United Nations Development Programme

Russian Federation

General Overview

The first chapter,The State and HumanDevelopment, analyses the status of human development internationally and within Russia in the context of global socio economic trends.Economic grow this increasingly fuelled by intangible capital, most notably human resources, the leveland quality of which are key drivers forbasic indicators of social and economic development. As a natural and significant participant in this process, the role of the modern State in creating enabling conditions for human development has expanded in the post industrial, globalised world. In Russia, this linkage is further shaped and determined by the ongoing reform process, giving rise to the central focus ofthis year's Report.

The state of human development inRussia remains complex, and the situationin key spheres, such as science, educationand healthcare, has deteriorated markedly. Such unfavourable tendencies must bereversed for the long term good of thecountry, and the State must play a key rolein this process. But the State itself can not make an adequate contribution unless it is fundamentally renovated, its place and rolein society changed, and its responsibilities and mechanisms revised. Resolution of the country's human development problems calls for focus on priority areas of public policy,including the further implementation of market reform strategies, the stimulation of a sizeable small and medium business sector and the fostering of civil society as a full partner. Urgent tasks include reorienting fiscal policies towards socialand humanitarian goals with renewed resource allocation to science, education ,health and culture. The social redistribution function of the State demands profound restructuring, with outdated forms of social protection and assistance appropriately adapted to meet contemporary demands.

Over the last several years, the government has increased its efforts to broadly restructure the social sphere. A number of directions of social reform initially suggested have been further elaborated, with legislative activity intensifying. Comparative analysis of global processes and the situation in Russia suggests that the resolution of key human development challenges in the country depends on the development of a socio economic model designed to diminish obstacles to growth in human potential. There is of course no singlerecipe for building such a model, anddespite increasing convergence across the principal forms of socio economic model simplemented in the world today, every country requires a system sufficiently adapted to its specific conditions to ensure sustainability and relevance. Russia is noexception to this rule, and must therefore focus on a socio economic model adapted to its own specificities. Given the prevailing historical, social, and cultural context in Russia, an economic model with a strong social constituent, i.e.a socially oriented market economy, is presented asmost suitable.

The second chapter, Russia in 2002:Striving to Modernise the Economy andthe State, analyses prospects for andobstacles to economic development, and the role of the State in managing this process.in Russia enjoyed a relatively positive year in 2002 across most basic indicators. Russian economic growth exceeded the world average for the third straight year following the crisis decade, with a significantly favourable effect on public sentiment, the economic decision making horizon and investors' assessment of the business climate. Nevertheless, institutional changes inRussia have taken place quite slowly(except in the initial stage of transition). The new reform package will be effectiveonly to the degree that it is adopted andimplemented at federal, regional and locallevels.

The country's overall economic recovery continued to have a favourable effecton human development since the last Report. However, enormous challenges ineducation and public health (especially inthe regions) persisted, and the number of poor people remained high as a few years of relatively concentrated growth has yet tocompensate for broad losses sustained in the preceding decade. Consumer spendinggrew by almost a third over three years, reaching its highest level since 1991. The overall growth in consumer prices during 2002 was largely the result of an increase incommodity prices rather than those in the service sector. A broad rise in prices formunicipal and housing services represented a growing source of social tension, asmany found it difficult (or even impossible) to cope with higher rates.

The rate of capital accumulation last year decreased to approximately equal that of GDP growth. Public investment remained insufficient to meet the enormous need for economic expansion and modernisation of the country's physical capital following the long period of acute capital stock depreciation between 1991and 1999. It is still unclear which economic forces will serve as the primary drivers of modernisation: integrated business groups, small and medium businessmen (the priority target of government programs) or the State, which has so far avoided post Soviet capital accumulation.

Continued budgetary dependence on external revenues, especially deriving from the concentrated natural resource sector, maintains a potential for macro economic in stability in the face of external shocks. The economy must urgently foster economic diversification, including the promotion of processing industries, to insulate against future shocks and preserve its long term growth potential. It is particularly important not to lose the renewed reform momentum gained during the legislative and presidential electoral campaigns of 2003 2004 and subsequently manifested in new policy and legislative initiatives. The modernisation of Russia will ultimately depend on a range of different economic agents and will require, in particular, reforms to harness the power of the private financial sector in facilitating capital accumulation.

