Academician of the RAS R. I. Nigmatulin
Professor B. I. Nigmatulin
THE CRISIS AND THE MODERNIZATION OF RUSSIA – THIRTEEN THEOREMS
TABLE OF CONTENTS
1. Economic Inequality and Income Distribution ................................................3
2. Progressive Taxation of the Rich Class ...........................................................6
3. Social Responsibility of the Government and Business ............................12
4. Balancing Costs, Prices, Wages, and Profits ...............................................15
5. Balancing Labor Compensation and the Gross Domestic Product .........18
6. Balanced Price Ratio ..........................................................................................20
7. Balanced Prices for Fuel Oil and Gas .............................................................22
8. Estimating Basic Balanced Prices ...................................................................27
9. Consequences of Ruble Appreciation and Ruble Price Variance .............28
10. Eliminating Unnecessary Investments .........................................................31
11. Relying on Specialists and Professionals ...................................................33
12. Science and Authority .......................................................................................35
13. Civil Society, Political Competition, and Corruption ...................................39
Why theorems? We will explain using an old anecdote:
— Comrade ensign, do crocodiles fly?
— No, of course not.
— But comrade lieutenant said they fly!
— Generally speaking, they fly, but very, very low.
Commentary. As opposed to the ensign’s last
relativistic statement, a theorem prevails.
Theorem: Crocodiles do not fly.
A key question in the economic strategy of present-day Russia is what resources should be used to modernize the economy? After all, there are not yet any signs of emergence from the primary trajectory. The head of the government corporation Rosnano, Anatoliy Chubays, has stated1 that modernization is possible “only by means of reducing expenditures in the social sphere. There are no other sources”. He also declared that the entire professional community, including the economic and expert elite, is intellectually backward and is not prepared to offer the government any system-based measures for rebuilding the economy. “I count myself in this group”, A. Chubays added. A remarkable admission, although most likely rhetorical!
Russia’s figures as far as income inequality and basic positions in world ratings (poverty, unemployment, male life expectancy, corruption, identity and property protection, commitment to democracy, and personal freedom) equal those of Nigeria. Under these conditions, the representative of the liberal market elite (hereinafter – the LM elite) says that the only source for innovations is reducing expenditures in the social sphere, which means expenditures for teachers, physicians, engineers, professors, and military officers. Here, it is not only a matter of intellectual backwardness. It is also a matter of selfish class interest and irresponsibility. Indeed, these savings are fraught with the risk of civil disturbances. And the LM elite will never understand the fact that savings in the social sphere can retard economic growth (more about this below).
This article also is dedicated to substantiating the measures that can extricate the Russian economy from the calamity into which liberal market dogmatism and an out-of-proportion greed for gain have led it.
1 Disaster Without Savvy – Bureaucrats Have No Idea How to Rebuild Russia’s Economy, Rosbizkonsalting [Russian Business Consulting] (RBC) Daily, 01.07.09.
1. Economic Inequality and Income Distribution
For the purpose of analyzing income distribution, the population is broken down into ten decile groups of identical size (10-percent increments) in ascending order of the money incomes accruing to each group (see the illustration at the end of the article).
The first group is the poorest, which has the lowest income, while the last (tenth) group is the richest, which has the highest income. A decile factor (DF), which equals the ratio of the money incomes of the two extreme decile groups – the richest and the poorest, is used to characterize economic inequality.
In Scandinavian countries, DF = 3-4, in the European Union it is 5-6, in South Asia, East Asia, Japan, and North Africa – 4-6, in the United States (US) – 9, in South Africa – 10, in Latin America – 12, and, finally, with a great breakaway “ahead of the entire planet”, in Russia the official DF = 16.
Such leadership is indicative of the scandalous and shameful economic inequality in Russia. In a number of studies, it has been shown that if the DF is more than 7-8, the social and an economic situation surrounding a country’s market economy will be unstable. And as will be demonstrated below, inequality of this type destroys production forces.
The richest decile group in Russia declared 30.6 percent of all the country’s overt2 money income, while the poorest group declared 1.9 percent. The next, slightly “richer” decile group had 3.5 percent of all money income.
