The Problems of Customer's Needs in Russia


Evgenij Golubkova (1995) ,"The Problems of Customer's Needs in Russia", in E - European Advances in Consumer Research Volume 2, eds. Flemming Hansen, Provo, UT : Association for Consumer Research, Pages: 323-324.

European Advances in Consumer Research Volume 2, 1995      Pages 323-324


Evgenij Golubkova, Russian Economic Academy, Plekhanov Academy

The aim of my presentation is to show links between the problems of the first level needs and Economic situation in Russia.

Abraham Maslow sought to explain why people are driven by particular needs at particular times. Why does one person spend much time and energy on personal safety and another on gaining the esteem of others? Maslow's answer is that human needs are arranged in a hierarchy, from the most pressing to the least pressing. In order of importance, they are physiological needs, safety needs, social needs, esteem needs and self-actualization needs. A person tries to satisfy the most important need first. When that important is satisfied, it ceases to act as a motivator and the person will try to satisfy the next most important need.

For example, a starving man (Need 1) will not take an interest in the latest happenings in the world of arts (Need 5), nor in how he is seen or esteemed by others (Need 3 or 4), nor even in whether he is breathing clean air (Need 2). But as each important need is satisfied, the next most important need will come into play.

In order to satisfy first level needs it is necessary to have money. In 1994, the nominal money income of the population in Russia amounted to 360,8 trillion rubles, an increase of 360% over the preceding year.

The way people adapt to market conditions greatly effects the transformation of the money income structure. Revenues from business activity, form sharing profits of enterprises and organization, and from real estate, credit and financial operations grow at a faster rate than wages.

The growth rates of nominal money incomes tended to slow down last year, which matched the falling inflation rate. Compared with the previous year, nominal money incomes rose by 770% in the first quarter of 1994, by 540% in the second quarter, by 350% in the third quarter (and by 250% in the fourth 1060%, 1070% and 960% respectively).

At the same time, in 1994 (as in the preceding year) nominal money incomes were, for the most part, rising at a faster rate than inflation. As a result, the increase in real disposable income of the population was about 15%, compared with 1993 (but in December 1994 disposable income was 40% less than in December 1991).

The positive dynamics of real income represents the continuing tendency for stabilization of living standards in 1995. This tendency was most pronounced in the summer when the growth rates of consumer prices fell to 4-5% a month and the average monthly increase in real income was from 5% to 10%.

The rising inflation rate from October through December prevented real incomes from rising further, which instantly affected people with fixed income. In October and November the population's real incomes were falling by 3-5% a month. In December current incomes again began growing faster; growth by 16%, was largely due to traditional bonuses paid at the end of the year in private sector and in some branches of the state sector of economy (Pic. p. 21).

The first victims of inflation are usually, the poorest sectors of the population. According to the Center of the government of R.F. estimates, in December 1994 the real income of two poorest groups (comprising 40% of the total population that is 60 millions) fell by 10-13% as compared to the preceding year real income of the middle sectors (third and fourth quintil groups) remained at the December 1993 level; and the real income of the wealthiest portion of society (the upper quintil, constituing 20% of the total population) increased by 14-20%. Toward the end of last year the value of the Gini coefficient changed markedly (this coefficient shows inequality in income distribution). From January through September 1994 the coefficient value increased by 4,5& while in the remaining three months of the year it rose by 8%. This testifies to a new, rapid differentiation of society by income level that started near the end of 1994. In December 1994, 10% of the population in the lowest income basket had a mere 2% of the overall current mony income in the country while 10% of the wealthiest population had 30% of the income (the respective figures for the end of 1993 are (2,3% and 27%).

According to the State Statistics Committee of the Russian Federation, the money income of 36 million people was below subsistence level in 1994. In 1993, about 47 million people lived below poverty level. As household statistics show the absolute majority of families with incomes below subsistence level have children, and about a third of them have more than two children. Despite the faster process of social stratification at the end of 1994, the overall structure of consumer expenditures did not change much last year. The average per capita natural consumption of staple foodstuffs kept growing, with the exception of milk and dairy products. Compared with 1993, consumption of meat and meat products, eggs, potatoes, and bread increased by 2-5%, that of sugar and confectionery, by 11%, vegetables and melons remained at the same level, and of milk and dairy products, dropped by 2%. Compared to 1991, consumption of meat and meat products fell by 9%, of milk and dairy products by 10%, comsumption of eggs increased by 8%, and that of bread, potatoes, sugar and confectionery increased by 12-28%.

In 1994, the physical volume of retail trade turnover kept growing, although it still did not reach its former level. Compared with 1993, it increased by about 2-3% on average, according to the Center of the government of R.F. estimates.

The fact that, prior to October, money incomes were growing faster than retail, prices promoted steady growth in the population's purchasing power.

