Transcript Public Sector Reforms in Russia

Public Sector Reforms in Russia
Igor Baranov
Graduate School of Management, St. Petersburg University
Agenda
 Russian economy and public finance in 2008
 A Review of public sector reforms in 1991-2008
 Developing market economy institutions and competitive
environment: Privatization
 Developing quasi-market institutions and competitive
environment in the public sector: Education and health care
 Current debates on public sector reforms
 Russian public finance and economic crisis
Page  2
What do you know about Russia? General statistics
 Population 2008: 141.8 mln
 GDP nominal 2008: $1,666 bn
 Real GDP growth 2008: 5.6% (2007: 8.1%)
 GDP per capita nominal 2008: $11,748
 Foreign direct investment 2008: $506.2 bn
 Inflation rate 2008: 14.1% (2007: 9%)
 Unemployment 2008: 7.7% (2007: 6.2%)
Page  3
Russian public finance
 General government balance 2008: 4% of GDP (last 5 years: 4 – 7.5%)
 Public debt 2008: 5.4% (2003: 28.9%)
– of which foreign 2.1% (2003: 23.9%)
 Consolidated government expenditures 2008: around 32% of GDP
– 50% - federal budget, 50% - regional and local budgets
Page  4
How much does Russia depend on oil and gas?
 Official statistics: oil and gas sector is 8% of GDP
 If we make all needed correction: about 20%
 Sources of oil and gas revenues:
– Tax on extracting natural resources
– Export custom duties
 How to use these revenues? Moderately conservative strategy:
– Oil and gas transfer to federal budget (6.1% in 2008) that should be declined in
the next 3 years (targets were set for each year)
– Reserve Fund (no more than 10% of GPD)
– the rest goes to the National Wealth Fund (to support pension system –
incentives for voluntary contributions)
Page  5
Launch of Public Sector Reforms: 1991-1992
 Market-oriented reforms started in 1991 after a sharp decline in
GDP and standards of living
 Options considered in the consequence of reforms:
– Privatization → developing market institutions → free market prices
– A quick movement to market prices → privatization → market
institutions
 Free market prices were introduced in January 1992 as part of
“shocking therapy” policy
 “Washington consensus”, the role of IMF loans and economic
advisers
 Was there a different option available in fall 1991?
Page  6
Privatization
 Tools:
– Voucher privatization in 1992-1994
– Loans-for-shares scheme in 1996
 Outcomes:
– Public sector production is only 15% of GDP
• Health care, education, public utilities
• Some companies in strategic industries: defense-related (Russian
Technologies), oil (Rosneft), gas (share in Gazprom), transport (Russian
Railways, share in Aeroflot)
– Higher productivity?
– More investments?
– Competitive environment and governance model are more important than
ownership
Page  7
Developing competition in the public sector:
A case of higher education
 1990:
– 660 public universities
– 100% of students a were on tuition-free, government-sponsored programs
– No incentives for higher efficiency (quality of research and education)
– No job market
 2008:
– Around 1000 public and 1200 private universities
– 50% of students in public universities are tuition-based
– Only 45% of budget comes from government
– Competition for students, professors, relations with companies
• between high-tier public universities
• between low-tier public universities and private universities
– Effect: strategic and operational freedom, enrollment, quality?
Page  8
Public sector reforms in 2000-2004
 Performance-based budgeting
 Mid-term financial planning
 Division of responsibilities between regional and local authorities, decline
of “unfunded mandates”
 Administrative reform of 2004:
– Division between government functions
– Ministry (policy-making), agency (financing and management of public assets),
federal service (control)
Page  9
Tax reform
 Flat personal income tax (13%)
 Reform of corporate taxation. Main principle: unification of rates, setting
new rate at level of effective tax rate
 Decreasing corporate income (profit) tax: 35% to 24%
 Social tax (payroll tax paid by employers): 36% to 26% (cutting the rate)
 VAT: 20% to 18% (elimination of specific rates)
Page  10
Social protection reform
Transforming in-kind social benefits into subsidies
 Initial stage: numerous in-kind benefits (free public transport, free or
subsidized drugs, etc.) which varied for different social groups
(pensioners, families with children, civil servants, etc.)
 Reasons for reform:
– In-kind benefit did not reduce inequality, but even increased it
– did not work well as a social protection mechanism
– stopped any reforms in public services provision (private producers,
competition)
– stimulated rent-seeking behavior of monopolistic providers (public utilities, etc.)
 Results: social protests and overspending money to increase pensions
and other monetary benefits. Poorly planned and managed reform
 What is a capacity of current administrative system to make significant
transformations?
Page  11
Public sector reforms in 2004-2008
 A slowdown in pace of reforms
 Illusion of long-term stability in public finance
 Discretionary, often politically-motivated decisions on public spending (pensions,
public servants salaries, etc.)
 Major projects / changes:
– National priority projects in 4 areas: Education, Health Care, Housing, Agriculture
•
Effect? Building new institutions (almost not), establishing best practices (rare), public
spendings on underinvested areas (often)
– Public procurement reform (mandatory open tenders or auctions with information
published at a federal / regional governments web-pages)
•
Effect? More transparency (yes), efficiency (yes, if measured as a difference between
initial and bid prices), competition among providers (yes, but often with negative effect
on quality)
– State corporation to foster development in chosen areas: Russian Nanotechnologies,
Russian Olympic Construction, Russian Agricultural Bank, etc. with a special status
(separate federal law for each corporation) and high operational freedom
•
Page  12
Effect? Avoidance of some bureaucratic procedures, but governance issues
Current economic problems
 The economy is contracting sharply – expected decline is 3%GDP in 2009
 Budget deficit – 8% of GDP
 Collapse of the manufacturing and unemployment problems
Page  13
Conclusion. What can we expect?
 Which countries should be used as a benchmark for Russia’s economic
and political development?
– Andrei Shleifer, Daniel Treisman. A Normal Country. Foreign Affairs, 2004
 Government policy slogan for 2008-2012:
– Institutions, Innovation, Infrastructure, Investments
 Significant improvement in the public sector performance can be achieved
without extra spending
 Current reaction is similar to Obama’s stimulus plan: to overspend the
crisis
Page  14