Individuals in the two poorest groups together comprise 20 percent of Russia’s population, and they live below or near the poverty level3. What resources are needed in order to increase the income of the poorest (first) decile group twofold (i.e., to increase their share from 1.9 percent to 3.8 percent) and the income of the second, less poor decile group by one-and-a-half times (i.e., to increase their share from 3.5 percent to 5.2 percent)? It is not hard to figure that, to this end, a total of 1.9 + 1.7 = 3.6 percent of the income of the total population must be added to them. If the latter income amount is taken from the richest (tenth) decile group (which declared 30.6 percent of the overt income of the overall population), this group will then lose a total of 3.6 : 30.6 = 12 percent of its declared income, and the “official” (declared) decile factor will then be DF = (30.6 – 3.6) : (1.9 х 2) = 7.1; i.e., it will enter the normal range.
And this is just a fairly small adjustment in the distribution of declared income for the purpose of bringing 20 percent of the population out of abject poverty.
Only the intellectual backwardness and greed of the LM elite explain the unwillingness to resolve this problem with such a tiny correction in income distribution for the benefit of the poor class.
This adjustment is, of course, insufficient to salvage and expand the public spheres (the military, law enforcement, education, culture, health care, and science), or to salvage and expand production forces; rather, the radical reform of income distribution and the modernization of the economic order in Russia are needed.
An analysis of income distribution in the tenth, richest decile group reveals that the bulk of this group’s income is concentrated among a very small portion of the group’s families4. Moreover, the incomes of the richest individuals, who comprise one percent of the population and are included in the richest part of the 10th decile group (i.e., the 100th centile group; see the illustration at the end of the article), are many times higher than the incomes they declared and that were hence factored into official statistics. These hidden incomes are comparable to the official total income of the Russian population as a whole and come to more than 29 trillion rub/year. The subject incomes are primarily received in foreign, not ruble currency. If these hidden incomes are taken into account, it then turns out that the DF in present-day Russia equals 30-50.
The “superrich” group, in particular, includes:
— 0.2 percent of families (100,000 families), which command 70 percent of the nation’s wealth, and;
— 0.4 percent of families (200,000 families), which had an income of more than 30 million rub/year in 20075.
Government ideologists and the LM elite usually repeat the popular maxim that labor compensation can only be increased following an increase in labor productivity. It is necessary to earn first, then share, they say, in contrast to the proposition of the far left, which wants to take everything away from the rich and give it to the poor.
The correct proposition is: in order for the country to earn more and produce more goods, what the country is already earning must be properly distributed. In other words, the country need not earn more.
The consequences to which anomalous economic inequity and the improper distribution of the national income will lead are shown below.
2 It is shown below that the richest individuals have “shadow incomes” that greatly exceed their declared incomes.
3 The poverty level established on 1 January 2009, averaged over the various population categories, equals 5,100 rubles (rub) per month (mo). According to data from the Federal State Statistics Service (Rostat), the number of poor individuals who have an income below the poverty level equals 24.5 million persons (17.4 percent of the total population), while a year earlier, the number of poor individuals was lower and came to 17.4 million persons.
4 S. Valyanskiy and D. Kalyuzhnyy. Elusive “Middle-Classers”. Literaturnaya gazeta [Literary Gazette], 8-14 October 2008.
5 Data from the Russian State Insurance Company (Rosgosstrakh) published in Kommersant-Deyli [Businessman Daily) on 27.02.2008.
Theorem 1: A progressive tax schedule is a necessary condition for a balanced market economy and economic growth.
This is absolutely necessary!
Progressive taxation (the higher profits and incomes, the greater the share that goes into the federal budget in the form of taxes) counterbalances the selfish tendency of a businessman to pay to a worker les s and to i nve s t les s i n production development. Progressive taxation saves capitalism and the market economy from destruction due to the overproduction crisis Karl Marx described.
For this reason, the rich in all developed and developing countries give the government a share (some 50-60 percent) of their incomes that is several times greater than that of the poor and middle class.
And the poor class is altogether exempted from taxes.
In the US, if an individual’s wages are less than $13,000/year, his or her taxes are then refunded. In addition, if there is a child in his or her family who attends school, the family is then supplemented with $3,000/year from the government treasury. In Europe, support for the poor class is even more appreciable. And taxes from the rich class provide this support.
But even given these income “equalizations”, western nations, pr imari ly the US, are not able to prevent the excessive and at times illegal concentration of incomes among a small group from the rich class (as its DF = 9 suggests), which has also led to a crisis in purchasing power and defaults on credit for housing. The present world crisis is also ultimately a consequence of imbalance, excessive inequality, and the disproportionate concentration of incomes among major US managers and financial magnates. These incomes were in fact withdrawn from the economy using various speculative subterfuges involving “securities” (derivatives).
