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the politics of inequality in russia this book investigates the relationship between the character of political regimes in russia s subnational regions and the structure of earnings and income based on extensive data from russian official sources and surveys conducted by the world bank the book shows that income inequality is higher in more pluralistic regions it argues that the relationship between firms and government differs between more democratic and more authoritarian regional regimes in more democratic regions business firms and government have more cooperative relations restraining the power of government over business and encouraging business to invest more pay more and report more of their wages in more democratic regions average wages are higher and poverty is lower but wage and income inequality is also higher the book argues that the rising inequality in postcommunist russia reflects the inability of a weak state to carry out a redistributive social policy thomas f remington is goodrich c white professor of political science at emory university he has taught at emory since 1978 he is the author of numerous books and articles including the russian parliament institutional evolution in a transitional regime 1989­1999 the politics of institutional choice formation of the russian state duma coauthored with steven s smith parliaments in transition the truth of authority ideology and communication in the soviet union building socialism in bolshevik russia and a textbook on russian politics politics in russia remington is a former member of the board of directors of the national council for eurasian and east european research and of the board of directors of the american association for the advancement of slavic studies he is advisor for russia workshops for the east-west parliamentary practice project based in amsterdam and he has planned and directed a series of workshops for parliamentarians in a number of cities in russia since 1993 his research focuses on the development of political institutions in postcommunist russia including parliamentary politics legislative-executive relations and labor market and social welfare institutions in addition to courses dealing with russian political development he teaches courses in comparative political institutions and comparative political and economic reform.

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tom remington s fine new book begins with an unexpected finding at the subnational level in post-transition russia more democratic regional regimes tend to have higher income inequality than more authoritarian ones more democratic regions do perform better in most respects earnings and tax receipts are higher poverty lower government more consultative with business and less predatory whereas authoritarian regional regimes have lower wages and tax receipts higher poverty and governments that are exclusionary and predatory toward business but still more equal income distributions in a deeply researched and methodologically creative study remington identifies the political factors contributing to this conundrum focusing on government-business-labor relations communist welfare state legacies and the inability of russia s weak state to implement effective redistributive policies and considers the implications for russia s future politics stability and place in the international system ­ linda j cook brown university

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the politics of inequality in russia thomas f remington emory university

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cambridge university press cambridge new york melbourne madrid cape town singapore são paulo delhi tokyo mexico city cambridge university press 32 avenue of the americas new york ny 10013-2473 usa www.cambridge.org information on this title www.cambridge.org/9781107422247 © thomas f remington 2011 this publication is in copyright subject to statutory exception and to the provisions of relevant collective licensing agreements no reproduction of any part may take place without the written permission of cambridge university press first published 2011 printed in the united states of america a catalog record for this publication is available from the british library library of congress cataloging in publication data remington thomas f 1948­ the politics of inequality in russia thomas f remington p cm includes bibliographical references and index isbn 978-1-107-09641-7 hardback ­ isbn 978-1-107-42224-7 paperback 1 income ­ russia federation 2 income distribution ­ russia federation 3 poverty ­ russia federation 4 wealth ­ russia federation 5 equality ­ russia federation 6 democracy ­ russia federation i title hc340.12.z9i5162 2011 339.220947­dc22 2010052775 isbn 978-1-107-09641-7 hardback isbn 978-1-107-42224-7 paperback additional resources for this publication at www.cambridge.org/us/9781107422247 cambridge university press has no responsibility for the persistence or accuracy of urls for external or third-party internet web sites referred to in this publication and does not guarantee that any content on such web sites is or will remain accurate or appropriate.

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contents list of figures list of tables preface 1 the political sources of income inequality in russia 1.1 inequality and globalization 1.2 income inequality in the united states and russia toward convergence 1.3 democracy and inequality 1.4 explaining inequality in russia 1.5 state capacity and regional diversity 1.6 the argument page vii ix xi 1 2 4 14 22 29 31 35 40 46 53 58 62 63 64 67 69 72 75 77 91 91 94 96 v 2 employment earnings and welfare in the russian transition 2.1 the soviet social contract 2.2 the 1990s informalization and decentralization of wages and welfare 2.3 labor and social partnership 2.4 reform and recovery 1998­2008 the single social tax the labor code of 2001 monetization of in-kind social benefits pension reform minimum wage economic crisis 2008­2009 2.5 conclusion 3 regime diversity in the russian regions 3.1 antireform regimes neopatrimonialism and autarky primorsk ulyanovsk kaliningrad

