What Kind of Poverty Alleviation Policy Does Russia Need?

Abstract

One of the main negative trends of the last decade in Russia has been an unprecedented rise in the numbers of the poor. The economic crisis has entailed an almost two‐fold drop in average incomes, modernisation of income distribution has led to an unprecedented increase of income inequality, and the Soviet system of social benefits and privileges oriented to supporting the wealthiest groups has remained in place. The result has been a surge in the poverty rate. This article outlines major issues to be addressed in developing a poverty alleviation policy for Russia. They can be broadly summarised as follows: Only comprehensive and consistent consideration of these issues will allow a strategy of poverty rate reduction to be formulated.

Firms and Social Policy Preferences Under Weak Institutions: Evidence from Russia

“…These issues were exacerbated by the vast expansion of the informal sector during the transition, as individual responded to unemployment and new market opportunities by entering the shadow economy, which made it hard for a country with weak state capacity, like Russia, to police evasion. Indeed, state capacity was so weak in Russia that many employers in the formal sector also created tax evasion schemes to save on payroll taxes (Dmitriev and Maleva, 1997, Ovtcharova, and Popova , 2001, Treisman, 1999, Yakovlev , 2001. At the same time, weak institutional controls over the bureaucracy responsible for collecting taxes and administering social policy exacerbated these problems, as officials were willing to turn a blind eye to tax evasion in exchange for rent-seeking opportunities and political favors (Cook, 2007, Shleifer and Treisman, 2000, Treisman, 1999 The solution adopted by the Russian government in the early 1990s was to move the bulk of its social responsibilities into four off-budget funds -for pensions, health care, disability and childcare, and unemployment -financed through a 37% payroll tax for employers and 1% for employees (Remington, 2011, Twigg, 1998.…”

“…On the one hand, many individuals responded to unemployment and new market opportunities by entering the shadow economy, causing massive revenue shortfalls. On the other hand, many employers in the formal sector responded to high payroll taxes and new competitive pressures with tax evasion (Ovtcharova, andPopova , 2001, Yakovlev , 2001). Such evasion was normally accomplished through collusion between employers and employees, where official wages were under-reported in exchange for premiums in the form of unreported cash payments or income from untaxable sources (Dmitriev andMaleva, 1997, Treisman, 1999).…”

“…small firms) (Gimpelson and Zudina, 2012). One must be cautious, however, since tax evasion and informality in Russia is characterized by both formal and informal components working side-by-side, which often results in both hidden production and hidden wages in unexpected places, such as large industrial firms (Dolgopiatova, 1998, Johnson, McMillan, and Woodruff, 2000, Kaufman and Kaliberda , 1996, Ovtcharova, and Popova , 2001, Yakovlev , 2001. Here I reject this approach, however, since sector dummies also proxy for a large number of factors other than propensity for tax evasion that may shape propensity to be inspected.…”