STANDARDS OF LIVING IN RUSSIA (1985-98):
CHANGES DURING TRANSITION TO THE MARKET ECONOMY *

Dr Ludmila Ruvinsky

Introduction

The processes of transition to a market economy in Russia has been accompanied by increasing inequality in the distribution of income and a resulting growth of inequality in living standards. Huge decreases in the level of production, a drastic rise in prices and the collapse of investment has led to a sharp drop in the standard of living for most Russians. In consequence, a substantial proportion of the population now lives below the poverty line. This fall in income has forced many households to increase their reliance on non-monetary resources.

In a modern market economy, money income is the most important source of household welfare. This principle does not always apply under other forms of economic organisation. Estimation of national output or per capita real incomes in underdeveloped countries is often complicated by the high level of ancillary household production and garden plots. In such cases, adequate statistics regarding household welfare must incorporate estimates of both money and non-monetary income. It is argued that such an approach is necessary when considering household welfare in Russia during the period 1985-98.

The relationship between the level of money and non-monetary income is often used by economists as an approximate measure of the stage of economic development. Despite this usage, the increased exploitation of non-monetary sources of income is compatible with the growth of market relations. Even when money incomes are limited, an increase in natural household food production can actually increase the demand for durable goods and services. This analysis is of particular relevance in the case of Russia in the late 1990s, where the transition process has created new patterns of consumption.

Analyses of household welfare in Russia must make allowance for non-monetary income sources. Measures of welfare based on income alone will overstate the drop in total consumption which followed the end of the Soviet system. Moreover, the development of household production has important implications for the day-to-day involvement of individuals in market relations. The analysis of trends in real living standards presented in this report offers fresh evidence for the quantification of recent economic and social developments. In addition, this report provides material for the study of social attitudes towards the transition to a market economy and the prediction of future economic changes.

Monitoring

Regional consumption statistics available from Soviet sources for the period 1985-90 generally obscure differences in welfare between households and the level of dissatisfaction with living conditions. In order to gain a clearer view of living standards, household surveys were conducted in a number of Siberian towns in 1990-91. These surveys focused on changes in the standard of living for different sectors of the population. The towns were Novosibirsk (the cultural and scientific centre of the region), Kemerovo (the centre of the Siberian mining industry), and Yakutsk, the capital of the Yakut minority group (in whose region many of Siberia's natural resources are concentrated: gold, diamond, semi-precious stones).

A stochastic choice of respondents was employed in order to ensure representative samples. Each observation was based on approximately 10,000 respondents. The representativeness of each sample was evaluated under the assumption of a 5% significance level. Standard of living observations were based on a special questionnaire, the 'Regional Consumption Budget', which included 120 questions about income sources, the development of household production and the consumption of food, clothes, durable goods and services. The results of this survey have been compared with changes in consumption statistics, level of prices, social trends and fluctuations in living standards.

Standard of Living in Siberia

The standard of living in different regions of Russia varies significantly. Interest is focused in this report on Siberia. Evidence from other regions may qualify the picture presented here. However, the findings of this report have obvious implications for trends across Russia as a whole.

The quality of life for the Siberian population is considerably poorer than that of the majority of people in the European part of Russia. Harsh living conditions reflect the following factors: a sharp continental climate with monthly temperature variations of more than 40°C, snow cover for half the year, an average annual temperature below 0°C, a slow rate of recovery from environmental pollution, limited crop growing potential and high labour costs in agriculture. These adverse conditions deterred efforts at small-scale agricultural production during the Soviet period. However, this situation meant that opportunities existed for many households to increase their incomes, including non-monetary incomes, through self-employment on allotments, a factor which has become increasingly significant in recent years.

Results of Household Observation in 1990-91

All consumers involved in the observation were grouped in three categories on the basis of per capita monthly incomes. These were the low, middle and high income groups. Average per capita monthly income in 1990 among low income consumers was approximately 81 roubles. This figure included income valued at 14 roubles from household natural production. In the middle income group, the equivalent figures were 145 roubles and 12 respectively. In high income group the average per capita income was 285 roubles. The monthly income in the high income group was therefore 3.7 times that of members of the low income category.

The low income group was mainly composed of pensioners, students and adults with large families. The high income group included professional people and were represented by advanced engineers and managers (47%), workers (23%), scientists (15%) and others. As might be expected, respondents from the low income group relied heavily on social support (which comprised approximately 24% of total income) and a comparatively high percentage of their income came from natural household production (8%). In comparison, only 5% of per capita income for members of the high income group came from natural production.

The overall level of self-provisioning was high in comparison to the situation in most urban communities in a modern market economy (see Table 1). According to the survey results, 77% of the potatoes consumed by respondents were grown at home. As Table 1 indicates, 24% of meat and 27% of vegetables and fruits eaten were the result of household production. Money expenditures on food products in many families were low. These families managed to obtain the bulk of their food from household natural production.

