What do Russians think about Transition?

What do Russians think about Transition? Irina Denisova (CEFIR), Markus Eller (OeNB), and Ekaterina Zhuravskaya (CEFIR, NES) wiiw seminar November 9, 2009 1

Motivation Shiller, Boycko, and Korobov (AER, 1991): Attitudes towards free markets in 1990: NY vs. Moscow Soviets were not more concerned about the fairness of free market prices and the possibility of a substantial rise in inequality as a result of free markets than Americans even stronger appreciation of the importance of economic incentives Whether and how have attitudes towards free markets evolved in Russia since the beginning of the transition? Are Russians satisfied with transition and just as hopeful of free markets as they used to be in 1990? What accounts for the evolution of attitudes towards markets? 2

Uniquely low support of democracy and market among transition countries Fraction of people with preference for market economy.4.5.6.7.8 russia albania mongolia azerbaijan belarus serbia montenegro romania kyrgyzstan poland czechrep tajikistan slovakrep georgia bulgaria latviarmenia croatia hungary ukraine moldova fyrom uzbekistan bosnia kazakhstan estonia slovenia lithuania.5.6.7.8.9 Fraction of people with preference for democracy 3 Source: EBRD/Worldbank Life in Transition survey, fall 2006

Data and Basic Facts RLMS (Russian Longitudinal Monitoring Survey) Large-scale representative survey of the Russian population (over 10,000 respondents) We focus on the round in fall 2006 that inquired this one time directly about: the people s assessment of various aspects of transition and their preferences towards regulation vs. the free market 4

Background: life satisfaction and incomes have been growing Among all respondents, individual fixed effects 3.5 4500 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 4000 3500 3000 2500 2000 1500 0 0.1 Life satisfaction Per capita 0HH Income 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 5 Same picture for people in relative poverty and elderly Even the most conservative estimates tell that standards of living bypassed the level at the beginning of transition by 2003 No Easterlin paradox

How did the economic and social changes of the last 15 years % of population affect your life? 40 35 30 32.4 37.7 25 20 15 18.4 10 5 0 0.5 11.0 STRONGLY IMPROVED IMPROVED DID NOT CHANGE WORSENED STRONGLY WORSENED 48.7%: worsened, 32.4%: did not change, 19%: improved In addition: 50% would prefer their kids to grow up in the USSR 6 Source: RLMS, fall 2006

Position on 9-step wealth ladder: 2006 and before transition 35 30 25 20 1991 2006 15 10 5 0 Poorest 2 3 4 5 6 7 8 Richest People feel that they have become poorer relative to others 7 Source: RLMS, fall 2006

Assessment of transition Most people live better now than before 1991 19% 57% I life better now than before 1991 23% 55% I have done better in life than my former colleagues in 1991 20% 52% 0% 10% 20% 30% 40% 50% 60% The rest of people are indifferent do not agree agree 8 Evidently, people make transition-related assessments not only on the basis of economic criteria Source: RLMS, fall 2006

Perceived decline in general trust toward people 70 60 50 40 30 20 10 0 15 38 Most people can be trusted Do you think that... 57 39 You cannot be too careful in dealing w ith people 27 2006 1991 23 Depends on w ho you are delaing w ith 9 Source: RLMS, fall 2006

What is most valued now and what was most valued in the Soviet Union? W EALTH POW ER HONESTY % of population (one answer) HAR D W ORK W ISDO M AND EXPERIENCE KNOW LEDGE TALE NT now in the USSR 10 0 10 20 30 40 50 Potentially a recall bias: people may have forgotten the true level of social capital Source: RLMS, fall 2006

State price controls are immensely popular 11 % of population who think that the state rather than the market should set prices for the following goods and services: 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 95% COMMUNAL SERVICES 92% 90% 80% REAL ESTATE GAZ AND FUEL FOOD Price regulation vs. experienced shortages; no reminder on costs of price controls Source: RLMS, fall 2006

Mainly state or market should provide employment, medical care, build roads, and collect trash? SUPPLYING EMPLOYMENT BUILDING ROADS MEDICAL CARE COLLECTING TRASH 70 60 50 40 50 59 50 45 30 20 10 0 12 MAINLY STATE Source: RLMS, fall 2006

What should be done with the majority of previously-privatized enterprises? % of population 60 52 50 40 30 20 13 renationalize 13 renationalize and then reprivatize 15 leave with current owners, but make them pay 20 leave with current owners 10 0 Source: RLMS, fall 2006

