Institutional, Regulatory Reform Is Key to Growth in Russia

• Pages: 377-379

Page 377

In its transition toward a market economy, Russia has made major progress in structural reform, by liberalizing prices and trade regulations, and in privatization. Recently, the country also achieved financial stabilization-a key precondition to growth. Nevertheless, declining investment, sluggish foreign investment, and a growing share of activity accounted for by the gray economy are signs that policies in these areas are still not fully conducive to growth. A complex tax system and high statutory tax burden, onerous regulatory requirements, administrative backlogs, and inadequate legal infrastructure deter the establishment of new businesses and reduce the profitability and expansion of existing ones.

To lay the foundation for sustained medium-term growth, Russian policymakers must introduce institutional and regulatory changes that will foster investment and promote new private sector activity. In a new study, Legal and Institutional Obstacles to Growth and Business in Russia, Elaine Buckberg of the IMF's European II Department examines the most crucial changes. Her analysis, which is based on discussions with members of the business and legal community in Russia, covers tax reform, simplification of legal and regulatory requirements, elimination of bureaucratic corruption, strengthening of the judicial system, and improvement of the capital market infrastructure.

Streamlining the Tax System

The Russian tax system is cumbersome and distortionary, Buckberg observes. Tax preferences, varying tax rates, and an uneven application of tax laws cause distortions, and imprecise drafting and ill-defined terminology give tax inspectors a large margin of discretion, facilitating corruption. Tax provisions may be undocumented or not publicly available, particularly at the regional and local government level. Despite the laws' ambiguities, inadvertent errors are penalized at the same rate as willful noncompliance. Furthermore, full compliance with taxation of turnover, wage costs, profits, and capital may leave almost no after-tax profit. Russian firms consider these tax burdens excessive and, as a result, evade taxes in increasingly sophisticated ways. Many smaller enterprises do not pay taxes, and larger firms often falsify their returns. Firms rely heavily on legal means...