FSU Enterprises Keep on Providing Social Services

by Scott Thomas

State enterprises provided a broad array of social benefits for free or at highly subsidized prices under communism, including health care, child care, education, housing, home heating, and electrical, telephone, and water services. Huge enterprises granted extensive benefits not only to employees and their families, but also to the local community. With privatization and the development of a market economy, this residual from central planning has become a serious loss-making liability. Nevertheless, following mass privatization, the divestiture of enterprises' social assets has been slow in the former Soviet Union.

To give an idea of the magnitude of the problem, consider that in 1992, at the outset of the economic transformation, Russia's regional and local governments were responsible for 70 percent of all expenditures from the consolidated national budget for health, education, and other social services. But enterprises' annual spending on social services accounted for half as much as that of regional and local governments. In 1992 enterprise expenditures on social services accounted for 17 percent of total enterprise revenues (on average across eighty-five oblasts), and, partly as a result of price liberalization, this proportion rose substantially in 1993. In addition, state subsidies, in the form of public credits and budget transfers, also contributed to enterprise financing of social benefits.

To deal with the problem of social assets, enterprises have been advised to:
• Eliminate production, delivery, and maintenance of services that are best left to the private sector, such as housing.
• Pass on to municipalities, autonomous public utilities, or regulated private monopolies such services as residential heating and water and sewerage.
• Assign municipal financing or fee- for-service delivery to such services as child care and sports facilities.

But, frequently, the transfer of fiscal authority to regional and local governments has been inadequate. Although in Russia, for example, responsibility for a wide variety of social services has, by presidential decree, been shifted to regional and local authorities, additional revenues to finance that burden have not been forthcoming; nor has the authority to tax and spend. (A similar situation prevails in other republics of the former Soviet Union and in Central and East European countries like Poland.)

This situation does not explain why mass-privatized enterprises, particularly in the former Soviet Union, have remained impervious to market pressures to divest social assets. For example, most of Russian mass privatization was completed in 1993-94. But by 1995, 12 percent of all employees continued to work in jobs considered "non-industrial," an accounting category closely associated with the provision of social services.

The method of mass privatization in Russia and the other republics of the former Soviet Union has been dominated by insider buyouts or giveaways. In the vast majority of cases in Russia, management and workers in effect became the controlling shareholders of the 20,000 large enterprises that were divested. These new owners—including the management—continue to provide social services to both the employees and the surrounding communities. Needless to say, for the new employee-owners, reducing social services and subsidies in health care, housing, residential heating, and the like does not go down well when the purchasing power of pensions and wages is falling; or worse, when wages are simply not paid for months at a time.

The author is a senior economist with Louis Berger International, Inc. This article is excerpted from his contribution to M. Mandelbaum and E. Kapstein, eds., Social Policy and Social Safety Nets in the Post-Communist Economies, Council on Foreign Relations: M.E. Sharpe, 1997.