[TABLE 1]

Moreover, the survey revealed that income from household production frequently formed a relatively high proportion of total income. This factor indicates that surplus agricultural production was a significant source of welfare and even purchasing power for many households. This situation probably reflects the declining rewards of labour in official employment and the growing length of the working day. These trends were a typical result of the deteriorating economic situation of the period.

Food Consumption in 1990-91

Food consumption patterns reflected sharp differences between income groups. Food consumption accounted for 59% of total expenditure by members of the low income group. The equivalent figure for the high income group was 40%. Annual meat consumption in different groups varied from 20 kg for the low income group to 80 kg in the high income group.

Low income families were able to purchase meat only through the state-owned trade system, where prices were lower than at the private markets. However, the purchase of meat products in state shops were rationed by means of a coupon system, a fact which accounted for the low level of meat consumption by such families (see Table 2). Consumers from the high income group were able to buy meat in the private market to meet their consumption needs. Because prices in the private market were higher than in the state shops, high income consumers spent ten times as much on food as consumers from the low income group. In comparison, differences in natural consumption did not exceed four times.

[TABLE 2]

Attitudes Towards the Market

The household surveys gave clear evidence of popular attitudes towards the forthcoming transition to market economy. Approximately 80% of the population assumed that prices would not rise. Other respondents believed that a 50% price increase would be the maximum acceptable. These responses seem to have been based on the desire of individuals to maintain their current standard of living.

Although most respondents favoured a transition to a market economy, their preferred mechanism was a general increase in salaries. No less than 35% of respondents thought that 'social truth' required a simultaneous rise in salaries and the end of shortages. The idea that employees would have to work harder if salaries were to rise did not enjoy general acceptance. Only 5% of respondents expressed a willingness to work harder in exchange for higher wages. These answers indicate that most consumers welcomed the introduction of market relations, but were naive regarding the difficulties involved.

Consequences of Shock Therapy

The results of the survey show that the Russian population was not prepared for the transition to a market economy. Despite the high level of popular ignorance, price liberalisation led to the rapid development of rudimentary market relationships. The first step in this process was creation of private shops and the increasing influence of the private food market (rynok) on the supply of foodstuffs. Inflationary pressures meant that prices in private shops by late 1993 were more than five times higher those charged in state outlets (see Table 3).

[TABLE 3]

Consumers were at first glad of the opportunity to choose the product they wished to buy. Attitudes changed as inflation began to reduce living standards. With falling living standards came social instability and rising levels of dissatisfaction. In hindsight, these developments were inevitable. Russian society was not prepared for change and paid the price in terms of economic dislocation and rising poverty.

The declining level of production and spiralling prices destroyed the relative stability of Russian society in the Soviet era. These forces created a new society in which 80% of the population live below the poverty line. At the same time, the transition to a market economy generated a small but growing business class.

Food prices have generally been regarded as one of the best indications of the extent of the decline in the living standards of most Russians. Food consumption at the level of the 1990 low income group would nowadays cost a consumer 2,476 roubles. The purchase of the same amount of meat and meat products alone would cost 605 roubles. If reduced to the same income as a member of the 1990 low income group, a Russian would be able to buy no more than 20 kg meat per year, 5 kg of fruits, 32 kg of vegetables, 15 kg of vegetable oil, 185 kg of milk and milk products and 16 kg of sugar.

The present day consumer has to spend 92.7% of the average income to maintain the food consumption level of the middle income group in 1990. To reach the standard of the low income group in the same year, a consumer must now spend 64.5% of the average income. For most members of the population even this meagre level of consumption is unattainable.

The situation improves somewhat if expenditure on vegetables, fruits and even potatoes is excluded. These foodstuffs are now largely produced at dachas near towns. Even making allowance for natural production of fruits and vegetables, the cost of consumer's food basket is near 3,177 roubles or 82.7% of average income. This means that the average level of food consumption is now less than the consumption of low income group in 1990.

Meat, butter, oil are no longer affordable for pensioners and people from low income groups. Increased payments for transport services, medicine and housing have meant a poorer diet for a significant part of Russian population. As a result, life expectancy has fallen sharply, reversing the long term upwards trend during Soviet times. In this situation, only a rapid improvement in the standard of living can stabilise the movement towards a market economy. However, the process of economic transition in Russia has been so drastic that the prediction of future events becomes very difficult.

1997-1998: Stagnation Before Growth?

There are signs of profound structural changes in consumption expenditures. These changes indicate the positive development of market relationships. The introduction of the new rouble has not only meant the dropping of a few zeros, but also structural shifts in the opportunity to buy goods and services.

