Public Sector Reforms in Russia Igor Baranov Graduate School of Management, St. Petersburg University

Page  2 Agenda  Russian economy and public finance in 2008  A Review of public sector reforms in  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  3  Population 2008: 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%) What do you know about Russia? General statistics

Page  4 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  5 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  6 Launch of Public Sector Reforms:  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  7 Privatization  Tools: –Voucher privatization in –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  8 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  9 Public sector reforms in  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  10 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  11 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  12 Public sector reforms in  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 Effect? Avoidance of some bureaucratic procedures, but governance issues

Page  13 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  14 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 : –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