Nonetheless perception of high and growing corruption 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Completely agree Agree Yes and no Do not agree Completely do not agree Corruption has gone down in the recent years Judges in Rus s ia are corrupt 14 Source: RLMS, fall 2006

Trust towards organizations and certain groups of people ARMED FORCES THE CABINET OF MINISTERS RUSSIAN BANKS COURTS SMEs THE PARLIAMENT POLICE INSURANCE COMPANIES FOREIGN BANKS POLITICAL PARTIES 2.1 3.1 3.0 2.9 2.8 2.7 2.6 2.5 2.5 2.5 15 1.0 1.5 2.0 2.5 3.0 3.5 On the scale from 1 to 5 1 is completely distrust, 2 is rather distrust, 3 is neither trust nor distrust, 4 is rather trust, and 5 is completely trust Source: RLMS, fall 2006

Evidence which requires explanation High demand for government regulation and increased state involvement in the provision of goods and services Low level of trust in government institutions and recognition of high and rising levels of corruption 16 => Why do individuals who distrust the government nonetheless want more government intervention?

Aghion, Algan, Cahuc, and Shleifer (2009): The Model (1) Continuum of risk-neutral individuals of mass one Individual decisions: Become civic or uncivic Become entrepreneur or routine producer (work for state-owned factory) If uncivic & entrepreneur: negative externality (pollution, cheating) on the society is imposed; may be productive or unproductive State-owned factories do not impose externalities, but are not productive 17

Aghion et al. (2009): The Model (2) Societal decision by election: Regulate entrepreneur s entry into the economy to reduce externalities or do not regulate Regulation is administered by public officials (randomly drawn from the population)» The more officials, the less neg. externalities but also the less the incentive to be civic civic official & uncivic entrepreneur: no entry (forbidden by official) uncivic official & civic entrepreneur: no entry (entrepreneur refuses to pay bribes) uncivic official & uncivic entrepreneur: entry (entrepreneur pays bribes) If entry is denied: entrepreneur returns to routine production 18

Aghion et al. (2009): Solution (1) - Solved by backward induction - Two equilibria: Good equilibrium: mass civicness, no regulation, no externalities, maximum level of production Bad equilibrium: mass uncivicness, regulation, neg. externalities, relatively low level of production, high degree of corruption Only the most productive entrepreneurs can enter (only they can afford to pay the bribes) The society would be worse off if all uncivic (also those who are less productive) would enter, because of more overall negative externalities Preference for more regulation, even though the regulators are corrupt! Government is bad, business is worse 19

Aghion et al. (2009): Implications More civicness, more trust => less demand for regulation If liberalization occurs in a low trust environment, the economy would converge to a bad equilibrium Increase in corruption, more demand for regulation, further reduction in social capital (lower trust) Interpretation of Russia s views: Russia seems to converge to the bad uncivic equilibrium 20

Aghion et al. (2009): Empirical Tests 21 Distrust in government, distrust in business, corruption, demand for regulation, and regulation should all be positively correlated but this is variation among equilibria Treat Russia as collection of local economies with their own equilibria => variation among equilibria at the PSU level Introduce individual heterogeneity into the model: beliefs about how many civic people are there (Pinotti 2009) => prediction about correlation of individual demand for regulation and individual perceptions of corruption and distrust

Tests support the theory Controlling for a wide range of individual characteristics, such as age, education, income, labor market status, and labor market history, we find strong positive conditional correlation between: individual and PSU-level demand for regulation and state provision of goods and services individual and PSU-level distrust in business, distrust in state institutions, and perceptions of social capital individual and PSU-level perceptions of corruption Social capital explains a significant share of variation in assessment of transition 22

