Reform Agenda

1. Reform Agenda Economic Transition Group By: John Pasowicz Lucas Korsman Yu Liu Bess Rubin

2. Overview • Institutional Infrastructure • Decriminalization • Growth-Oriented Policy • Restructuring and Competition • Social Contract • Conclusion

3. Institutional InfrastructureInstitutional Traps Tax Evasion • 2003: 5.5% of GDP • 2004: 6.4% of GDP • 60% of Russian firms used tax evasion schemes • Large firms evaded aprox. 40% of taxes • Small firms evaded aprox. 40% more than large firms • Economics of Spacemen: Tax Evasion and Firm Performance: • Evidence from Russian banking transaction data • Maxim Mironov • Solution: • Tax Compliance: • Establish modern accounting and auditing standards

4. Institutional InfrastructureErsatz Banks 1992-1995 Estimated $80 million dollars in capital flight Solution: Financial Institutions: Require banks to use a portion of their capital to fund productive investments or contribute to government lending institutions Increase the power of the Federal Securities Commission

5. Institutional Infrastructure Property Rights 70%-80% of banks and enterprises were said to be under the control of the Russian Mafia Solution: Property Rights Reduce licensing fees and eliminate licensing of business activities that do not pose health or safety risks Establish strong, stable, and transferable property rights for individuals and corporations (foreign and domestic) Strengthen legal system and police protection

6. Decriminalization • Under Shock Therapy, “Impoverishment and crime became hallmarks of the economic transition.”—Marshall Pomer • Reform Agenda: A corrupt and criminalized economic system emerged in Russia. Government disclosure, strengthened Investigative Powers, and tougher Sanctions are all needed.

7. Government Disclosure Ch. 15-Crime and Corruption -Shock Therapy: Immediate transition from monopoly to privatized competitive markets -Void Filled by Organized Crime and Oligarchs Reform: Government action needed to both break down monopolies and reduce barriers to entry. -Therefore, public officials should disclose second jobs and investment holdings to prohibit potential conflicts of interest.

8. Investigative Powers Ch. 10-Shock Therapy -President Yeltsin leans strongly on western influence and advisors -Poor conception and implementation of transition Reform: Economic strategist and advisors need to be unbiased and in tune with national preferences -Therefore, broaden parliamentary responsibility to advise and consent on major presidential appointments and technocrats

9. Sanctions Ch. 7-Institutional Traps -Corruption: Bureaucrats offered more from bribes than from what state can pay -Corruption becomes increasingly tempting with successes and government inability in prevention  Compounding cycle of corruption Reform: Legal penalty and enforcement must disincentives corruption -Therefore, Severe penalties for extortion, bribery, and interference with judicial process must be enacted

10. Growth-Oriented Policy Expansionary macroeconomic policy is needed to create employment and reduce overdependence on exports of unprocessed or minimally processes raw materials. • Investment Stimulus - would enhance demand and improve productivity • Capital Controls and Monetary Policy - should reduce capital flight, limit inflow of unstable short-term capital, and provide an environment that would allow interest rates to stabilize at moderate levels.

11. Investment Stimulus Ch. 8-Lessons from Korea • Russia and South Korea with overdependence on exports of unprocessed or minimally processes raw materials. Reform: Korea applied labor-intensive methods to construction of new infrastructure (roads, dams) -Boost demand for Russian goods while enhancing the private sector’s competitive potential

12. Capital Controls and Monetary Policy • Ch. 12 – Sham Stabilization • Vicious cycle of Capital Flight from government borrowing: • Firm do not pay taxes • Government borrows abroad to cover deficit • Money leaves Russia • Government forced to borrow again • Reform: Tighten controls on capital flight and enforce severe penalties, including seizure of assets. • Enforcement against illegal transgressions.

13. Restructuring and Competition • Privatization • Problem: • Voucher program • Pricing of buildings and equipment • Solution: • Restructure enterprises and ensure competitive bidding of enterprises

14. Restructuring and Competition • Price Regulation • Problem: • Removal of price controls on January 2, 1992 increased prices • Solution: • Regulate prices of basic commodities

15. Restructuring and Competition • Tariffs • Problem: • Steep upward climb of prices in energy and raw materials • Solution: • Make tariff rates conditional on progress in industrial restructuring

16. Social Contract • Social contract implies that the people give up some rights to a government or other authority in order to receive or maintain social order through the rule of law. It can also be thought of as an agreement by the governed on a set of rules by which they are governed.

17. Replace or overthrow it Protect their rights Give power Misuse power

18. Only government can ensure that the benefits of the new economic order are shared, which would improve the moral climate and fortify respect for democracy. What should the government do ? Solution: • Expanded Social Services would ease transition and expedite restructuring. • The system of Public Finance requires overhaul.

19. Social Service • Increase funding for education and health care. • Ensure that social guarantees provided to the poor and pensioners are adjusted for inflation. • To reduce public opposition to downsizing, guarantee reasonable benefits to laid-off worker, and provide retraining and relocation assistance.

20. Health Care • Lower birth rates and higher death rates reduced Russia's population at a 0.5% annual rate. The causes for this sharp increase in mortality are widely debated, with some academics citing alcohol abuse as the main culprit, and others citing the drastic and widely negative changes in lifestyle caused by economic reforms that followed the collapse of the Soviet Union.

22. Public Finance • Concentrate high-rate taxation on natural resources and luxuries including imports of alcohol and tobacco. • To complement taxes on natural resources, use competitive bidding for concessions, with extensive safeguards to ensure fair pricing.

23. Conclusion • Successful transition requires a realistic and balanced economic program. The five-point agenda, if implemented responsibly, would ensure a prosperous and equitable future for the Russian people.