (see Novokmet et al.): top 10% has more than 45% of income; (low 50% has close to 15% of income. Current statistics give 45% of income to 5th quintile (less than in Brazil). And there is no easy way to change this inequality in the short run. Russia in few years of 1990s had made a step to inequality Latin American style – not a European continental, as some could have expected. Since we observe the substantial rigidity of social inequality (see Grigoryev & Pavljushina) we may also expect the serious role for the Great Gatsby Curve in the long run (see Corak). Now the high social inequality has become one of the key elements of “the new path dependency“.

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