Summary of WP/92/92
“Price Liberalization in Russia: The Early Record” by Vincent Koen and Steven Phillips
After being almost completely fixed for decades, prices in Russia have been decontrolled in several steps since early 1991. This paper analyzes their behavior before and after the January 1992 price liberalization as well as the associated movements of wages and overall consumer incomes and expenditures, focusing on developments in the first half of 1992. It presents evidence on shortages, saving, and income distribution and compares Russia’s experience with recent experiences in Eastern Europe.
The main lessons are as follows. The Russian price jump of January 1992 far exceeded those registered in Eastern Europe. The question of overshooting, however, remains open. Following the January jump, CPI inflation dropped sharply but continued at double-digit monthly levels, in contrast to the aftermath of other comprehensive price liberalizations. The jump in industrial producer prices in January was even larger than that of the CPI. The sustained growth of these prices may result from the fact that households were subject to credibly hard budget constraints in 1992 whereas state enterprises were not. The increase in the price level not only rationed consumer demand but also induced some supply response at the retail level. The availability of goods in stores increased significantly, and the rundown of retail inventories was ended. The spread between prices for similar goods in free markets and state stores declined sharply. However, the extent of the supply response at the producer level remains more difficult to assess.
The disequilibrium that grew through 1991 was the result of an increase in the measured real wage, which was out of proportion to the supply of consumer goods and desired saving. The price jump of January 1992 brought the average wage, in real terms, to about two-thirds of its 1987 level (1987 being the last year before the beginning of a pronounced divergence in wage and price developments). A recovery of real wages ensued, and, by June 1992, they had returned to their 1987 level. The incomes policy Russia pursued failed to provide a nominal anchor, with nominal wage inflation averaging nearly 30 percent a month during the first half of 1992. The overall distribution of wages widened significantly, partly reflecting widening intersectoral dispersion. By historical standards, the level of the minimum wage and of pensions was significantly lower than that of the average wage in the first half of 1992.
Household expenditures grew considerably in the late 1980s and surged in late 1991 in conjunction with a significant rundown of retail inventories. With the January price burst, recorded real expenditures plummeted although they recovered partially thereafter. The impact of the decline in expenditure on consumer welfare was presumably offset, to some degree, by reliance on previously accumulated stocks and by the reduction of time spent in queues. The saving rate grew significantly in the late 1980s and rose further in 1991, with a surge in nominal incomes and increasing shortages. After prices were liberalized in January 1992, the measured saving rate remained near the levels of late 1991.