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Russia: The Roots Of Labor Malaise

  • Tony Wesolowsky

Prague, 11 February 1998 (RFE/RL) - There are a multitude of factors contributing to why a quarter of Russia's labor force receives its wages late, in kind, or not at all.

Commonly cited as the main cause of wage arrears is incompetence and corruption on the part of local bureaucrats and enterprise directors, who have failed to shut down or restructure unprofitable enterprises or who siphon off enterprise funds for their own personal gain.

There is little doubt those factors play a key role. But others say the root of the problem lies much deeper.

The London-based Institute for Public Policy Research (IPPR) partially blames the neo-liberalist "shock therapy" economic policies first pursued by Yegor Gaidar, then economic adviser for President Boris Yeltsin.

"What was fundamentally wrong with the concept of shock therapy was its neglect of institution building, efficient corporate governance, the development and implementation of the laws necessary for a market economy, the creation of a modern and effective public administration, the development of appropriate social policies, and other tasks which inevitably take time," it said in a report issued at the end of last year.

The managing director of the International Monetary Fund, Michel Camdessus (IMF), told the Financial Times (Jan. 10, 1997) when referring to Russia that, "no-one measured the true depth of the collapse of all administrative structures, the decomposition of the state which accompanied the collapse of the communist system."

David Kotz, economics professor at the University of Massachusetts in the United States, writes in his book "Revolution from Above; The Demise of the Soviet System," that Russian might have been better off with a gradual transition to a capitalist market economy than shock therapy's laissez-faire approach. He notes China encouraged the creation of new non-state enterprises while providing a stable and supportive economic environment for one to develop. Kotz says by 1994 over half of China's industrial output came from the non-state sector.

According to neo-liberalist theory, cutting government credits and freeing prices would force Russian industry to learn to either swim or sink in the new capitalist order. What the theory failed to take into account, according to the United Nations' International Labor Organization (ILO), was that during the Soviet era, enterprises and plants were already making due without credit, as money played only a nominal role for accounting purposes. Instead of cutting staff or production, the ILO says Russian plants, which enjoyed monopolies and were integrally linked, merely arranged barter agreements among their suppliers and costumers. Where payments were called for, such as wages and taxes, they just didn't pay them. Russia's Goskomstat estimated that almost 70 percent of deliveries were exchanged on barter terms in industry in 1996.

A report by the Moscow-based Institute for Comparative Research into Industrial Relations (ISITO), in collaboration with Warwick University in Great Britain, says by 1993 the problem of unpaid bills was isolated mainly between companies.

But in statistics culled from Russia's Goskomstat, starting in 1996, companies also were postponing payments to the federal and regional budgets, pension funds and wage earners. Again citing Goskomstat information, the report said at the end of 1996, total arrears of companies, excluding arrears to banks, accounted for 23 percent of the GDP over the last 12 months.

Stanley Fischer, Deputy Managing Director of the IMF, said recently (Jan. 9, 1998) that Russia's economy is improving. He noted the economy grew slightly last year, albeit barely .2 percent, its balance of payments was in surplus, and that the Russian Central Bank had brought inflation under control.

He acknowledged: "Now the challenge is to move the economy toward sustained growth of output and living standards."

That will be a massive task. Russia's economy has been devastated since the downfall of the Soviet system. Kotz says GDP fell by 42 percent and industrial production by 46 percent following the introduction of shock therapy from 1992-1995. Kotz says Russia's economic contraction was worse than during the height of the great U.S. depression between 1929 and 1933.

The expected Western credits to finance Russia's industrial rebirth never really materialized, according to Kotz. More money actually left the country than came in. Yuri Melnikov, head of the Russian bureau of Interpol, estimated that the capital flight from Russian at $80 billion at the end of 1994. Meanwhile, between 1992-1994, gross foreign domestic investment in Russia was $3.9 billion and official grants and credits totalled 15.5 billion, according to the Economic Commission for Europe.

Fischer said the country's banking system "remains too small to serve the financing needs of the private sector--particularly given the large borrowing needs of the government sector."

The Brussels-based International Confederation of Free Trade Unions (ICFTU) says the limited role of Russian commercial banks in the productive sector means that they are not able to play the regulatory and financing role which banks play in a developed capitalist economy. The ICFTU says the development of such a banking system is unlikely given the high returns on secure investments in government debts, while the productive sector faces very low profits and uncertain prospects.

Fischer says the main reason Russia and other CIS countries lag behind other Eastern European and Baltic countries in reform is because of the slow pace of economic restructuring. But the ILO points out that simply closing many Russian enterprises would cause even worse social dislocation. It notes Russia's Avtovaz is not just Russia's Chrysler. It's more like Russia's Detroit providing a wide-range of social services, albeit quickly deteriorating.

The IPPR notes the revolutionary changes initiated in 1989 were fairly easy, ranging from price liberalization and the intiation of privatization and financial stabilization. The IPPR says Russia, along with Central and East Europe, is at a very vital stage. "The choices now being made are more difficult than ever. It is this second-generation transformation that will determine what kind of societies the new democracies and market economies become."

(This article is one in a three-part series called Russia's Workers: Why They Go Without Wages.)