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vi 3.2 market-adaptive regimes pluralism and coordination perm yaroslavl samara contents 97 97 101 103 110 112 118 122 125 128 130 135 136 137 139 139 142 142 146 147 152 153 156 161 168 169 172 175 177 189 201 217 4 democracy and inequality in the russian regions 4.1 4.2 4.3 4.4 4.5 4.6 democracy income and output wages social spending and social dependency dynamic effects other sources of income and employment conclusion variables and sources 5 regional regimes and the labor market evidence from the nobus survey 5.1 the nobus survey categories of benefits adjustments for prices and household size 5.2 predicting variation in individual income 5.3 household cash income 5.4 household level of analysis total adjusted wage and social income 5.5 aggregating to the regional level 5.6 the distribution of household incomes by region 6 helping hands or grabbing hands government-business relations in the regions 6.1 6.2 6.3 6.4 6.5 models of enterprise-government relations the beeps data regional regimes and the business environment validity checks conclusion 7 accounting for regime differences 7.1 elite discretion 7.2 uncertain sources uneven impact 7.3 organized pluralism 8 after the crash index

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figures 1.1 gini index of income inequality united states and russia 1992­2008 1.2 income distribution by quintile russia and united states 1998­2008 1.3 decile ratios united states and russia 1995­2008 1.4 official reported poverty united states and russia 1992­2008 1.5 gini index 1987­2005 selected postcommunist countries 1.6 average regional real incomes 2006 and 1995 2.1 median regional employment unemployment poverty and output rates 1990­2008 2.2 median regional wage pension and income as multiples of subsistence minimum 2.3 median regional poverty and inequality rate 2.4 median regional nominal wage pension and subsistence minimum 1995­2006 2.5 ratio of wage to pension income by region 4.1 predicted income and inequality levels by democracy score 4.2 predicted real wage by democracy score 4.3 predicted social expenditures by democracy index 2004 4.4 predicted social income share by democracy score 4.5 predicted real income 2005 by interaction term 4.6 predicted inequality 2006 by interaction term 4.7 predicted share of income from property by democracy score 5.1 predicted earned income of employed persons by region by democracy score 5.2 predicted cash income of household by region by democracy score 5.3 predicted total household income by democracy score 5.4 predicted mean social share of household income 5.5 predicted mean household wage income of top decile page 6 7 8 8 9 29 37 39 39 68 69 116 119 121 123 125 126 129 141 143 145 148 148 vii

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viii figures predicted mean total household income of top decile predicted incidence of bribes by region predicted affordability of courts predicted likelihood of investment growth percent of time managers spend talking with officials ease of obtaining information about law consistency of interpretations of laws regulations regulatory uncertainty problems with tax administration predicted democracy score 2001­2006 by literacy rate 1926 predicted democracy score 2001­2006 by literacy rate 1897 competitiveness of governor s race 1996 by predicted democracy score turnout in governor s race 1996 by predicted democracy score party saturation legislative elections 1996 by predicted democracy level distribution of democracy scores by administrative status of region democracy score by enterprise dispersion 1990 by employment democracy score by enterprise dispersion 1990 by output 149 163 164 164 165 166 166 167 168 179 179 181 181 182 185 193 194 5.6 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8.

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tables 1.1 2.1 2.2 2.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 7.1 7.2 7.3 7.4 determinants of average regional real wage 2000 page 28 incomes and social benefits by source and type 41 selected european country gini indexes mid-1980s 43 nonmonetary social benefits nobus survey 2003 49 determinants of democracy 113 predicted vote for yeltsin april 1993 referendum 114 predictors of income and inequality 2006 115 effect of democracy score on gross regional product per capita 118 predicted real wage 2005 by democracy score 119 predicted social expenditures 2004 by democracy score 121 predicted social dependency rate 2006 by democracy score 122 effect of interaction of democracy and income in 1990s on income in 2000s 125 effect of interaction of democracy and inequality in 1990s on inequality in 2000s 126 descriptive statistics 134 cash benefits 138 individual wage income 141 household cash income 142 household spending 143 predicting total household income 144 household wage income 145 household social income 146 share of social income in household total income 146 democracy score 2001­2006 by regional literacy rates 178 democracy levels by pre-soviet development levels 180 democracy scores by territorial administrative status 185 ethnic composition and modernization as predictors of democracy scores 186 ix

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x tables 187 188 188 195 7.5 ethnic heterogeneity and modernization as predictors of democracy scores 7.6 ethnic heterogeneity interacted with share non-russian as predictors of democracy scores 7.7 ethnic fractionalization scores by territorial administrative status 7.8 democratic over and underperformers

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preface this study began out of a nagging curiosity about the nature of income inequality in russia why did it rise so sharply after the transition from communism and why has it stayed so high is income inequality in russia driven by similar forces to those that have been deepening inequality in the united states for the last three decades what are the effects of democratization on inequality my initial assumption was that generally speaking where democratic political institutions were more effective inequality would be lower although whether this was a result of redistribution after market forces had yielded an initial differentiation of earnings or affected the very structure of earnings seemed an open question i also wanted to understand the three-way interaction among inequality democracy and that diffuse intangible quality of public life that is often termed governance governance is a multifaceted concept arguably too diffuse to be treated as a single concept at all as daniel kaufmann and his associates at the world bank institute treat it it is a way of characterizing the set of traditions and institutions by which authority in a country is exercised 1 this is reasonably broad but the multiple studies of governance carried out by the world bank institute team have demonstrated that assessments of the quality of six sets of institutions by which governance is defined tend to be well correlated and in fact help predict countries economic performance a number of studies have suggested that high inequality subverts governance thus in turn harming the long-term prospects of economic development my simplistic notion starting this study was therefore roughly as follows early democratization and market reform in russia as in other postcommunist countries had brought about an initial explosion of inequality as wages were decompressed but with time more democracy would gradually bring down inequality through the provision of public goods such as education and public health care that would equalize conditions for the population as 1 daniel kaufmann aart kraay and massimo mastruzzi governance matters 2006 worldwide governance indicators washington dc world bank institute 2006 xi

