Reforms aimed at reducing inequality are the most complicated ones

12 december 2018 | Kommersant

Leonid Grigoriev, Chief Advisor to Head of the Analytical Center, gave a detailed interview for the Ogonyek magazine in which he explained why the increase in fuel prices is causing such a backlash in a variety of countries around the world.

Leonid Grigoryev
Leonid Grigoryev
Chief Adviser to Head of the Analytical Center

Mr. Grigoriev, what's your explanation for the fact that so many countries have found themselves in a fuel crisis at the year close, all at the same time? And how has Russia managed to dampen it, while the French government has been forced into a retreat and last ditch maneuvering, and now the reputation of president Macron is at stake?

France has a long tradition of street protests and my reading of the situation is that the fuel prices are just a pretext. The yellow jackets don't at all look like the long haul drivers that would be hit the hardest by the proposed increase in the diesel fuel prices.

As for reasons of fuel prices rising, they are various: in Europe the global price of oil plays an important role while in Russia it's not really that relevant. Then there are the 40% taxes added to the price in Russia, while in Europe this percentage is even greater. And then it has to be mentioned that Russian fuel producers don't buy oil at the global prices. If they did, the price of fuel in Russia would be about 100-120 rubles per liter or at least it would have reached 1 dollar per liter that people pay in the USA (that's about 65-66 rubles).

As for the social tensions we're seeing both in Russia and in Europe, they suggest that all this controversy around fuel prices, the real cause of it is not fuel or oil prices or even the government's fiscal policy, the real root cause is social inequality. There is a world of difference between a situation where the prices go up but you still can afford to pay them, and a situation where the increase in prices leaves you destitute, making it impossible for you to make enough money to live on or drastically reduces your purchasing power. And that's the context we want to be looking at this in: for the many Europeans and Russians a car is no longer a luxury but a means of transport and furthermore, for many it's also the source of their livelihood.

Inequality persists even during economic booms, it is stubborn, if you will. And there is no simple mechanism for reducing inequality in the market economy.

Why?

Well, our hypothesis is that inequality emerges simultaneously with the entire system of public institutions. When a modern society emerges or undergoes a transformation, certain property relations emerge at its very basis (who owns what), social norms (how wealth gets redistributed and to whom) as well as a multitude of other economic and social parameters and one of these is social inequality. It's an important element integrated in our socio-economic system and it serves as the link between labor relations and property relations. There are people who are wealthy because they have worked hard but there are also people who have simply inherited their wealth and last but not least there are people who have stolen their fortune. And the same rules apply to poverty: some people are born to poverty and get stuck in conditions that make it near impossible for them to accumulate any appreciable wealth, some start out wealthy but then lose everything and end up poor and still others fail to get the requisite education/ In other words, there are a multitude of causes of poverty but they all emerge in society at a certain point and then persist over an extended period of time. The developed nations saw conditions and institutions change in after the Second World War while the developing nations saw it after the end of colonialism. But whatever the case may be, once a socio-economic system emerges, it is extremely hard to change things about it.

And what's the state of play on this rather sensitive issue in Russia today?

In our country, inequality emerged in the 1990s and early 2000s. The transformation started with the impoverishment of at least 50 percent of the population of the Russian Federation. Meanwhile, the new oligarchs in Russia did not emerge as a result of innovations or wealth inherited from the steel, coal and automotive magnates of the industrialization age. In Russia, we had three effects: the privatization of the Soviet heavy industry, the privatization of the oil and gas industry and the development of the banking sector. It should be noted that in our country the controlling stakes in major corporations are not owned by general public, but by specific individuals controlling extremely high portions (according to global standards).

In effect, our oligarchs pushed inequality to an extremely high and rather rare level for a middle-income country, seeing how in this country right next to the affluence of our oligarchs we have a fairly large number of really poor people who are, at the same time, very well educated, it's a rather unique situation in history. In western countries, there is a fairly consistent social law: the more money you invest in education, the more money you are going to make over your career.

Increasing the GDP per capita (even by a large amount) is never going to be enough to reduce domestic social inequality. So, any reforms aimed at reducing it are always among the most difficult reforms because reducing social inequality is not just about redistribution of wealth, any attempts to do so also inevitably end up dealing with issues of property, balanced growth and transitioning to a postindustrial society...

Is there any economic criterion that could be changed in order to significantly reduce inequality?

Redistribution of wealth, and I'm talking about major redistribution of wealth here. But redistribution of wealth from those who work hard and make a lot of money to those who are barely making ends meet should be rather careful because it can end up slowing down the economic growth.

However, inequality has never in human history been reduced to zero. If I knew a radical solution, I would be calling for action right now and the whole world would start using this recipe if it was successful. Unfortunately, we know from history some very unpleasant ways to reduce social inequality. We would better stay away from those methods because they result in economic crises in which profits fall faster than worker compensation and in wars that equalize millions of people in abject poverty.

And can inequality be minimized without crises and wars?

We could try and do it at the level of children. That's some idea! If the state manages to ensure that all children regardless of how wealthy or poor their parents have access to the same quality of education and the same conditions for education, that could be a serious intervention in social inequality. That, of course, assumes that the level of education in Russia is directly correlated to household income and there is really such a correlation, by the way.

The only drawback is that we are only going to see results in 15-20 years. But seeing how quick fixes for inequality have historically always led to disasters, maybe it is time we tried some long term solutions?

Source: Kommersant