The Russian LM elite is proud of the fact that, at its insistence, we have a poor (linear or proportional) tax schedule and everyone pays 13 percent of their incomes. After all, this is very convenient, they say. And how much does this convenience cost the country? In 2007, the 200,000 richest families had incomes of more than 30 million rub/year. If 50 percent of these incomes were mobilized to rescue the domestic economy, a sum of 3 trln rub/year would then be available. Even this amount is not sufficient for a balanced federal budget.
Then, too, there is the luxury property (expensive homes, land, yachts, etc.) on which, including the right of inheritance, its owners in all normal countries pay decent taxes. And this is not only a matter of fairness.
The point is that the excessive concentration of incomes within a small group of the richest individuals (excessive inequality) leaves the incomes of the bulk of the people too low. The purchasing power of the poor and middle classes, who are the consumers of domestic products, becomes insufficient to purchase the goods produced. Demand drops and an overproduction crisis arises, accompanied by a default crisis. And the superexcessive inequality that exists in present-day Russia does not make it possible to even pay for life-sustaining commodities at prices that cover costs. That is to say, this poor segment of the populace consumes goods and services [food, housing and utility (H&U) services, and transportation), but they are not fully paid for due to low wages and pensions. Consequently, the life-sustaining sectors (agriculture, H&U, transportation, and the production of basic and essential consumer goods) are suffocating from underpayment. This mechanism of the deterioration of production forces was analyzed in a book by one of the authors7.
Russia is reminiscent of a family with unintelligent parents. In this family, almost all the funds the parents earn are given to a single “favorite” child, who spends them on playthings. As a result, all the other children and the parents themselves have almost nothing left, even for food to keep up their strength. And the biggest problem is that the parents no longer have enough food, they grow weak, they work more poorly, and they soon lose their jobs. The whole family suffers, including the “favorite” child, for whose sake the family’s budget was thrown askew.
Associates of the Institute of Social and Economic Studies of the Population of the RAS, headed by professor A. Yu. Shevyakov, analyzed Rosstat data for the past 17 years8. Their analysis revealed that excessive inequality reduces the rate of economic growth. The analysis also showed that if the government had made even a slight adjustment in income distribution by means of progressive taxation, had withdrawn a share of the incomes of the richest individuals, and had transferred them to the poor class, the rate of economic growth could then have been increased by one-and-a-half times.
The present income distribution and the present tax concept do not make it possible to sustain government or to develop the people and their production forces. There are no prospects of any kind along this path. And the longer the appropriate reforms are delayed, the more severe and painful they will be later, and greater the risk of the country’s deterioration, social instability, and revolutionary disturbances.
Tentatively, given current (2009) ruble incomes, what should the progressive tax schedule in Russia be?
First, low-income individuals with wages of less than 15,000 rub/mo should be exempted from taxes.
Second, a 13-percent tax should be taken from a portion of an income that is higher than 15,000 rub/mo.
Third, a rate higher than 13 percent should be applied to incomes that exceed 100,000 rub/mo, increasing this rate as incomes rise and reaching a level of 50 percent for incomes of approximately 1 million (mln) rub/mo or more.
Property should be taxed in a similar manner. Ordinary apartments and small cottages should be exempt from taxes, while “elite” real estate should be taxed at an annual rate that equals approximately 3 percent of the market value of this real estate.
Of course, rough estimates based on foreign analogs are presented here. The Russian rates must be more precisely def ined during the preparation and practical application of laws. Moreover, all changes in tax rates as compared to the current rates should be made gradually, over a period of three-five years. But the work associated with introducing the progressive taxation of personal incomes and luxury property must be immediately begun; otherwise, we will lose all the institutions supported by the federal budget, and teachers, physicians, military officers, and professors will be very poor.
6 As shown below, the rich nevertheless “shroud” their incomes and pay 13 percent on a very small portion of their earnings.
7 R. I. Nigmatulin. How to Arrange the Economy and Authority in Russia. Economy Publishing House Joint-Stock Company (CJSC), Moscow, 2007.
8 A. Yu. Shevyakov. Factors of Inequity in Economic and Demographic Dynamics and the Formulation of New Government Social Policies. Vestnik Rossiyskiy akademii nauk [Herald of the Russian Academy of Sciences], volume 77, number 4, 2007.