Both prescriptions seem logical; both of them have been implemented and have failed.

When taxes were rising, the budget payments were spread out among a huge number of recipients, so each of them only got crumbs. Real revenues and domestic demand were growing slightly. Correspondingly, the economy had no incentives: most likely, business was quietly fading away; the number of jobs was declining, while the newly-unemployed swelled the ranks of budget recipients or recipients of social welfare.

For some reason, there was no explosion of enterprise when business taxes were cut. The budget payments weren't growing; therefore, the budget recipients were in a state of unrest and the Communists were murmuring about social injustice and an anti-people regime.

Nobody has asked themselves or society this question: why does nothing work in Russia?

Appointing a budget recipient

If a rise in taxes doesn't improve the well-being of budget recipients, it means the number of recipients is more than the budget can maintain. However, we don't actually have many direct recipients of social welfare: single mothers, the disabled, war veterans, Chernobyl clean-up workers. The benefits they receive are very small. That means they are not the ones responsible for an excessive burden on the budget. So who is responsible?

The only possible answer: the huge state-sector workforce. It appeared in Russia at the dawn of reform. After the first coup attempt, the polls indicated that two-thirds of the population unconditionally insisted on retaining all free benefits, which had existed in the Soviet Union - primarily free health care and education. It was possible to understand them - they've never known anything different. Even the most ardent reformers thought likewise then.

Privatizing the science and defence sectors was fearsome as well - what would become of Russia's defence resources? All federal privatization programs were then issued with an indefinite ban for privatization of educational institutions, health care network and scientific centres. By a single signature tens of million of people were thus appointed as budget recipients. This was done when there was virtually no tax base - no serious business existed in the country then. One could only surmise about the sources used to pay money to the budget sector, which then comprised 50% of the country (if not more).

It was possible to avoid that. It is not evident that the millions of people still employed in the state sector really have to be there. For a long while, experts have referring to the need to reform the state sector and its revenues: anyone who can make money from the market is supposed to do so, rather than taking state funding. Only those who cannot be in private ownership, such as security and the law enforcement agences (the siloviki), must remain in the state sector. Defence enterprises could be both state-owned and private. Prosperous private enterprises are producing military hardware and weapons in many countries; the defence potential of none of them seems to have been damaged so far. In Russia the tremendous share of the defence industries is dependent on the budget and is eking out its miserable existence; the political elite keeps saying that private defence enterprises should be nationalised (read: shouldered on the budget).

Why should the money assigned for healthcare be transferred via the budget and taxes? There's a more direct way: an employer pays an annual medical insurance policy to an employee; the Pension Fund does the same for a pensioner, the budget - for the unemployed. At the same time, an insured person is free to choose the insurance company and clinics to be attached to. No taxes, which should be administered and on which an unknown person may lay his hands. Why should a clinic be state-owned? I might be willing to give my savings to a private owner - his management is better and embezzlement is at a lower level? However, the moratorium on privatization of clinics is still in force, while the unclean system of mandatory medical insurance has been shoving our money into thousands of "black holes," leaving no chances for qualitative aid to a patient, and no chances for a better life to a doctor.

Nobody has yet resolved to shrink state-sector employment in Russia, although experts are raising an outcry about this being probably the main cause of poverty. Heavy taxes, collected to maintain the budget recipients, keep business half-suffocated. Miserly wages in the state sector are oppressing the entire labour market, since a private owner sees no sense in paying big money to a hired worker: slightly above the wages paid in the state sector can be offered for people to come. Therefore, the wages are very slowly growing in Russia. It means that real demand is tightened. The boom of consumption in Russia is a myth. The Levada Centre polling agency reports that only 10% of the population can buy major consumer items without hardship; 37% of respondents say they have no difficulties with purchasing food and clothing. The rest (over 50% of Russia's population) can only afford (or not afford) to buy food. Since consumer purchasing power is so low, the manufacturers or sellers of goods are forced to cut costs. All things being equal, they prefer a cheap worker to a good one or don't hire anybody at all. It means unemployment and poverty, a vicious circle...

New serfs

I've already mentioned that in modern Russia the huge state sector appeared when there was virtually no tax base. The political class started to settle this situation using a method that is customary in Russia: by raising the quantity and quality of "whips," knocking our taxes from the business.

Policedom started to grow and breed. Although the foundation of a police state was only mentioned under Putin, this process had really started under Yeltsin. The fact that it hadn't struck out loud was worst of all - the public didn't realize the imminent danger.

