Publication: Prism Volume: 3 Issue: 11

A leading Russian economist warns that the Kremlin’s proposed housing reforms could provoke strong popular resistance

By Leonid Gordon

A new round of social and economic reforms is beginning in Russia. This makes it all the more important to direct our attention to the lessons to be learned from our most recent experience. The processes that led to the reduction of real wages and pensions in the 1990s are very instructive here. They show that social threats do not necessarily bear any relation to the magnitude of material losses suffered. The way in which measures leading to such losses are carried out, and how they are perceived in the mass psychology, are no less important.

Russian society lived through two forms of reductions in real wages in the 1990s. From 1991 to 1995, we experienced the consequences of rapid inflation and, since 1995, the consequences of massive non-payments of wages and pensions. The total loss as the result of inflation significantly exceeded the total debt in unpaid pensions and wages. Over five to six years, inflation cut the purchasing power of wages in half, if only officially recorded wages are counted; and by about 37 percent, if all wages are counted (that is, if shadow economy earnings are included). When inflation was at its peak, the purchasing power of wages and pensions declined by 25 to 35 percent per year, and sometimes even faster.

Even when non-payments were at their peak, they still consumed a smaller proportion of wages than inflation. According to 1995 figures, the state and enterprises owed their employees a total of 20 trillion rubles in arrears; in 1996, about 50 trillion. However, officially recorded wages totaled approximately 350 trillion rubles to 1995, and over 600 trillion rubles in 1996 (and even higher, if you add hidden wages earned in the shadow economy). In fact, therefore, nonpayments deprived workers of only five percent of their annual pay or, when all workers are taken into account, less than a month’s pay. At non-paying enterprises, wage arrears amounted on average to 10 to 20 percent of salaries. This is a lot and it is, of course, absolutely illegal; all the same, it is less than the quarter or third that inflation ate up every year.

What is striking, however, is that delays in wages and pensions, which ate up a smaller share of income, provoked a much sharper social protest. As soon as non-payments became widespread, they immediately jumped into first place in opinion polls as the Russian population’s chief cause of concern. Over 60 percent of those polled identified wage delays as what alarmed them most, whereas only 40 to 50 percent mentioned inflation.

Still more important, many people reacted to nonpayments not only more sharply, but differently, than to inflation. Faced with nonpayment of salaries and pensions, especially when it lasts for many months, tens or even hundreds of thousands of people feel themselves virtually forced to resort to violent, and in large part, spontaneous actions. In the Kuzbass, unpaid miners blocked trains and held meetings at which they demanded to be given guns. Teachers took their supervisors hostage. In Bryansk, so many workers came out onto the streets that some were crushed to death. In Kimry, pensioners blocked bridges. In Saratov, they smashed the windows of government buildings. In Chernogorsk, angry workers came close to burning down the country cottages of the town’s rich inhabitants. Reports of suicides and hunger strikes multiplied from month to month.

Mass protests have so far been sober and restrained, however. When the trade unions called, in March 1997, for demonstrations against wage arrears, they were to their credit able to ensure that the rallies were organized and peaceful. But television footage of the March protests revealed a great many people so contorted with desperation and hatred that they seemed to have lost their reason. In this sense, the reaction to nonpayment of wages is distinguished from the reaction to inflation by a greater degree of irrationality, irritability and hysteria. Nonpayment, while taking away less money than inflation, bears much more explosive and disruptive potential.

It might seem logical to suppose that people react more strongly to wage arrears because wage arrears are by definition a long-term phenomenon. But this supposition is not borne out by reality. In 1995, inflation was still continuing — prices doubled or tripled over the year — while payment delays were already widespread, affecting between 20 and 30 percent of workers. On average, inflation ate up more than a quarter of real wages, while wage arrears accounted for between one-twentieth and one-tenth. Wage arrears were, nonetheless, the cause of twice as many labor conflicts as the yawning gap between wages and prices. Almost 40 percent of the conflicts in 1995 were over nonpayments, while only 20-25 percent were over low wages.

One can offer many explanations for why nonpayment of wages and pensions provoked sharper and more dangerous protests. One is the observation that many people perceive inflation as something elemental, affecting everyone and against which protest is futile. It is much easier to discern selfish interest or even evil intent on the part of specific employers and politicians where the nonpayment of wages and pensions is concerned (especially since such factors really do lie behind a large number of nonpayments). It is also significant that delays in wages and pensions constitute a direct violation of the law, and increase the personal dependence of many workers on the authorities and their employers. In real life, nonpayments over a period of months are rarely absolute in character. Usually, part of the money owed, or goods for use in barter, are given to the workers. Who gets what, when and how is decided arbitrarily by the administration.

While these explanations are still only hypotheses, there is no doubt that nonpayments provoke more dangerous social consequences than inflation. And there are lessons for social policy which flow from this.

First, the direct lesson. Wage arrears must be paid off within the next few months, whatever the cost. This lesson seems hardly to need further elaboration. Both government and society have realized the urgency of this problem.

It is more important, therefore, to concentrate on the long-term conclusions and lessons for the future, especially as regards the proposed reform of housing and communal services. Several elements of the proposed reform will likely find support among the population. This applies to the fostering of competition in the provision of utilities and communal services, cost-cutting measures, and the establishment of a clear correlation between charges for water, gas and electricity and the financial resources of each specific household. Other measures — such as reducing state subsidies to the owners of very large houses — may not meet with particular enthusiasm but are unlikely to provoke excessive indignation. But the wholesale abolition of state subsidies of which the government is now speaking (which would cut housing subsidies across the board and double or even quadruple rents to achieve cost-recovery levels by 2003) could entail very high political risks. Such measures could provoke desperate resistance and mass unrest in which the role of spontaneity, irrationality and hysteria could prove even stronger than in the popular reaction to delays in the payment of wages and pensions.

Translated by Mark Eckert