The third chapter, State Regulation ofIncome and Employment, demonstrates that real personal incomes in Russia continued their return to pre crisis levels in 2001 -2002. This resulted primarily from growth in employment income (wages and business revenues), abating inflation, pension increases and poverty reduction measures. Wage arrears were reduced, as was the number of employers found in breach of labour contract obligations due to delayed wage payments. As a result, consumers' purchasing power increased, and publicself assessment of material conditions improved over 2000. The shadow economy remained a significant contributor to GDP and a source of livelihood for a considerable part of the population with an estimated one third of total wages in the Russian economy going unrecorded in 2002.

Nonetheless, poverty continued to bean acute problem in Russia. Wages remained low compared with economically developed countries. In addition to the more traditional factors of income based inequality among the Russian population (e.g. household ratio of dependants to income earners, employment status, unemployment, varying levels of educational attainment), growing wage differentials among the employed and irregularwage payments wields an increasingly marked impact on the structure of poverty and wealth distribution. Mainly concentrated in the public sector, many jobs continue to offer salaries below the subsistence level. Pension increases raised the average pension in 2002 above the official subsistence level for pensioners, but the financial situation of Russian senior citizens remained characterised by fairly low incomes and a pattern of consumer spending with a high share of spending on foodand daily necessities.

The role of the State in employment generation is examined in the context of changes that took place in 2001 -2002: liquidation of the extra budgetary StateEmployment Fund, which financed the government policy of employment protection during the 1990s, and transition to funding such protection from the federal budget. The shift, however, has not resolve dinconsistencies between the mandated provision of material support to the unemployed, which is formally preserved in theEmployment Law, and mechanisms for its implementation. Nor has the transition resolved the lack of continued and long term funding for employment programs or equal access of Russian regions to public funds. One notable negative result of the sechanges was an out flow of highly qualified specialists from the National Employment Service Network.

Continuing this discussion, the chapter employs scenario analysis to investigate various possible outcomes in labour policyover the medium term. This approach includes a range of considerations, from one extreme in which public policies continue to evolve towards centralisation, limiting the impact of regional policies with the curtailment of employment promotion programs and a general transition to social benefits for the unemployed. Counter scenarios are further proposed in which conceptual changes in public employment policies are matched with alternative sources of public financing.

The population level in Russia has been falling for over a decade with a general consensus across demographic projections that this trend is likely to persist for at least another half century. This critical dynamic constitutes the primary focus of the fourth chapter, The State and Demographic Problems. Experts tend to be quite cautious about forecasting the mortality rate trajectory in Russia. While Russia was only slightly behind the West in terms of life expectancy in the mid 1960s, the situation has degenerated considerably since then both in relative and absolute terms. According to the most optimistic United Nations scenarios, life expectancy in Russiain the late 2050s will increase considerably, though remaining below levels currently observed in Western European countries. Life expectancy forecasts by Russian experts are largely less optimistic.

The historical evolution of mortality in Russia shows that it is not an issue that can be easily resolved through improvements in living standards or the quality and accessibility of health care. While the need for comprehensive approaches is clear,Russian research struggles to offer viable strategies or policies for the rapid reduction of mortality. Existing estimates of the incidence of certain diseases differ by an order of magnitude, and mutually exclusive recommendations regularly compete for attention. Russia would benefit greatly from more indepth study and assimilation of evidence based international approaches for the effective reduction of mortality rates intransition countries.

Finally, the chapter outlines a worrying trend in official Russian statistics, which have gradually begun to ignore a considerable amount of standard demographic data. For example, the nation wide census of 2002 neglected to gather even basic dataon respondents' socio economic status. This resulted from the implementation of a1998 federal law stating that new birth, marriage, divorce and death certificates are not required to contain socio economic information about parents, newlyweds, divorced couples, or the deceased. Collection of such data during censuses had been standard in the USSR and, subsequently, Russia since 1970.

The fifth chapter,Public Health Policies and the Gender Based Approach discusses changes in the basic principles of national public health strategy over the past decade from a gender perspective. Public health policies based on a sound legal framework influence the broader social environment in various ways. However, despite the abundance of relevant federal and regional legislation, it has become apparent that the fundamental principle of the individual's right to health, as stipulated in the Russian Constitution, has become vague in practice. Laws are often difficult to interpret and have been amended many times over. Streamlining of the legal framework and adoption of a Public Health Code (in preparation for over sixy ears) have become matters of utmosturgency.