When residence permits were replaced with registration in mid-1990s, it was presented as the paramount victory of democracy: you're free to come to any city, find a job and an apartment, get registered at a place of residence - nobody will touch you. This is how this all looked on paper, but as usual, the devil was in the detail.

Firstly, the registration at place of residence actually proved to be permit-based and had to be acquired after a fight. Secondly, it didn't guarantee safe living: a person with a loose leaf in his passport quickly became the favourite object of humiliation and blackmail by the police. Thirdly, this registration entitled far narrower rights than a residence permit. A person with temporary registration couldn't send his child to a kindergarten or a school, get registered with a clinic or in general get medical aid - all these trivial services remained tightly assigned to the state and linked to the residence permit (which was renamed permanent registration but preserved actually).

Most importantly, the registration provided no free movement of manpower across the labour market as promised. As usual, a person seeks a job first and rents an apartment only afterwards (how else could a person finance the rent?); after renting some housing he informs the authorities about his place of residence (if this is a rule in a country). Our registration set everything upside down. One has to find housing first and then get a permit to live there (which can be denied); one can be hired with this permit only. Regional satraps have received an important signal: the subordinates won't get anywhere. Once they run away, they'll be internal illegal migrants, second-class people. It is then possible to relax - not to pay wages to budget recipients for years and suffocate entrepreneurs in the regions, giving them no opportunity to create new jobs. This is how registration has begun reproducing poverty.

Millions of normal and law-obedient people were forced to state another paradox: social mobility is not the way towards a well-paid job and comfortable rented apartment, but a way straight to the "monkey-house." Here's a result: the mobility of the population in Russia has fallen to 0.5% per annum. I.e. only 5 out of 1,000 Russians dare to seek jobs and housing outside the region where they now live. By this indicator, we're down to the level of immobility of peasants under serfdom. Even in the Soviet Union the mobility of the population was 300-400% higher than in Russia of nowadays. It might seem that the Soviet system of residence permits didn't allow for social mobility. In fact, in the Soviet era the state had actually concluded a deal with a socially mobile citizen. If a guy from a Chuvashian village got to ZIL factory, and an assistant professor got to an educational institution in Tver, such people got the residence permit together with their jobs. After that, they could live in dormitories for years without any hopes for an apartment - at least nobody threw them outside the legal framework.

There's a strong suspicion that even the talks about privatizing the public utilities system in Russia have been tabooed for the same reason: the state monopoly for housing and residence permits is still viewed as an effective tool of police control. As a result, Russia doesn't actually have a market of rented housing (if we exclude half-criminal sub-letting), while millions of workers of the public utilities sphere are doomed for poverty, together with other budget recipients. However, even in Kazakhstan the entire stock of housing was made private; the new Home-owners were bound to unite in associations of housing owners. If a five-storied building doesn't like the prices for heat from a neighbouring thermal power station, several houses club together, purchase an old boiler-room, repair the boiler and select the workers who don't drink. Many associations maintain boiler-rooms, as well as bakeries and kindergartens. This hasn't brought anything new: a private owner had been building and leasing houses for rent to anybody he might wish. It appears that in the sphere of hobbling the citizens contemporary Russia has outscored considerably both the Soviet and the Tsarist empires...

The fact that we don't have profitable housing is fraught not with immobility of manpower alone, but demoralization of our population as well. It is a habit in Russia that several generations of a family reside one apartment: to rent an apartment is expensive and is unusual. An indivisible family with its inevitable admonitions and total control over private life has been the perfect factor for preserving the social infantilism, which is not the most required quality on the modern labour market.

An indivisible family can bring any person to a neurosis. The fact that smiles are rare in our streets is not the peculiar trait of upbringing. The majority of our citizens are people with typical problems: no individual housing, no private life, no work incentives.

By the way, let me say some more on work incentives: if a person living in a private profitable house suddenly becomes unable to pay for housing, he'll either agree postponement of payment or move to a cheaper apartment (or, to relatives in a village). By finding a new job, he'd find the appropriate version on the market. Now imagine a Russian citizen, ousted to a dormitory for defaulting on payments. Imagine he has overcome the hard times and got to firm ground.

Who'll he now conclude a new contract of tenancy with? With a housing management department? You're probably laughing. By definition, the monopolistic renter is not interested in its client. Nobody will build private houses for rent in a police state: once you build a house and rent apartments, a policeman comes to you next day and asks you to evict 50% of tenants "for violating the residence permit regime." Nobody is likely to take up this business under similar circumstances.

