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Russia: Income Inequality Growing In Transition Nations

Washington, 10 June 1998 (RFE/RL) -- Two-thirds of Russia's population is receiving some sort of welfare, or social transfer payment, according to a senior government official, and 90 percent of many of those payments are going to the well-to-do, not the poor.

First Deputy Prime Minister and Minister of Labor and Social Development Mikhail Dmitriev says the Russian system is actually causing a growing income inequality because welfare and pensions are still largely based on the old communist system -- where benefits went to everyone regardless of income.

It was an advanced, comprehensive, and mature system in communist days because the general level of poverty was relatively small and incomes were generally equal, Dmitriev told an IMF conference on economic policies and equity in Washington this week.

However, he says in the transition to a market-based system, these huge social transfers, designed to assist the poor, are actually making the rich richer and the poor poorer.

The upper 30 percent of the Russian population collects more allowance for children than does the bottom 40 percent, says Dmitriev, and that happens in almost every category of social payment.

This brings "enormous" political resistance to any reform designed to better target benefits to the most needy. Making the problem worse, says Dmitriev, is that only 20 percent of this huge 350 billion ruble government outlay for social payments is actually financed. The remaining 80 percent is an unfunded liability of the government, showing up usually as arrears, and contributing to general fiscal imbalances.

In some Central European countries, says Dmitriev, the problem was dealt with by increasing taxes. But in Russia that is not a solution because the tax system itself is regressive.

He says 40 percent of the general government revenues come from individual income and payroll taxes, which are assess on wages that are already below average. This means that mostly the very poor and the middle class are paying these taxes, the revenues from which are than unevenly redistributed in favor of the richer families.

Former Polish Deputy Prime Minister and Finance Minister Grzegorz Kolodko told the conference that designing policies to tackle many of the issues of growing inequality is not so easy. Often, he said, officials fail to consider the feelings and beliefs of the people.

Part of the problem, he said in a paper for the conference, is that there were naive, unrealistic expectations that the transition would be swift, quickly bringing both higher income and more fair distribution of the fruits of a better-performing economy.

The reality was far different, he said, with income inequality growing rapidly, often enriching the wealthy at the expense of the poor. This accounts for a 1997 public opinion poll in Russia in which 82 percent of those questioned said poverty was due to the transition economy while 88 percent believed that wealth came from connections. Only 39 percent through wealth came from hard work.

But this doesn't mean that the people don't accept growing inequality, said Kolodko. They accept and even expect it "so long as they see that it serves the public service that everybody is going to be better off," he said.

Kolodko, now a professor at the Warsaw School of Economics, said this is the biggest challenge for policy makers -- to understand that while inequality must necessarily rise in the transition, changes in equity should be controlled and managed by sound policies. These changes cannot be left "entirely to the just-released market forces, he said. The challenge is to assure that in the longer run, "everyone's standard of living may improve."