The Effect of Privatization on the Wealth Distribution in Russia

This paper considers the Russian privatization process through the end of voucher privatization and examines how its deviation from the competitive sale standard was likely to affect wealth inequality. While empirical evaluation is all but impossible due to the dearth of reliable data, it is feasible to analyze the institutional features of Russian privatization in terms of their effect on redistribution of wealth. The attempt is made to consider distributional effects of privatization independently from the resolution of uncertainty about the value of privatized assets and from other market-oriented reforms such as liberalization of prices and foreign trade. (Privatization here is defined rather narrowly as the transfer of existing assets from government ownership to private hands.) The paper argues that there are at least two reasons to believe that Russian privatization might have systematically redistributed wealth and caused an increase in wealth inequality even compared to the informal distribution of property rights that existed prior to reforms. The first reason has to do with the rent-seeking nature of privatization, and the second relates to the differences in opportunities for various wealth groups to take advantage of privatization due to the differences in the composition of their wealth. The analysis of these two reasons and their implications constitutes the main contribution of the paper. The effect of wealth redistribution on economic growth in Russia is also discussed.