Aug 14
Part two:
Yet while economic growth boosted by record oil prices has helped the government to achieve impressive numbers, inequality has grown.For one, differences between the country's regions are huge. Whereas the average income in Moscow is 30,818 rubles ($1,233), in Dagestan, the country's poorest region, the average income is just 6,923 rubles ($276).Even though most of the country's wealth is accumulated in Moscow, the capital also boasts a much higher fraction of people living under the local poverty line.
According to the city's statistics service, last year 23 percent of Muscovites lived in poverty, defined as a monthly income of less than 5,758 rubles ($230).Many experts agree that high levels of inequality pose multiple problems, threatening social cohesion and an increase in crime rates.Middle Class and TaxesThe government, it seems, has decided to address the problem by focusing on the growth of the middle class.President Dmitry Medvedev has said that only a fast-rising middle class "can become the buttress of democratic development." He has also said the middle class should make up 60 to 70 percent of the country's population by 2020, on par with levels in Western Europe.Yet sociologists said that while 22 percent of the population is middle class by income, only 7 percent of the population could be classified as belonging to that group if education and self-consciousness are taken into account.
Many blame the tax system for galloping inequality."I don't know one other country in the world where the tax system stipulates that the poor share with the rich, rather than the rich sharing [their wealth] with the poor," said Oleg Smolin, a Communist State Duma deputy. Smolin identified the country's flat income tax, introduced in 2001 at 13 percent, as the main culprit.He said that since opportunities for tax evasion were more widespread among higher income groups, the system was turning absurd. "We have gone even further [than the flat tax] to a regressive system -- the more an employee earns, the less he gives back to society," he said. To bridge the income gap, he said, the government needs to introduce a progressive tax system.
Kryshtanovskaya, who heads the Russian Academy of Science's center of elite studies, also backed the introduction of progressive taxes and said financial controls should be increased. "[The government] should be able to control payments like in most other economies around the world, where the majority abides by the law," she said.While Guriyev agreed that inequality was too high, he strongly warned against changing the flat income tax regime, arguing that it was important for pulling the economy out of the shadows. Rather, he said, it is necessary to tackle inequality because as long as it is high, "it is very hard to resist temptation to tax the rich, which in turn undermines economic growth."The most promising path, he said, would be to promote equal opportunities through the reform of health care, education and housing. Guriyev said it was a good sign that the Kremlin's national projects addressed exactly these issues. "This shows that the government understands pretty well what needs to be done," he said.The national projects, overseen by Medvedev when he was first deputy prime minister, target health care, education, housing and agriculture.
Spending reached 256.5 billion rubles ($10.8 billion) last year.A second state initiative, special economic zones, is intended to diversify regional development by creating greater economic activity outside of Moscow and the oil-rich regions.In addition, the government is hoping to tap its sovereign wealth fund to address the problem of inequality between generations.As with so many things in the country, the challenge lies in the implementation. "It will be very difficult to get qualified bureaucrats for the projects," Guriyev said.He warned against attempts at large-scale redistribution of wealth because this would jeopardize private property. "Any attempt at expropriation would scare away badly needed foreign and domestic investors," he said. As examples he listed Latin American countries like Bolivia and Venezuela, where nationalization had been suppressing economic activity as well as driving foreign money away. He said the Yukos affair, where the state had forced the country's biggest private oil firm into bankruptcy, had similar effects, since the oil industry has seen both investment and output declining. Smolin, however, lambasted a law introduced in 2005 that abolished taxes on inheritances and gifts received from family members and relatives. What was meant as a gift to all our citizens who pass on apartments to their children actually "turned out to be a grandiose present for the so-called oligarchs, who handed down colossal real estate wealth to their children and close relatives," he said. The Communist deputy also said salaries needed to be significantly raised in sectors where they are lowest, including agriculture and education.He criticized the fact that a professor can earn roughly the same salary as a congressman in the United States but that the difference in income between the two is huge in Russia.
"Wages in education, science and arts are laughable. Teachers in some regions earn just 150 euros [$232] per month, while a Duma deputy like me is making 200,000 rubles [$8,500] a month," he said. Communist deputies, Smolin said, are giving almost half of that back to their party."The government steadily refuses to raise salaries for the intelligentsia and public servants, saying this would propel inflation. But at the same time, it is pumping gigantic sums into its state corporations, which in the opinion of many, including liberals and experts, pose the much bigger factor for inflation than public sector salaries," he said. Power of InflationInflation is actually itself a contributing factor to inequality, because it tends to hit the poor more than the rich.A study released last month by audit firm FBK found that an inflation rate of 14 percent this year would translate into 25 percent in real terms for the poor. This is because poorer people spend a higher fraction of their income on staple goods, and food prices rose much more than the average, the study found. Also, wealthier people have easier access to sophisticated financial instruments that avoid inflation, while the portfolios of the poor tend to have a larger share of cash.Smolin warned that the current status quo posed a grave threat to political stability."The relative stability we have is based on the golden rain of oil revenues. It might be easily destroyed," he said. People may not be taking to the streets now, but at the beginning of 2005, some 500,000 to 2 million people protested the monetization of state benefits, Smolin warned.Kryshtanovskaya said the main reason for the current stability is that even the poor are seeing a chance of being better off soon -- a major difference from the 1990s. "Back then, one segment got richer, while the rest got poorer. Today, everybody is getting richer, and everybody is busy earning and spending money," she said.
Kryshtanovskaya said there probably was no point in the country's history where more wealth was being generated. During the last large-scale economic expansion in the 1960s and early 1970s, much was eaten up by the military-industrial complex. "Today, a lot goes into welfare, and that is probably unique," she said.
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