Andrei Nechayev: The pension system is a time bomb

Andrei Nechayev, Doctor of Economics, leader of the Civic Initiative party, and Minister of the Economy in 1992–1993, spoke with Invest Foresight about the economic reforms that Russia needs and the reasons why they are stalling during the 2020 Gaidar Forum organized by RANEPA.

Credit: Valeriy Melnikov| RIAN

– I would like to start with a question that many speakers, including Alexei Kudrin, have raised at the Gaidar Forum. Why does it happen that any kind of reform projects remain unclaimed in society? And in what situations would they enjoy demand?

– This does not exactly depend on society; rather on the elite in the broader sense of the word – a term I do not like, but admit it is absolutely appropriate in this case. The problem is that a reform is always a risk. That is why people who are authorized to make decisions on launching serious reforms rarely make these decisions.

In particular, turning from abstract concepts to our modern-day life, our President is extremely cautious in making decisions on reforms because he probably has some kind of historical memory. The fate of Russian reformers was sad, from Alexander II and Pyotr Stolypin to modern reformers such as Nikita Khrushchev, Yegor Gaidar, Boris Yeltsin, and Mikhail Gorbachev. Some of them paid for their reforms with their lives, while others just lost their power and popularity with a significant part of society.

So reform is always a risk, a threat to popularity, a threat to the reputation, and not every politician is willing to take on such responsibility.

– Speaking of the reform everyone says we need – reducing the inflated government service in Russia – does it also carry political risks?

– Our government is definitely not ready for this reform. This is for certain. The government has recently unveiled its privatization plan for the next three years, which caused a lot of raised eyebrows. The projected revenue of RUB 10 bln ($160 mio) is a meager figure for Russia’s budget. It means there will be no real privatization – just an imitation. Another unpleasant suspicion is that they will simply give state property away to their friends at a symbolic price. Unfortunately, the recent transactions with Gazprom shares suggest that suspicion is not unjustified.

Therefore, what we see here is not political risks from the point of view of society. At the end of the day the active part of society doesn’t care. Who owns Rosneft? Does it belong to a private investor, or Igor Sechin, or the state and in what share? I think 97% of Russian citizens are not concerned with this issue as they have their own problems.

However, privatization could create a conflict. It means that there is no consensus yet on how to reduce the state’s share. At the same time there are a significant number of people, including top managers of state-run companies and corporations, who are pursuing anti-privatization. This is a paradox. In our country, people are formally appointed by the government. They are not government officials but are essentially close to them. And they do management and act like owners, major beneficiaries of the companies under them, starting from siphoning off assets and finishing with lifestyle accessories such as private jets, yachts, etc. I think these people are quite happy with the status quo.

— There are many other things we could mention when it comes to which of the reforms people are not ready for and whether there is no consensus on any of the reforms. Is there anything that we are ready for? And overall, do we have any economic policy that could be meaningfully described?

— There is always an economic policy because some decisions are indeed made; the budget is developed and spent. Of course, this policy creates a lot of questions and criticism. The government placed its bets on national projects as some sort of drivers of economic growth. Pessimists like me said that it is an illusion from the very beginning. At most, they can provide a short-term boost but without net investment by the government you will never be able to ensure a long-term economic upturn.

I don’t want to recite liberal mantras but the only way to do it is what we call “a favorable climate for entrepreneurship” that includes property protection and judicial reform so that the justice system becomes a true institution where both businesses and individuals can find protection of their violated rights and interests. Instead, what is happening is just spending more government money.

We built a bridge to Russky Island and who cares that nobody lives there. We built a bridge to Crimea. Was that really necessary in terms of logistics? I’m not sure. For several hundred years, people managed to get there without a bridge. Prince Grigory Potemkin managed to get there without a bridge. But again, this was a huge project that provided the opportunity for certain people to make good money. Well, maybe these investments did give a boost to the economic growth. But the project was completed and we are seeing a decline again.

There can be no economic growth that shows this growth-decline pattern. We are talking about a sustainable development and the growth rate that will allow for solving social tasks that will at least help us not to fall behind the main leading countries. And they want another national project. It will be the Crimean bridge all over again.

— The Russian history has seen a repeated situation when necessary reforms were postponed for several decades, and then they were adopted quickly without any preparations, sometimes with catastrophic consequences. Do you think that we are currently in this situation again when reforms are being constantly postponed?

— Absolutely. We already have reforms that are long overdue. Speaking of time bombs, the reform of the pension system is one of them. What is being done now is not a reform, it’s nonsense. They have eliminated the funded system by freezing pensions. The system is dead now, and it is clear that the pay-as-you-go pension system inherited from the Soviet Union will not be able to provide a minimal decent level of pensions to the future retirees given the demographic situation that we will see in approximately 10 years. This is why the entire world uses a combination of the funded and the pay-as-you-go pension systems. We have destroyed our funded pension system.

There are currently discussions about the fantasies of a ‘guaranteed pension capital.’ There are no relevant documents in the government yet. The government does not have a ready, approved draft law that can be submitted to the State Duma. What will the funded pension system look like? This is in fact a catastrophe waiting to happen.

Then there is the reform of the law enforcement system. I am aware this is a vulnerable issue. “Militsiya” (militia) was renamed police, a couple of people were sacked, and a couple of them were promoted. This is not a reform. This has resulted in our law enforcement agencies solving various tasks except their main one: providing public security.

A less extensive yet very necessary reform should be implemented regarding tax system, particularly tax administration. What businesses are lamenting about is a total inequality of tax inspectors’ and tax payers’ rights. A tax agency can arrest your account, block activity of a business or wreck it for various reasons, including for a failure to pay a fine imposed not for non-payment of tax – although this is true that not paying taxes is wrong – but for failing to submit your accounts on time. Of course, this is also bad – but does it inflict any harm on the country? Not at all. Yet, you will have to pay a fine for this, and your account will be blocked and business activity paralyzed in case you fail to pay it on time. Such dramatic examples are plentiful.

To put it shortly, there is a dozen of reforms that either have not been initiated at all or have been launched to no avail, such as the healthcare reform which has a damaging and even destructive effect.

And healthcare is a sector that does require drastic reforms. Back then, the government I worked in introduced a health insurance system for the first time in our history, and also set up the Compulsory Medical Insurance Fund. But is it obvious that today its functions have to be changed. The entire system of its work and the system for financing the sector are going to be different now, 30 years later. The situation has changed, as have citizens’ lifestyle and health standards. In this regard, the world is making progress, with efforts taken to develop new advanced mechanisms.  

By Konstantin Frumkin

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