In September 1994, purchasing power in terms of every day foods such as beef, sausage, butter, potatoes, onions and apples, and also in terms of consumer goods such as ladies' coats, a girls' dresses (50% wool), a color TV set, tobacco, etc., was perceptibly higher than in December 1991. Yet in October and November retail prices grew faster than money incomes. As a result, in terms of staple foodstuffs such as bread, milk and sausages and of consumer goods, the population's purchasing power dropped by 7-17% compared to September, and in terms of pasta, granulated sugar, eggs, butter and vegetable oil, it dropped by 19-39%.

In December the situation changed again. The increase in money incomes was far greater than the price increase. In terms of staple foodstuffs (with the exception of butter and sour cream) and consumer 10-30% compared to November. Compared with December 1993, it increased by 30-60% in terms of basic consumer goods, and by 10-20% in terms of sugar, vegetables and meat products.

At the same time, in terms of butter, purchasing power dropped by a third, in terms of noodles, by a fourth, in terms of wheat and rye bread, vegetable oil, milk, sour cream and potatoes, by 10-16%, and in terms of eggs, cheese, wheat bread and apples, by 3-6%.

In about the middle of the fourth quarter of 1994, the consumer market saw widening gaps between demand and supply of certain types of products. In some Russian regions there were shortages of butter and dairy products and the situation with gasoline worsened. In November and December the level of retail trade saturation with these products dropped. As compared with September, in December, the saturation rate for oil was 95%, and for dairy products 92%. Yet, compared with December 1993, the level of saturation of the retail trade sector with consumer goods increased. Saturation rates for foodstuffs rose from 71% in December 1993 to 90% in December 1994, and for nonfoods, from 86% to 94% respectively.

The consumer market became more dependent upon imports of commodities. Regarding many commodity groups, retail trade offers a far greater variety of imported products than domestic ones.

The service sector also underwent considerable changes. Traditional types of services declined, and new ones, typical of the market economy, began coming to the fore. Traditional consumer service establishments were being ousted by the unorganized service sector.

According to Center estimates, the overall volume of goods and services made available to the population in 1994, and evaluated in comparable prices, remainded at the 1993 level.

Problems of the customers' needs are linked with problems of price Liberalization.

One could periphrase Leo Tolstoy's words like this: all healthy economies rezemble each other, but each ailing one is sick in its own way. What feature makes the Russian economy's illness different?

Three years ago, when Russia's reforms began the expectation was that the main driving force in the economy would be economic interest, private property, and the private initiative and responsibility of managers and executives and exactly with these aims in mind the dependence of enterprises on the center was weakened; and prices, trade and money markets were liberalized.

The reformers believed that under new conditions market incentives would quickly create a competitive environment that would make a self-regulating economic mechanisms that would start to work. It is true that the decline in production was expected, but only of a structural character, while market balance was supposed to be maintained by a tough monetary, credit and fiscal policy.

Reality proved to refute all expectations - a very deep crisis broke out in the country, which gripped all sectors of the economy and was accompanied by exceptionally high inflation. Its causes are not in the substance of the actual reform, but in the fact that liberalization set free not only positively oriented market forces, but also destructive factors, inherited from a deeply structurally - unbalanced economy, particularly in consumer sector. Scarcity of the market contained huge hidden inflation. A super-high concentration of production in large enterprises created a unique monopoly unheard of in the world. Its uniqueness lay not only in its dimensions and degree, but also in its total economic inefficiency and surprisingly low ability to adapt to changing conditions.

When the economy was still centrally planned such disproportions were held in check by manipulating price ratios, resources, and by the monopoly. When these opportunities disappeared, the whole structural disbalance came to the surface. Market scarcity and free prices combined caused immediate skyrocketing prices - for every thing. As a result, enterprises' cashflow reduced to nothing. This prompted cuts in production and an even bigger hike in prices for products (in order to compensate for lost income).

And what was the end result? Rising prices led to curtailing demand, which led to new falls in production volumes. As a result of the crisis, agricultural enterprises, including viable ones, found themselves insolvent and unable to continue operation.

In these conditions the state was forced to make concessions by changing course of a tough financial policy. The central Bank issued money and credits, which were directed at clearing insolvency and indirectly at indexing cashflow. This allowed stabilization of production to some degree, but at the same time created very strong inflationary pressures.

In this way the real roots of inflation were found not in the monetary and financial sector, but rather in the legacy of the structure of the Russian economy. Money and finance are no more than the final links in the inflationary chain and were used as an urgent response to a critial situation.

But structural factors do not only directly affect inflation. A conversion link also exists. As in high inflation conditions the possibility of investment practically vanishes, structural reorganization becomes impossible. Insufficient investment and the retention of structural disproportions deepened the crisis.

Under these conditions it is hardly possible to define exactly the real needs and wants of the population in Russia.



Evgenij Golubkova, Russian Economic Academy, Plekhanov Academy


E - European Advances in Consumer Research Volume 2 | 1995

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