Economics, Law and Confidence

On April 4^th the second plenary session of the 13^th April International Academic Conference on Economic and Social Development took place at the HSE Cultural Center.

Arkady Dvorkovich and Evgeniy Yasin

Evgeniy Yasin commented on the topic of the meeting – Economics, Law and Confidence: ‘The problems of law and confidence in the near future will take priority among the problems of infrastructure development in Russian society’. And truly, the speakers’ presentations at the session could lead to the general conclusion that without restoration of confidence in the ‘state-business-society’ triangle, no serious results can be achieved in socio-economic reforms.

Arkady Dvorkovich, Assistant to Russian President, started his speech from a thesis which caused some animation among the audience: ‘Our legislation allows almost anything’. The freedom of wording in many laws leaves a large space for different explanations and leads to growing risks in the economic sphere. The same activity can be considered by economic subjects as non-restricted, which means legal, and by the investigating authorities and courts as illegal. And since there is opportunity for manipulation, corruption appears.

In the meantime, if the state trusted entrepreneurs and treated them with a presumption of honesty, the structure of control and supervision over economic activity would be built in a different way. In practical terms it would mean simplification of customs control and tax cuts, and therefore, cuts of ‘non-necessary’ business costs. ‘But there is no such trust’, Arkady Dvorkovich stated, ‘and that’s why we cannot make decisions which would improve the investment climate’.

But there is also no trust on the other side – no trust regarding the state. How to break this circle of mistrust? Probably, through a new social contract. The state should be strong, and in order to become strong, it has to give up its excessive functions, first of all in the economic sphere. Another part of this concept is to create open mechanisms of state management.

Yaroslav Kuzminov

Yaroslav Kuzminov, Rector of the HSE, spoke at the plenary session about social reform, and specifically about the measures introduced by the developers of the Strategy 2020. He drew his colleagues’ attention to the ‘five key social problems’. The first of them is that despite all the market reforms, today’s system of social institutions involves only budget funding and is a direct heritage of the socialist economy. The social institutions which prevail in Russia cannot and often do not want to work with private sources of funding.

The second problem is a ‘large asymmetry of information’ which means that the majority of the population has no opportunity to choose and adequately evaluate the quality of schools, medical aid and universities. According to expert evaluations, up to one third of expenses for the educational system ‘have absolutely no connection with the current situation in the labour market’.

The third problem is the poor selection of staff in health care, education and even science. This problem is related to the non-competitive terms of labour contracts in the social sphere. Salaries in this sector do not depend on the quality and efficiency of a specific employee’s work.

Finally, the fifth problem, according to Yaroslav Kuzminov’s presentation, is underdeveloped target programmes related to the support of indigent, talented children, seriously ill and disabled people. Two thirds of the funds allocated for social care today are distributed among those who do not actually need state support that much.

What are the solutions suggested by the Strategy 2020 authors? The key problem is distribution of resources by priority areas. ‘To get medical aid to the modern level, it is necessary to allocate 7% of GDP to health care instead of today’s 4%’, Yaroslav Kuzminov suggested. And it will be impossible to reach this result without co-financing from the population. ‘We can assume that before 2020 the society will not agree to co-finance the health care’, HSE Rector said, ‘That’s why we suggest an asymmetric solution for the next decade. Unlike in Western countries, where 80% of medical expenses are spent for the last year of people’s lives, we need to focus on supporting the health of working people and non-medical health care factors’.

Octaviano Canuto

Two international experts who were invited to the plenary session spoke about Russia’s development and desire to create civilized economic and social institutions. They were Octaviano Canuto, Vice-President of the World Bank, and Deepak Lal, James S. Coleman Professor of International Development Studies, University of California at Los Angeles.

Speaking about the World Bank’s projects in developing countries, including Russia, Mr. Canuto mentioned some serious changes in the approaches to public administration. In his view, people have become more exigent to the state, they expect transparency and controllability from it, as well as provision of a certain level of social justice. To achieve these goals, the state needs functioning institutions which manage information, financial resources and provide security guarantees, including social security.

The World Bank helps developing countries to create such institutions, conducts education for state officials and policy makers, provides communication and experience exchange with other countries. Octaviano Canuto is optimistic about the results of the World Bank’s work in Russia. At least, the surveys conducted by the Bank in 2006 and 2010 show growing level of satisfaction with the quality of public services and the decrease in corruption.