An important sign of this process is sharp differences in price trends for different staple food stuffs. Enjoyment of an average monthly income in 1990 enabled a consumer to buy 44 kg of meat. In December 1994 an average income allowed the purchase of no more than 11 kg. But, in June 1998 the figure was 29 kg (see Figure 1). The same trends have taken place in the price of sugar, another important consumer product. In 1990 the average income allowed the purchase of 156 kg of sugar. In December 1994 the figure was 50 kg, and was 80 kg in June 1998. On the other hand, the opportunities for the consumption of bread have fallen. The average monthly income in 1990 allowed the consumer to buy 600 kg of bread. In December 1994 the equivalent figure was 150 kg, and in June 1998 only 64 kg.

[FIGURE 1]

Differences in the elasticity of consumption are probably the primary cause of these variations in price trends. The influence of such factors on prices shows that Russia is moving slowly into a real market economy. If this is the case, then it is possible that further increases in food prices will be restrained by the current low level of disposable income.

The regional differences in the level of food prices are also signs of the further development of market relationships. Thirty years ago, prices were approximately the same across the Russia. There were slight regional variations, but these were not as important as they are now. In this respect, the household production of food for sale has made a significant difference. This trend is shown in Table 4. Private production of carrots and beetroot is higher in Siberia than in Moscow. As a result, such vegetables are actually cheaper in Siberia than in the capital. On the other hand, climatic conditions make the private production of tomatoes and cucumbers much more difficult in Siberia. For this reason, the prices of these vegetables in Novosibirsk is now twice as high as in Moscow (Table 4). The impact of distribution costs on prices is also apparent.

In theory, the mediating effect of price changes means that demand factors should have a corresponding influence on supply in the future. The interaction of demand and supply forces should then work to develop an effective market. Unfortunately, the operation of such basic economic mechanisms remains uncertain and there is no coherent program at the Federal level to stimulate this development.

[TABLE 4]

The contraction of total output in the agricultural sector has been a major factor inhibiting the development of real market relations. Farm production fell by 7% in 1995 alone and there has been no visible increase in recent years. Agricultural output has fallen by 45-50% compared with the 1986-90 average. The number of cattle has declined by 20 million (24%), pigs by 11 million (36%), sheep and goats by 17 million (40%). The grain harvest has fallen to 76 million tons, significantly lower than the already disastrous 1994 figure (this shortage being exacerbated by Moscow's continued push to increase grain exports). As a result of the downwards trend in both incomes and agricultural output, international comparisons of per capita meat consumption place the former Soviet Union at seventeenth place, well below Poland and Bulgaria (see Table 5).

[TABLE 5]

Moreover, there is little sign of successful structural adjustment in the rural sector. Farmers are short of fuel and equipment. The annual interest rate on credit increased in 1998 to 150%. Prospects for agriculture remain bleak.

The situation regarding manufacturing and the extractive industries is little better. Falling production and economic disruption have led to continued financial instability and the interruption of regular wage-payments. Many workers are now regard a situation in which they are unpaid for three months at a time as normal. This factor has not only further decreased real living standards but has encouraged widespread despair regarding the prospects for stable development.

The increasing stratification of society has been another major result of the post-communist economic transition. There is an increasing gap in consumption levels between the high income group and other levels of society. The gap between middle and low income group has also diminished. This shift has been accompanied by a painful drop in economic status for the members of many professions. Whole sections of the population once regarded as relatively affluent have become low income earners.

Most scientists, teachers and doctors are now paid a wage below the national average. The result has been strikes and a high level of dissatisfaction, which has led to suicides among the top level of Russian scientists. In this manner the declining standard of living threatens to decrease the intellectual potential of Russian society. This trend further undermines the prospects for a successful transition to a modern market economy.

Conclusion

The social and economic consequences of the transition to a market economy in Russia are as follows: (i) a sharp decline in the standard of living and the impoverishment of the main part of the population; (ii) increasing apathy among some elements in Russian society and growing aspirations for the redistribution of goods and capital among others; (iii) the increasing stratification of the society; and (iv) a growing gap between needs and the opportunities to satisfy them. The end of the Soviet economic system has resulted in a range of seemingly intractable problems. There are, however, some signs of the development of normal market relationships.

The fall in living standards stands out as the main cause of popular discontent within this period of change. The majority of people in Russia would nowadays prefer not to live under the former ideology and system. However, the population is unwilling to accept the current economic and social situation. It is vital to raise the standard of living in order to stabilise the political situation during the transition to a post-communist market economy.

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* I am very grateful to Cameron Barnes from the Teaching & Learning Centre for his editorial assistance.

This report is based on the dynamic analysis of Russian food consumption patterns during 1985-98. The analysis is based on the results of household surveys conducted in Siberia during 1990-91 and economic events during the period of post-communist development.