The chapter presents a special study of mother and child health internationally and in the context of Russia's current socio economic development. Current challenges facing Russia include high rates of maternal and infant mortality, a broad decline in health indicators (e.g. health of pregnant women, post natal health and health of new born children) ,a high incidence of disease among women, and the high frequency of abortions. The state of child health is marked by growing incidence of disease, disability,drug and alcohol addiction, Sexually Transmitted Infections (STIs), and HIV/AIDS. This rather gloomy picture is somewhat mitigated by several positive trends, including are duction in maternal and child mortality rates, and a decline in the total number of abortions.

Gender remains a key structural determinant of health at the level of the individual, the group and society at large. A gender based approach to healthcare is therefore useful in prioritising and targeting public health policy goals. Though gender analysis is not yet mandatory for public health reviews in Russia, the existence of strong gender roles within society and the demonstrated potential for fomenting positive change through public policy strongly suggest that such analysis is critical.

One of the greatest challenges facing the Russian Federation is the establishment and preservation of equal opportunities for sustainable human development across its constituent regions. The sixth chapter,The State and Human Development inthe Russian Regions, focuses on this issueand policy directions best positioned to meet with success. The campaign for political centralisation at the end of the 1990s was accompanied by an increased concentration of economic resources centrally at the expense of regional fiscal autonomy. In 2001, 71 of the 88 constituent members ofthe Russian Federation (Chechnya excepted) received transfers from the Fund forFederal Support to Regions. Federal transfers and other forms of financial assistance constituted 50%to 80%of the budget in 20regions. A lack of balance between control from the centre and fiscal autonomy among the regions and municipalities reduce sincentives for regional and local authorities to establish sound social policies and enabling conditions for economic growth.

The comparative economic advantages of strong subjects of the Russian Federation, largely related to natural resource endowments, has fuelled growing disparities in regional development. Federal fiscal equalisation policies have only managed to reduce the potential growth of regional divergences in personal incomes rather than reverse the trend. From 1999 through 2001, the most rapid growth of real per capita income was recorded in leading oil exporting regions. Intensive growth was also observed in someless developed regions that benefited from the centralisation of fiscal policy and acon current increase in social transfers and public sector wages. The status of regional labour markets improved broadly in 2001, with unemployment levels falling across 68 regions. However, serious fundamental disparities remained; republics in the southern part of European Russia and ethnicareas in southern Siberia continued todemonstrate relatively high unemployment rates. Regional differences persisted due toa combination of natural and climatic conditions, the standard of living, and varied levels of modernity in life styles across regions. Differences in infant and child mortality between rural and urban areashave increased over the transition period, resulting from a lack of significant investment in rural health care. Positive changes in child and maternal mortality rates are largely due to a decline in the birth rate.

Human development variations across the Russian regions can be illustrated with the help of the Human Development Index (HDI), calculated using data of the State Committee of the Russian Federation on Statistics. Only three Russian regions (the city of Moscow,the Tyumen Region and Tatarstan) presented index values on par with those of the EU accession countries. The Moscow HDI was close to that of Slovenia,while exceeding those for theCzech Republic and Hungary. Due to amajor gap between the top few regions and the rest, the HDI exceeded the national average in only 12 regions (the smallest number since the HDI was first calculated five years ago). Almost half of Russia's regions have similar HDIs levels, which areslightly below average. Regions with the lowest indices include poorly developed republics in southern Russia and autonomous regions in Siberia and the Russian Far East.

Chapter Seven,Modernisation of the State Apparatus, begins with the observation that, by the end of the 1990s, Russian society was almost unanimously supportive of strong government. This comes in marked contrast with sentiments prevalent during the preceding three decades. The spontaneous development of market mechanisms had largely outpaced the formation of democratic institutions, givingrise to serious imbalances between two poles: freedom and the rule of law, entrepreneurial initiative and the provision of public goods, increasing inequality and social policies designed to integrate society.

Historically, the government in Russia has relied heavily on the state administration (the Russian word for this, apparat , has even come into English use as a synonym for a rigid bureaucracy, and even more so the derivative Russian word apparatchik , which refers to an individual administrator) to govern the country. Agenuine separation of powers began to appear only during the past decade. The fact that political parties and parliament exert influence in Russia today represents significant progress, even if this influence remains on aggregate smaller than that of the government.

Nonetheless, there exists a dilemma that has characterised reforms to date. Dramatic changes have often led to a general weakening of power, as old structuresare drained of capacity and conflicts between new structures arise. Further, the country's cultural and historical legacy hasposed and will continue to pose an obstacle to democratic reforms. Nonetheless, Russia faces a significant opportunity to create a mature, efficient and stable democratic state relatively quickly if the state apparatus can be sufficiently modernised. Key conditions for such a transformation include a modernisation timeframe as expedited as the phase in which power was consolidated and a guiding framework for modernisation that seeks to maximize common interests with those prevalent in the apparatus itself.