Deepak Lal

Deepak Lal, who was introduced by Evgeniy Yasin not just as an economist, but as a ‘real philosopher’, dedicated his presentation to the historical and cultural factors of Western development. He believes the ‘Pope’s revolution’ in the 11^th century was the key event: in 1075 Pope Gregory VII de-facto declared the creation of a ‘Church state’ to protect the land of the Catholic Church. This event, according to Deepak Lal, became an incentive to creating ‘the whole legal administrative infrastructure which was later in demand by the growing market economy’. This is thanks to the support from not one particular monarchy, but from the Catholic Church, which had a huge spiritual authority in the Middle Ages and indeed, this infrastructure was accepted almost by all the Western-Christian world at that time.

For obvious reasons, Russia was left outside the institutional revolution which took place in the Western world. The further history of the Russian state included three periods of ‘catching-up with Europe:  Peter the Great’s reforms in the first quarter of the 18^th century, Alexander II’s reforms, the effects of which were visible for almost half a century, and, finally, Stalin’s industrialization of the 1930s. The first two, according to Deepak Lal, were in some way related to the idea of individualism, which promoted rapid development in the Western Europe. The roots of Stalin’s collectivist reforms are also European – ‘thanks’ to Karl Marx. Post-communist Russia again is turning towards individualist and liberal Western traditions, but the dispute between the westernists and Slavophiles, as well as the talks about a ‘special way’ have not been concluded, even at the beginning of the 21^st century.

The presentation by Mikhail Zadornov, President and Chairman of the Management Board at the VTB24 bank, covered three topics: trust in Russian financial institutions, the state of court proceedings and the suitability of increasing public expenses.

Mikhail Zadornov

The number of accounts in commercial banks has increased by 43% over the last three years. One of the reasons why bank deposits are becoming attractive, according to Mikhail Zadornov, is the creation of a system of deposit insurance. But what is even more attractive than deposits for Russian citizens is investment in real estate. The total volume of mortgages in 2011 increased to 1.6 trillion roubles, and today about 1 million Russian families participate in mortgage programmes. Interest rates for home loans in October-November 2011 reached a historical low of 11.6%.

In the end of his speech the VTB24 President spoke about the problem of budget cost increase – both defense costs and social ones. The former Minister of Finance doubts that such huge expenses are necessary (he reminded the audience that at the same time there are big projects related to the 2014 Olympic Games, FIFA World Cup 2018 and APEC Summit 2012, each of which will cost several hundred billion roubles).

Evgeniy Yasin, Academic Supervisor of the HSE, partly agreed with his colleague (he is also embarrassed that several extremely expensive projects sometimes appear suddenly and almost simultaneously), but at the same time said that it is impossible to delay social reform. According to Evgeniy Yasin, it is necessary to take into account the dangers of social inequality.

In the closing part of the plenary session the participants spoke about the trust in court and law enforcement systems in Russia. Vadim Volkov, Academic Supervisor at the European University at Saint-Petersburg, was one of the speakers in this part. He mentioned the following paradox: while the level of citizens’ mistrust of courts is extremely high (57%), the number of application to the courts is consistently increasing. For example, since 2000 the number of actions filed in arbitration courts has grown by 70%, and in general jurisdiction courts – by 100%.

But mistrust in courts is growing mainly due to criminal court proceedings. The total share of guilty verdicts in Russia is an astronomically high figure of 99%, while in Western Europe the share of not guilty verdicts is 15-20%, and in tsarist Russia it reached 25%. Vadim Volkov believes that judges are so loyal to prosecutors because they belong to the same institutional mechanism.

Vadim Volkov

At the same time, such a situation is similar in many post-Soviet countries. The data on Ukraine, Poland, Georgia and Latvia show that there, the percent of preadjudication detentions is close to the Russian level, and the share of not guilty verdicts is just a little higher (1-4%). And this is  more surprising if we take into account the fact that the judicial corpus in most of these countries has been totally changed, and in Poland, lustration has taken place.

What is the reason for this phenomenon? Vadim Volkov suggested the following hypothesis: the Soviet-type legal system should be considered a specific one along with the Anglo-Saxon and continental variants. While the Anglo-Saxon system is competitive (the prosecution and the defense compete in persuading the judge in their rightness), the continental one is inquisitional (in fact, the judge himself authorizes the investigation and is involved in the collection of facts and evidence), the Soviet court system is accusatory. The judge here only checks the work of the investigation and inquest bodies and authorizes the indictment.

By the way, it is the radical reform and ‘clearout’ of the law enforcement bodies in post-Soviet countries which led to the situation where although the guilty verdicts level is almost as high as in Russia, the trust in justice systems is rather high. 

Oleg Seregin, HSE News Service

Photos by Nikita Benzoruk