Institutional Change in Transition Economies

Michael Cuddy, Ruvin Gekker

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9781138730175
• eBook ISBN:
  9781351742634
• Topic: Business
• Subtopic: Business General
• Index: Business

This title was first published in 2002.The importance of institutions for transition economies has so far been overlooked; Michael Cuddy and Ruvin Gekker bring together leading experts in the field to fill this crucial void in the literature. The contributors concentrate on an ongoing tension between informal constraints and mechanisms and the new formal rules and mechanisms that have gradually evolved through the transition period. Experiences are primarily drawn from Russia. The book consists of three parts, the first comprising an analysis, synthesis and generalizations of the institutional adaptations, as a market economy slowly emerges from a fog of shifting rules and varying interpretations. This is followed by the study of business and taxation authorities' behavior as they try to minimize or maximize the taxation take. The volume also analyzes the challenges facing central and regional governments in delivering equitable levels of public services across regions of vastly different development levels, while at the same time trying to stimulate regional economic growth.

PART I
INSTITUTIONAL CHANGES IN THE RUSSIAN ECONOMY

Chapter 1

The Russian Economy: Market in Form but “Feudal” in Content?

Richard E. Ericson

Introduction

One of the generally recognized lessons of the transition experience of east central Europe and the former Soviet Union has been about the absolutely critical role of the legal, political, social and economic institutions in determining the performance of modern market economies.¹ These institutions comprise a complete, coherent interactive system which allows for much variation in detail and superficial structure, but which can become severely dysfunctional if certain critical institutions or institutional functions are absent or deviate sufficiently from a common core. These institutions have evolved over centuries, some with roots in classical antiquity and Roman law, others in medieval faith and practice, in their reformation and in renaissance rebellions, and still others in the co-evolution of the modern state with science and technology. While each society and culture has developed its own variations, there is arguably a core of common functional characteristics which make all recognizable as functioning market economies.

This evolution of institutions consistent with and supportive of the proper functioning of a market economic system was also occurring in eastern Europe and the Russian Empire as the 20^th century dawned, although the development was uneven and increasingly sporadic at greater distances from the core areas of Western civilization. Yet it seemed to be accelerating everywhere prior to the upheavals of World War I and the ensuing Bolshevik Revolution that destroyed the Russian Empire and sealed Russia and the other Soviet Republics off from the social, political and economic development of the rest of the world. At that point Russia explicitly and consciously departed from the evolutionary path of market economy development, and set about systematically destroying each and every one of the fundamental institutions on and around which coherent market behavior and interaction are based.² The resulting configuration of institutions, sustaining the survival and growth of the Soviet regime, formed the basis of the command economy and totalitarian (in aspiration if not, ultimately, achievement) polity that survived until the end of 1991 as the Soviet Union. These economic and political institutions were diametrically opposed, and inherently inimical, to the functioning of a democratic market economic system, yet provided a complete, coherent alternative for the organization and development of social, political and economic life on the basis of completely different principles and incentives.³

Beginning in 1989, that coherent system of socio-economic organization began to disintegrate as Gorbachev’s well-intentioned, but economically irrational, “reforms” proceeded to dismantle, piece by piece, the essential institutional underpinnings of the command economy. Accelerated by centrifugal political pressures and newly released high powered economic incentives unmoderated by constraining market institutions, this disintegration culminated in the collapse of the Soviet Union into 15 newly independent states (NIS), among which Russia remained the key successor to Soviet statehood and its surviving institutions. In the face of a broad and expanding collapse of economic activity in the fall of 1991, the newly elected President of the Russian Republic, Boris Yeltsin, chose the path of radical “marketizing” reform and a core group of young, politically inexperienced, economists to guide post-Soviet Russia along that path. Driven by a sense of urgency, an aura of impending doom, they undertook truly radical measures to try to implant the seeds of a market economy into the inhospitable post-Soviet institutional soil.⁴

The story of the fate of this “big bang” reform has been often and well told.⁵ Price and enterprise liberalization, and the removal of controlling state bodies, were necessary to allow markets to form and develop; monetary stabilization and fiscal restraint were necessary if prices were to convey meaningful information for market-oriented decisions; and privatization was to provide high powered incentives to exercise new freedoms and respond to those market incentives in a manner that would maximize social economic wealth. And indeed, new markets arose, many new enterprises formed and appeared to operate, and new concentrations of private wealth appeared. Further, new regulatory organizations and institutions developed, often with substantial assistance from Western advisors, creating some of the regulatory and intermediating infrastructure on which well functioning market economies rely.

Yet underneath this flurry of change, much of the Russian economy, indeed most of its economic agents, remained in patterns of activity and interaction that they had inherited from the Soviet economic system, striving to merely survive in an environment of institutional chaos and economic collapse. The old, highly centralized order had broken down, and new, localized orders arose, focussed on maintaining familiar activities and relations to the extent possible, with leaders seizing “as much autonomy” and indeed sovereignty, as they could.

The empire had fallen, the center disintegrated, and effective sovereignty was rapidly parcelled out among those willing to seize it, particularly strong regional and local leaders. Local political structures stepped into directive economic roles abandoned by the central political and economic authorities, protecting their economic constituents, supporters and friends, and shutting out others who might pose a threat to their position and well being.⁶ Old economic ties were explicitly resurrected and maintained, while new activities and arrangements, unless by a trusted insider, were resisted and blocked where possible. A defensive contraction, a reliance on personal political and business ties, a striving for autarky in essentials, and a focus on accumulating mobile (fungible) rather than fixed, productive wealth seems to characterize the economic activity and policy across many of these regions and “autonomies”.