It is notable that, contrary to the prevalent view, the number of bureaucrats in Russia relative to the size of the population and economy generally compares favourably to other countries. The overwhelming majority of civil servants are employed in executive bodies of government. In 2001, the President approved aConception of Public Service Reform in the Russian Federation . Its primary objectives include (a)a significant increase of the efficiency of public servants in assisting the development of civil society and consolidation of the State, and (b)creation of an integrated public service system with due regard to Russia's historical, cultural, ethnic and other specific features.

Finally, the reform of the state (and municipal)apparatus is in many ways apart of a broader process: the reform of federative relations. There are two basic challenges that arose during the 1990s in this regard.

First, the rights and responsibilities in matters subject to joint jurisdiction of federal, regional and/or local authorities were left virtually undefined. Second, there remains a wide discrepancy between the fiscal capacity of regions and their formal rights and responsibilities with regard to citizens and institutions. These interrelated phenomena serve to encourage populism in government, as officials are free to make extravagant policy decisions without the necessity of specifying the authority charged with implementing them.

The eighth chapter, Government and Business: Development of a New Social Contract, argues that the social contract between business and government that arosein Russia in the 1990s has become outdated and no longer satisfies either party. According to this social contract, the government derived direct and indirect revenues from the regulation of business (i.e., regulation became a sort of public enterprise ). This burden served to push a large share of businesses out of the formal economy and away from regulation of any kind. The policy of economic deregulation announced in 2001 with the aim of reducing barriers and transaction costs for business was the first step towards the elaboration of a new social contract. The first three laws on deregulation of the economy were passed in the same year. Another important law governing technical regulation was passed in 2002, introducing fundamental changes in the overall system of standardisation, safetyand quality control, as well as opening up a new field for dialogue between government and business concerning the development of quality standards for products. However, a limited number of statutory acts on deregulation of the economy constitute a necessary but insufficient critical mass for fundamental change, as has been highlighted by ongoing difficulties in applying them.

Carrying the analysis further, the chapter highlights five key aspects of renewal for.

a revamped social contract. First, deregulation should be continued. Second, government transparency in reform is needed. The administrative and municipal reforms being carried out at present are insufficiently consultative; the reform process requires greater broad based involvement of civil society. Third, administrative barriers distort the competitive environment and create inequalities in opportunity among actors. Therefore, the participatory development of a new policy framework regulating competition is of crucial importance. Fourth, transition to a contributory pension scheme involves an unprecedented convergence of interests between business and the public sector. Pension reform, however, is complicated by the role of government as both regulator and participant in the new market for pension cash. Fifth, the de facto gradual legalisation of business should be recognised and facilitated by society and the state.

There is a perhaps unexpected but nonetheless strong positive relationship demonstrated internationally between the development of civil society and the sustainable use of natural resources. This thesis is elaborated in Chapter Nine, Environmental Protection and the Development of Civil Society in Russia. It is taken as a given that Russia's economic and national development depends heavily on its rich reserves of natural resources. Unfettered exploitation of these resources,however,could lead to their depletion and serious environmental pollution, turning a source of wealth into a threat for Russia and the global community. It is vitally important to build public awareness on the immense economic value of natural resources, eventhose that cannot traditionally be bought and sold, to ensure their sustainable use. A rigorous assessment of the country's natural wealth, accompanied by the development of a long term strategy for protecting and building on that wealth, would represent an important step in the right direction.

Finally ,Russia's environmental and economic future is largely dependent on the degree to which the development of civil society can catch up with the unimpeded expansion of natural resource exploitation, i.e. on whether a newly formed civil society will be able to present an effective counter to the status quo. The non government sector, which is relatively strong on environment issues in Russia, plays a key role as a catalyst for broader civil society development. A large part of the work of environmental NGOs includes lobbying government to pursue policies that protect and enhance the natural environment. But NGOs would be well served to focus efforts on demonstrating to government that they can support the more efficient provision of many public goods and services through partnership by providing information, analytical capabilities and human resources to state entities. TheRussian government has historically had a reputation for a lack of interest in listening to the non government sector, and that habit will only be broken when state officials are convinced that they can best serve their own interests through mutual collaboration with civil society.