Institutional and policy changes affect economic reality of Russian people

In the last 20 years, the people of Russia have experienced major societal changes caused by extensive political transformation and ensuing economic reforms. These changes have impacted every sector of society including labor services and employment, health services and their utilization, and the public education system. CPC Faculty Fellow Klara Sabirianova Peter is an economist who studies the myriad ways individuals respond to major institutional and policy changes, and how the changes impact the society as a whole. She is an Assistant Professor of Economics at University of North Carolina at Chapel Hill.

After the dissolution of the Soviet Union in 1991, Russia’s emerging economy was in crisis. In response, the government implemented a set of economic reforms that affected nearly every person in Russia. These reforms came at a time when Russia’s birth rate was already below replacement level and falling, life expectancy was declining, and income disparities between the rich and the poor were substantial. Moreover, in the country that is geographically the largest in the world, there were vast regional differences in these factors. This created an extraordinary opportunity for a population-based study to examine how these reforms changed the economic well-being of individuals and households within and across these regions.

As a labor economist and population scientist, Klara Sabirianova Peter focuses her research on places with government instability, social conflict, and informal economies. These are often developing countries that underwent major structural changes in a weak institutional environment. Corruption, bribery, tax evasion, and violation of laws are hallmarks of these weak institutions.

Peter says “I approach my research by looking for puzzling questions, for some kind of phenomena that is not traditionally observed in a stable environment. There are a lot of puzzling questions in developing economies that cannot easily be explained by conventional neoclassical economic models. I often find these questions by observing the behavior of individuals and firms in transition countries that seems to be uncommon in more developed markets. ”

She has recently published results from a number of studies about Russia, and has studied market reforms in other countries in transition such as Slovakia, Ukraine and the Czech Republic. Most recently, she studied data from 189 countries to identify global trends of personal income tax reforms. [1]

For Peter’s research on institutional and policy changes in Russia, she uses data from the Russia Longitudinal Monitoring Survey (RLMS) which began a year after the fall of the Soviet Union. The RLMS is a project based at the Carolina Population Center and is led by CPC Faculty Fellow Barry Popkin and a team of researchers including Barbara Entwisle, also a CPC Faculty Fellow. The RLMS measures individual employment and pay, allocation of time, health conditions, and program participation; household-level expenditures and income; and relevant community-level data such as region-specific prices and data about community infrastructure. Data were collected eighteen times in 38 regions between 1992 and 2009.

Data collection for the RLMS will continue annually for the next few years, perhaps longer. Peter is awaiting the next round of RLMS data to extend her analyses.

With widespread and significant economic reforms in Russia in the 1990s, characteristics of the labor market – such as wages, employment, investment in human capital, and labor mobility – changed, too. Peter’s research shows that by 1998, 60 percent of Russian workers did not receive their wages on time. In fact, wages were overdue by an average of five months’ salary per affected worker. [2, 3]

Why did workers continue working when they weren’t getting paid on time? Why didn’t they quit, or protest, or strike? To help understand this, Peter and her colleagues interviewed managers from more than 500 Russian agricultural and industrial firms. They found that some managers approached paying wages as a decision influenced by whether other managers paid wages on time. A manager might ask, “Why would I pay wages to my employees if no other managers pay their employees?” The actions of a manager became an incentive for other managers to engage in “deviant” practices.

“Frequent adoption of a deviant practice within a community will make it more likely that firms in that community will engage in deviance and less likely that injured stakeholders – the workers – will actively mobilize to oppose it,” Peter writes in her paper.

Russia saw much change in the 1990s and the next decade would bring even more. Fortunately, the Russia Longitudinal Monitoring Survey continued data collection to document how the institutional and policy changes affected Russian citizens.

Peter’s research interests evolved as well: from labor market aspects of Russia’s economic reforms to more general issues of economic development such as bribery, corruption, contract violation, inequality, and tax evasion. “The beauty of the [RLMS] survey data is there are so many opportunities to discover phenomena that you cannot ask people about directly. But they are very important phenomena from a policy point of view,” Peter says.

“By looking at the discrepancies in reporting between income and consumption, unusual mobility patterns and other choices, we can infer about the extent of bribery, underreporting of income, informal employment, and other hidden phenomena.”

For example, one of her articles examines the effects of the 2001 flat tax reform on consumption, income, and tax evasion. Russia was the first large economy that introduced a flat tax at a very low rate, 13 percent of a person’s income. Using RLMS data, Peter and colleagues developed a new measure of welfare gains from tax changes under conditions of tax evasion. This was an important theoretical contribution to the existing literature. They found that following the implementation of the flat tax policy, tax evasion declined significantly and yet real productivity measured via consumption did not increase as much as expected. This paper was awarded the first-ever Russian National Prize in Applied Economics for the best paper devoted to the Russian economy published between 2006 and 2009. [4]

Peter’s current research projects deal with the determinants of bribery and informal payments in the health care sector and education.

[1] Klara Sabirianova Peter, Steven Buttrick and Denvil Duncan, “Global Reform of Personal Income Taxation, 1981-2005: Evidence from 189 Countries,” National Tax Journal 63(3), September 2010: 447-478.

[2] Earle, John S., Andrew Spicer, and Klara Sabirianova Peter, “The Normalization of Deviant Organizational Practices: Wage Arrears in Russia, 1991-1998,” Academy of Management Journal, 53(2), April 2010: 218-237.

[3] Earle, John S. and Klara Sabirianova Peter, “Complementarity and Custom in Wage Contract Violation,” Review of Economics and Statistics 91(4), November 2009: 832-849.

[4] Gorodnichenko, Yuriy, Jorge Martinez-Vazquez, and Klara Sabirianova Peter, “Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia,” Journal of Political Economy 117(3), June 2009: 504-554.