Dividing the Spoils: Pensions, Privatization and Reform in Russia's Transition

29 Pages Posted: 28 Feb 2000

See all articles by Ethan B. Kapstein

Ethan B. Kapstein

Independent

Branko Milanovic

World Bank - Development Research Group (DECRG); University of Maryland

Date Written: February 2000

Abstract

The gains from the transition in post-communist Russia were captured by the new managerial class, which won rents from the state in the form of privatized enterprises, state subsidies, credits, and opportunities for tax evasion. Those rents reduced state revenues that could have supported social policy - including pension reform, which in turn could have fueled industrial restructuring. With neither pension reform nor industrial restructuring, Russia's economy has continued to shrink.

Kapstein and Milanovic present a political economy model in which policy is the outcome of an interaction between three actors: government (G), managers and workers (W), and transfer recipients (P).

The government's objective is to stay in power, for which it needs the support of either P or W. It can choose slow privatization with little asset stripping and significant taxation, thus protecting the fiscal base out of which it pays pensioners relatively well (as in Poland). Or it can give away assets and tax exemptions to managers and workers, who then bankroll it and deliver the vote, but it thereby loses taxes and pays little to pensioners (as in Russia).

The authors apply this model to Russia for the period 1992-96. An empirical analysis of electoral behavior in the 1996 presidential election shows that the likelihood of someone voting for Yeltsin did not depend on that person's socioeconomic group per se.

Those who tended to vote for Yeltsin were richer, younger, and better educated and had more favorable expectations of the future. Entrepreneurs, who had more of these characteristics, tended to vote for Yeltsin as a result, while pensioners, who had almost none, tended to vote against Yeltsin.

Unlike Poland, Russia failed to create pluralist politics in the early years of the transition, so no effective counterbalance emerged to offset managerial rent-seeking and the state was easily captured by well-organized industrial interests. The political elite were reelected because industrial interests bankrolled their campaign in return for promises that government largesse would continue to flow.

Russia shows vividly how political economy affects policymaking, because of how openly and flagrantly government granted favors in return for electoral support. But special interests, venal bureaucrats, and the exchange of favors tend to be the rule, not the exception, elsewhere as well.

This paper - a product of Poverty and Human Resources, Development Research Group - is part of a larger effort in the group to study the political economy of reform in transition countries. This study was funded by the Bank's Research Support Budget under the research project The Political Economy of Fiscal Policy in Transition Countries (RPO 682-52). The authors may be contacted at ekapstein@hhh.umn.edu and bmilanovic@worldbank.org.

JEL Classification: D72, P26

Suggested Citation

Kapstein, Ethan B. and Milanovic, Branko, Dividing the Spoils: Pensions, Privatization and Reform in Russia's Transition (February 2000). Available at SSRN: https://ssrn.com/abstract=205959

Ethan B. Kapstein

Independent

Branko Milanovic (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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Washington, DC 20433
United States
202-473-6968 (Phone)
202-522-1153 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/bmilanovic

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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