23 Individual characteristics as determinants of the variation in attitudes General attitudes towards transition Price regulation Direct involvement of the state Worsened life Housing Garbage Age 0.025 0.001-0.003 [5.85]*** [1.58] [1.50] Age Squared -0.0001-0.0001-0.0001 [4.93]*** [1.01] [3.00]*** Education [compared to "Secondary and below"] = "Junior and Secondary Professional" = "University and higher" -0.003 0.000-0.038 [0.23] [0.02] [2.92]*** 0.011-0.031-0.102 [0.42] [4.27]*** [5.36]*** Used personal computer last 12 months -0.069-0.031-0.047 [3.90]*** [4.93]*** [2.86]*** Used the internet last 12 months -0.039-0.026-0.016 [1.50] [4.23]*** [0.76] Self-reported health [1-poor, 5-excellent] -0.1-0.005-0.003 [8.07]*** [1.30] [0.41] Log of per capita household consumption -0.089-0.008-0.051 [7.95]*** [3.15]*** [5.38]*** Employment [compared to "Work for wages in public sector"] = "Work for wages in private sector" 0.004-0.009-0.028 [0.25] [1.36] [1.48] = "Unemployed" 0.172-0.019 0.054 [5.32]*** [1.62] [1.77]* = "Out of labor force" 0.097-0.019 0.018 [3.74]*** [3.47]*** [1.08] Has experience as entrepreneur or self-employed -0.006-0.018-0.044 [0.26] [2.71]*** [2.38]** Had to accept less qualified job 0.114-0.006-0.009 [6.08]*** [0.96] [0.48] Got job in new sector -0.091-0.025-0.06 [3.85]*** [3.29]*** [2.74]*** Gender [Male compared to Female] 0.009-0.018-0.032 Location [Urban compared to Rural] [0.96] [3.80]*** [2.66]*** 0.022-0.019 0.008 [0.42] [1.65]* [0.15] PSU dummies Yes*** Yes*** Yes*** Observations 7329 10019 10127 Pseudo R-squared 0.13 0.12 0.09 Log Likelihood -4417.34-2347.66-6276.84 LR Chi Square 2407.95 39729.56 123342.49

Distrust and corruption correlate with demand for state regulation and state involvement Price regulation Direct involvement of the state Transition worsened Food Employment life Distrust in private business Distrust small business 0.034 0.05 0.039 [5.05]*** [4.52]*** [5.48]*** Distrust insurance companies 0.013 0.024 0.038 [2.29]** [2.66]*** [5.87]*** 24 Distrust domestic banks 0.011 0.027 0.038 [2.03]** [3.76]*** [5.07]*** Lack of cooperation No cooperation between rich and poor 0.016 0.013 0.038 [2.85]*** [1.48] [5.50]*** No cooperation between common and powerful 0.013 0.016 0.036 [2.10]** [1.74]* [5.40]*** General distrust (regional-level) General distrust (FOM) 0.057-0.145-0.024 [0.82] [0.95] [0.33] Distrust in state institutions Distrust government 0 0.018 0.045 [0.03] [1.78]* [6.44]*** Distrust courts 0.017 0.015 0.04 [2.36]** [1.75]* [5.12]*** Distrust of political parties 0.002 0.026 0.044 [0.36] [2.28]** [5.75]*** Corruption Judges are corrupt 0.004 0.028 0.02 [0.64] [2.79]*** [3.29]*** Disagree that corruption decreased in the last years 0.005 0.004 0.027 [0.68] [0.60] [3.18]***

Conditional correlation between distrust and corruption Distrust in private business Judges are corrupt Disagree that corruption decreased in the last years Distrust in small business 0.141 0.178 [6.05]*** [8.24]*** Distrust insurance companies 0.201 0.224 [8.07]*** [10.53]*** Distrust domestic banks 0.198 0.213 [9.20]*** [12.98]*** Lack of cooperation No cooperation between rich and poor 0.059 0.134 [3.50]*** [8.07]*** No cooperation between common and powerful 0.102 0.158 [5.90]*** [9.65]*** General distrust General distrust, regional level (FOM) -0.072 0.482 [0.18] [2.16]** Distrust in state institutions Distrust government 0.271 0.233 [12.28]*** [10.74]*** Distrust courts 0.406 0.236 [19.14]*** [10.15]*** 25 Distrust in political parties 0.27 0.264 [9.84]*** [11.42]***

Conclusions (1) 1 st paradox: although living standards and life satisfaction have broadly improved 2000-2007, a majority of Russians is disappointed with transition 2 nd paradox: a high demand for government regulation and increased state intervention coexists with a low level of trust in state institutions and recognition of high and rising corruption 26

Conclusions (2) Theory by Aghion et al. (2009) helps to resolve these paradoxes: It is the lack of social capital in Russia that drives the demand for government regulation and bad attitudes towards transition Society chooses to demand regulation and tolerate corruption in order to reduce externalities imposed by uncivic business => bad equilibrium trap 27

Back to Shiller et al. (1991) According to Shiller et al. (1991), Soviets and Americans attitudes in 1990 were very similar in all aspects but two: 1. expectation about the security of property rights 2. attitudes towards civicness of private entrepreneurs In light of our findings, it is clear that these two differences have foretold the nature of transition 28