Thus, despite substantial and real change, the Russian economic system is one that is neither ‘command’ nor fully ‘market’. For all the amazing changes, the ‘liberalizations’, ‘stabilizations’, and ‘privatizations’ that comprise the Russian process of ‘marketization’, substantial legacies of the Soviet period live on, melding with and mutating the new policies and institutions of ‘transition Russia’ to the point where the currently functioning economic institutions and structures often bear little resemblance to those of a modern market economy. The result seems to be a highly politicized hybrid of market- and administered-economy structures, of centralized pretense and decentralized power, of virtual production and actual decay, behind a commonly accepted pretext of “transition to a modern market economy”.

In this essay I would like to explore the nature of this hybrid economic system and the question of whether it is best considered a variant of a market economic system. I begin in the next section with a summary of what I see to be the core, unifying characteristics of a market economic system, and outline how the Russian economy seems to deviate in essential ways. In Section III I propose a “feudal” paradigm for understanding the structure of economic interaction in Russia, and discuss its ‘fit’ to what we know about the Russian economy. Finally, I conclude with a discussion of how the “feudal” paradigm frames the discussion of potential paths of future development of the Russian economy, and how the apparent policies of Vladimir Vladimirovich Putin are apt to influence that development.

The Objective: A Modern Market Economy

Despite numerous variations in institutional structure and organizational form, all tolerably functioning modern market economies are essentially identical in their core institutions and operating principles - the essential general characteristics that identify them as true “market economies”. At the heart of a market economy is a vast, continually adjusting and changing, complex set of interdependent markets.⁷ These markets provide not only fora for interaction, but also the foci for economic decision making and behavior as the primary sources of both critical information and incentives. Despite varying degrees of political intervention and social constraint on their operation, these markets, and the agents who operate on them and respond to their signals, are substantially autonomous and not subject to direction or dictate by social or political ‘superiors’. Rather, they comprise complex, flexible and continually changing networks of horizontal interaction in the pursuit of economic advantage and/or loss avoidance, reflected in flexible and continually changing patterns of business and industrial organization through entry, exit, mergers, acquisitions, divestitures, and bankruptcies.⁸ Thus a market system is built around a thoroughly decentralized, non-hierarchical structure of interaction of independent economic agents.

The proper functioning of the complex interactive system that comprises a market economy requires the effective realization of a number of core “principles of the market”. The first and foremost of these is “voluntary exchange” and voluntary participation in the system; agents cannot be compelled to participate in an activity or exchange, or be arbitrarily excluded when they agree to mutually acceptable terms of participation. This implies a general freedom of entry, exit, entrepreneurship and activity, the ability to experiment, and the freedom to succeed or fail in economic terms only. In a modern market economy, these rights and freedoms are enshrined in well-defined, uniformly, impartially and effectively enforced (predominately private) property rights, including the sanctity, protection and enforcement of (legal) private economic arrangements and contracts. For markets to operate effectively, political and social constraints on economic activity must be impersonal, transparent and universally applied, providing a stable, impartial framework for economic calculation and activity. Thus effective property and contract rights rely on uniform, transparent, and impartially enforced laws and legal norms.

A third core characteristic of a complex, modern market system is the existence of an effective, universal, depersonalized “value-equivalent” - a real money. This allows for effective economic calculation in the face of complexity, the minimization of transaction and coordination costs of complex exchange arrangements, and the effective implementation of complex intertemporal exchange and transfer of economic value. It also allows for effective, but non-disruptive of markets, social and/or political intervention/direction of market activity through monetary allocations and budgets, and similarly for internal budgetary coordination and control of complex economic organizations. Finally, it provides the foundation for a further essential characteristic of properly functioning markets: an elaborate, interdependent system of flexible prices, responsive to market pressures. Such prices, and more particularly their continual changes, aggregate the vast, changing and disparate information of all the participants in the market system, providing critical informational signals for the coordination and development of economic activity. It is the self-interested response of economic agents, both to these signals and to social and private information about alternative dangers and opportunities, that drives market outcomes and the continual change that characterizes a properly functioning market system.

The resulting dynamic has no overall direction or goals, but arises largely spontaneously from the continual experimentation and probing of opportunity, the both anticipated and unanticipated gains and losses, and the continual creation and destruction that comprise the essence of market economic activity. Hence, at a high level of generality, we might characterize a market economy as one with uncertain fates and outcomes, but certain institutions and procedures.

How “Market” is the Russian Economy?

The hallmark of the Soviet economic system was a near complete hierarchical structuring of control over economic activity, with a pretense of ultimate central control over all that was, or was not, done. This was facilitated by hierarchically structured centralized planning, and direct administration of economic activity and interaction in an essentially demonetized environment without property rights, where ‘law’ was the discretion of political and/or administrative superiors.⁹ “Markets” and “contracts” were administratively controlled tools of plan implementation, agent autonomy was restricted to the (relatively fine) details of implementation, and ‘money’ (outside of personal transactions) could only legitimately be used in amounts and for purposes specifically authorized by superior organs. This system embodied in most respects the antithesis of a market economy, and it was that antithesis that was attacked by the reform triple of “liberalization”, monetary “stabilization”, and “corporatization / privatization”.

The result has been a phenomenal change in the economic system. There is no longer any attempt at ex-ante central coordination (planning) or centralized administration of the economy. Most Soviet hierarchical structures controlling economic activity have been eliminated and control over economic ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures and Tables
• List of Contributors
• Acknowledgements
• Introduction
• PART I: INSTITUTIONAL CHANGES IN THE RUSSIAN ECONOMY
• PART II: TAXATION IN TRANSITION ECONOMIES
• PART III: REGIONAL DEVELOPMENTS AND INSTITUTIONAL REFORMS
• Index