To simplify distributive issues, we look at social policy formulation in terms of three groups of actors:

Rent-recipients are workers and managers of state-owned enterprises and entrepreneurs not working for state enterprises. (Rent-seeking can be defined as any activity designed to exploit a monopoly or gain access to government subsidies, as opposed to profit seeking in a market with competitive firms). We consider workers and managers jointly because, once the government decides on mass privatization, their common interest at the outset is to receive state enterprises and other state property at the lowest price, and to obtain tax breaks and subsidies, all with the objective of maximizing income. Over the longer term, the interests of workers and managers can diverge.

Transfer-recipients include pensioners, recipients of other social transfers (such as the unemployed and destitute), and public sector employees. Their common feature is that their incomes depend entirely, or largely, on government transfers, which in turn depend on tax collection.

Elected officials in government have three assets that they "sell" to voters: state property, rents (including tax exemptions and subsidies), and transfers. They "sell" state property and rents to workers, and transfers to pensioners. To get funds for transfers they need to tax workers. Politicians sell these assets in exchange for votes and campaign contributions.

Failure of the Social Safety Net

In Russia, a large, diverse, and politically fragmented country, winning popular votes is costly. The funds have come largely from the entrepreneurial class, as a reward for "gifts" received from the administration— subsidized credits, deferred tax payments, and other rents, including the gains from privatization. The concentrated interests of the winners, especially the managers and workers in privatized enterprises, have overwhelmed those of the politically unorganized pensioners, who despite their large numbers find it difficult to act collectively. Poor, often living in rural isolation, and lacking information about how to influence the electoral system, Russian pensioners have yet to create a "gray power" lobbying group, as their counterparts have done in many other countries.

Joel Hellman, in his article on Russian political economy during the transition era ("Winners Take All: The Politics of Partial Reform in Postcommunist Transitions," World Politics 50, January 1998), made the case that "surprisingly, the politics of postcommunist economic reforms has not been dominated by the traditional short-term losers of economic transition—striking workers, resentful former state bureaucrats, impoverished pensioners, or armies of the unemployed. Instead, the most common obstacles to the progress of economic reform have come from very different sources: from enterprise insiders who have become new owners only to strip their firms’ assets, from commercial bankers, from local officials, and from so-called mafiosi." These winners, Hellman argues, "have frequently attempted to block specific advances in the reform process that threatens to eliminate the special advantages and market distortions upon which their own early reform gains were based." We argue that these groups have siphoned off the gains from transition that were up for grabs and that could have gone instead to transfer recipients, including pensioners.

Along with unskilled and public-sector workers, pensioners have been the relative losers in the transition. In 1993–94, although only 19 percent of the population, pensioners were 26 percent of those living in poverty. Their potential electoral weight is considerable—they are about 40 percent of the electorate.

Russian pensioners have never been relative beneficiaries of state largesse. But at least during the Soviet era they regularly received the meager sum that they were due. The transition has been even less kind to them (see box). Apparently, the government has had higher priorities than meeting its obligations to the aged, no matter what their electoral weight. Of those priorities, few were higher than the privatization of Russian state enterprises.

Soviet-Era Directors as New Owners

Russia began its privatization program in 1992. As Michael McFaul recounts (Agency Problems in the Privatization of Large Enterprises in Russia, 1994,) "Empowered with increasing control over their enterprises, directors could also supplement their individual wealth by hiding profits or skimming extra production. An extensive gray economy provided tremendous incentives for opportunistic behavior. Moreover, the forces inhibiting corruption did not exist." Nor did workers offset the malign behavior of their managers. Russian enterprises provided their employees with medical care, apartments, leisure facilities, and schools. Workers were thus completely dependent on enterprise directors not only for their employment, but also for the subsidies that kept these services at nominal cost.

A majority of enterprises were transferred from the state to their managers and employees, who were able to acquire 51 percent of the ordinary shares at 1.7 times their book value. This prevented outside investors from gaining majority ownership. The authorities lost their tax base, but continued to subsidize the firms and social assets. In 1992 these subsidies amounted to $55 billion, falling to $20 billion in 1993. As subsidies fell, however, tax arrears mounted.

Tax arrears are one of the most important ways in which budget constraints are softened, but this has consequences for pensioners. The state’s failure to collect taxes and its willingness to turn a blind eye to tax evasion have led to a fiscal crisis, which in turn has been met by the government’s failure to meet its obligations to transfer recipients. Joseph Stiglitz pointed out (Corporate Governance Failures in the Transition, presentation in Paris, 1999), that reneging on social payments—for instance, by not paying the elderly pensions what they believe they have earned—was not only tantamount to breaking an implicit social contract, but also helped to destroy social capital that is crucial for economic development, especially if it became obvious that the government was simultaneously transferring vast amounts of wealth to a few individuals.

The Russian state was easily captured by well-organized industrial interests. They allied themselves with the government elite, bankrolled it, and helped Yeltsin win the 1996 presidential election, in return for promises that government largesse would continue to flow. Figures from the Russian Center for Public Opinion and Market Research, analyzing the voting patterns of social groups during the second round of the 1996 election, show that 93 percent of entrepreneurs and 82 percent of the self-employed voted for Yeltsin (see table 1). An analysis by employment shows that 91 percent of top managers, 82 percent of division heads, and 78 percent of professionals voted for Yeltsin (table 2). All these groups were among the winners of the transition.