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Testing Russia's Virtual Economy

  • Vlad Ivanenko

In the aftermath of sovereign default of August 1998, the hypothesis of virtual economy in Russia developed by Gaddy and Ickes has gained popularity. The hypothesis states that the country has not moved towards free-market economy but developed a system of implicit price subsidization similar to what had existed before. Non-viable sectors that the state supported with subsidies before survive by over-pricing their output. Customers pass the bill back to the government by reducing their tax liabilities. We test the proposition that the distribution of the value-added across sectors is biased because of price distortions and estimate the distribution at world prices. The results support the claim that Russian price structure is different from the world level and three out of fifteen sectors, for which we construct price indices, become "value-destroying". We investigate the reasons behind price differentials and find that difference in processing and the use of barter explain a large part of it.

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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 428.

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Length: pages
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:wdi:papers:2001-428
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  1. Berkowitz, Daniel & DeJong, David N., 2003. "Policy reform and growth in post-Soviet Russia," European Economic Review, Elsevier, vol. 47(2), pages 337-352, April.
  2. Mathilde Maurel, 2001. "Investment, Efficiency, and Credit Rationing: Evidence from Hungarian Panel Data," William Davidson Institute Working Papers Series 403, William Davidson Institute at the University of Michigan.
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