So, our evicted people will be sinking to the bottom, realizing that they have been deprived of an apartment forever. For this reason, few people are hurrying to get up from the bottom: no matter how one might work, you'd never get your own apartment. Houses for rent could partially remove this total lack of incentive, raise the construction industry and create millions of real jobs around Russia. Apparently, in a police state residence permits and the controllability of its citizens are more important than fighting poverty.

Managed poverty

Fighting poverty has been mentioned before, to no effect. Oleg Sysuyev was the first federal politician to say clearly that the huge state sector was suffocating the Russian economy and giving rise to poverty. He said that shortly before the 1998 default, when arrears in state-sector wages had reached immense figures. As soon as he said that, he was expelled from federal politics. As it seems now, that was no coincidence: no federal politician has mentioned reducing the state sector and reforming revenues ever since.

Almost with tears in his eyes, an economist who is my friend told me recently how a renowned political consultant picked on his arguments in favour of reforming revenues. He said that reforming the state sector is unacceptable, since low-paid budget recipients, their welfare fully dependent on the state, are almost perfect voters: they regard themselves close to the middle class and hope that the state will raise their wages; therefore, they don't indulge in street riots or electoral mischief. In general, they vote in favour of those they're dependent on. Whom will they support if the bad reformers kick them into the street?

"Why should they be kicked out? Why cannot they become rich physicians or prosperous professors at private universities?" my colleague asked.

"Who'll let them become that? Our society and political system won't endure another stratum of the rich," the political consultant retorted.

Most ridiculously, the meek electoral behaviour of the budget recipients is a myth. Look at the figures in any public opinion poll: budget recipients make up the core of the protest electorate. However, some politicians continue believing this myth and drawing their own conclusions.

At the previous Duma Igor Artemyev and Sergei Ivanenko, both from Yabloko, tried to push a simple draft law: that family enterprises be opened on a notification (not permit-based) manner and only pay income tax. This is global practice: participants in small business only pay this tax, because they get no social protection from the state. They pay all fees into the medical and pension insurance funds on their own. Not getting huge tax revenues, the state actually gets rid of huge social commitments. Yabloko's law was smashed by all the corresponding ministries - the finance, economic and taxes ministries v as an incompetent, popular initiative. It turned out that rich European states dream of spinning off their social commitments, while our poor state is reluctant to get rid of them. This kindness is strange. I was later explained why we are so kind. If some of our citizens start paying their fees to pension and hospital funds independently, foreign and insurance funds will have to be admitted to Russia. Any people are unlikely to voluntarily give money to our "thieves" with their credit histories. At the same time, it will be necessary to admit foreign banks: our banks won't finance the family business at decently low interest rates. Foreigners will need independent courts; "Basmanni" courts are more comfortable for our elites. In general, let millions of healthy and able-bodied citizens be a burden to the budget. The more budget recipients and administered taxes we have, the more opportunities to steal and find faults

It appears a steady situation has formed, which suits many people. The budgetary sector has been "reforming itself." It has grown smaller after many people left (refusing to work for a song). This is when a supply deficit appeared on the markets for many services - for instance, we are facing a catastrophic shortfall for places in state-owned kindergartens.

The top of the budgetary sector has quickly recalled the Soviet principle: any deficit means bribing. They started maintaining the deficit, not admitting private players to the most profitable market sectors. Headmasters of schools and kindergartens, rectors of institutions of higher education, chief physicians of hospitals have been in control of huge financial flows. The corrupt top officials have actually furtively privatized the state sector. No wonder that these people are shouting now: "We won't let them ruin free health care and education, which are our greatest achievements." Indeed, they've achieved something.

Meanwhile, medium-sized business (i.e. the majority of private employers in Russia) has actually become "addicted" to cheap labour. It should be noted that under law, Russian employers have commitments to the state (they must pay taxes), but no commitments to employees: we don't have a legally-established hourly minimum wage.

It appears that the current situation suits all Russian elites to some extent, including those well-known antagonists - the business elite and the police elite. The elites are not interested in overcoming poverty. Therefore, we have managed democracy and managed poverty.

What will be the outcome? No politicians have ever announced plans to cut the state sector, reform revenues, cancel residence permits or give foreign insurance companies and pension funds access to the Russian market. It means no institutional reforms are to take place. The result is predictable: when subsidies are once again spread among millions of recipients and this gives no expected prosperity, in the end it will transpire that Russian business is unable to carry the burden of social spending. This will be the plea for launching talks at "a minimal level of repression" and the necessity for a just redistribution of property. Against this backdrop, the poor will only become poorer.

See also:

Russian Economy

Novaya Gazeta, June 3, 2004