What Prevents Pension Reform in Russia?

April 22, 2015 9:00 AM

The Russian finance minister, Anton Siluanov, announced in mid-April that without a major pension reform later this year, next year's budget would be in jeopardy. Shortly afterwards, the press secretary of President Vladimir Putin, Dmtriy Peskov, said that nothing of that sort would take place and that "the President has many times stressed that reforms take time and first need to be discussed in the government and then subjected to a wide public debate."

The topic of pension reform has come up so often in the last decade in Russia that even informed readers may think the reform has already taken place. Not so.

In 2004, a large working group developed a detailed reform plan, which was lauded by international institutions and local experts. The government also made positive noises, implying that the plan would be adopted very soon. Ten years later, we are still waiting.

For any significant reform to happen, three conditions need to be in place. First, the country has to be experiencing some fiscal or social difficulties, so that unpopular reforms can take center stage. Second, reforms typically happen early in a government's term. Unpopular decisions are unlikely to be taken shortly before elections. And third, the government needs to have professed reformers.

How does Russia stack up on these conditions? It satisfies the first—the economy is in recession, hit by sanctions, currency devaluation, and the rise of monopolies. The next elections are two years away, but the next president is hardly in doubt. So there is time to implement pension reforms. What's needed are reformers—a rare breed in Russian politics and government, not seen for at least a decade. Without reformers, plans will be announced and quickly scrapped—just like what happened last week.

The interesting question is why Russia no longer has reformers. The answer is that in the absence of political competition, there is no incentive to stick your neck out and implement unpopular reforms if you are in the government—even if there is a constituency for such reforms, there is no political platform upon which to carry the reform banner. Previous studies show that reforms are tightly linked to political competition (see, for example, my recent study with Mohammad Amin in the Journal of Comparative Economics ). Reformers are elected to implement structural transformations in the economy in hard times, when politics-as-usual have shown their impotence.

But what if reformers cannot win elections, as has been shown repeatedly in Russia since 1994? Then the desire to be a reformer is not present either. The country simply muddles through. This is what is happening in Russia now.