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xii preface well as through redistributive mechanisms such as effective pension coverage unemployment assistance and poverty relief programs if at the national and subnational regional levels more democratic regimes undertook policies that succeeded in reducing inequality in turn governance would improve and with it the country s ability to take advantage of economic opportunities where governments failed to reduce inequality on the other hand perhaps because they fell captive to powerful early winners that sought to lock in the rents from the initial liberalization and privatization efforts persistent inequality would subvert governance and injure the country s prospects for economic development my reasoning was similar to the argument that eric uslaner makes about the effect of inequality on corruption even though inequality itself has a relatively weak relationship with corruption he finds it acts to undermine basic trust the ability to trust people other than family and close friends and thus to undermine faith in the rule of law this syndrome of generalized mistrust then increases corruption which then feeds back onto inequality by perpetuating the gap between haves and have-nots.2 similarly my basic expectation about russia was that democratization would lower inequality at least over time and that lower inequality would improve governance improved governance would produce both higher growth and a more equal distribution of its benefits reinforcing democracy i decided to test this argument by taking advantage of the diversity of regional regimes within russia itself which have been extensively studied by both russians and outsiders in particular the degree to which the regional regimes reflect democratic characteristics has been measured systematically by a team of experts based in moscow who through their network of contacts in the regions were able to code each region s regime by scoring each of ten attributes on a fivepoint scale i discuss this rating system in more detail in chapter 1 suffice it to say here that their scores are widely used and generally trusted i proceeded to collect a substantial body of data on incomes income inequality wages and a host of social and economic conditions for each region from the early 1990s through the present much of this data comes from russian official sources as well as from world bank­sponsored studies of incomes and of government-business relations in some cases i have employed regional-level data collected and shared by other scholars including the measure of the level of democracy in each region to my surprise i found that it was the regional regimes scoring highest on the democracy scale that have the highest income inequality ­ even after controlling for other factors that are related to income inequality such as natural resource wealth generally regions with higher incomes have higher income inequality but even after accounting for the effects of income more democracy is positively associated with higher inequality trying to understand the causal pathway for this effect led me to study the political forces that shape the structure 2 eric m uslaner corruption inequality and the rule of law cambridge cambridge university press 2008

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preface xiii of employment wages incomes and welfare region by region my conclusions remain tentative necessarily because not all links in the chain of reasoning are amenable to measurement and empirical verification the evidence however is reasonably strong and the pieces of the argument fit together briefly i conclude that 1 the effect of democracy on income inequality runs through earnings not post-tax or post-transfer policy where wage differentiation is greater that dispersion translates directly into income inequality 2 more democratic regimes are those where the political authorities have institutionalized greater participation in decision making by economic and social elites and maintain more consultative relations with local firms they have accepted some constraints on their power to confiscate the gains of business including greater media freedom and electoral competition less democratic regimes not only block competition and consultation in the political arena but they are also more predatory toward local enterprises 3 regions with more cooperative relations between government and regional firms encourage managers to pay higher average earnings earnings are higher at both the lower and the higher ends of the spectrum and there is greater dispersion between the lower and upper ends of the distribution than in lower-wage lower-democracy regions thus this decompression of earnings appears to improve wages for both lower-paid and higher-paid employees but at the cost of greater inequality poverty and social dependency are higher in less democratic regions small-business development and other indications of secure property rights are stronger in more democratic regions 4 some portion of the higher inequality of earned incomes in the more democratic regions is a function of their greater openness in other words it may be that income inequality in less democratic regions is also high but that much less of earned income is reported to the authorities taxed and returned to the public in the form of collective goods and redistributive transfers but because the practice of under-the-table earnings is not amenable to systematic study only to anecdotal reports i have no direct evidence of this however it is worth noting that the current economic crisis in russia is driving more and more earned income back into the shadows which will certainly increase inequality 5 finally even though the more democratic regional regimes seem to have done a better job of adapting the regional economies to the conditions of market competition they did so at the expense of allowing some of russia s inefficient giant industrial firms to survive often because the life of an entire city or region depends on it this left russia s economy susceptible to the devastating effects of the global 2008­2009 crash this book addresses the political determinants of income inequality in russia rather than its short-term or long-term consequences it is certainly contrary

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