State Capture, Political Risks and International Business

Cases from Black Sea Region Countries

Johannes Leitner, Hannes Meissner

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781138233775
• eBook ISBN: 9781315308616
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Global Politics
• Index: Politics & International Relations

In the OECD-area states provide security business to be conducted through a legal-institutional framework where state institutions, working in a legal-rational, predictable and effective manner, are often taken for granted. Worldwide, however the situation is very different. Private actors seize public institutions and processes accumulating ever more power and private wealth by systematically abusing, side-stepping, ignoring and tailoring formal institutions to fit their interests. Such forms of 'state capture' are associated with specific political risks international businesses are confronted with when operating in these countries, such as institutional ambiguity, systematic favouritism and systemic corruption.

This edited volume covers state capture, political risks and international business from the perspectives of Political Science and International Business Studies. Uniting theoretical approaches and empirical insights, it examines Azerbaijan, Armenia, Georgia, Ukraine, Moldova, Romania, Bulgaria and Turkey. Each chapter deals with country specific forms of state capture and the associated political risks bridging the gap between political analysis and business related impacts.

Part I

Theory

1 Corruption, favouritism and institutional ambiguity as political risks

Insights from the concept of neopatrimonialism

Hannes Meissner

Introduction

This chapter focuses on political risks to international businesses from the perspectives of theory and area studies. In the search for an approach leading to a deeper understanding of political risks, their underlying complexity and interdependences, the focus of this chapter lies on the political science concept of “neopatrimonialism”. The concept delivers insights into how specific factors of political risks are embedded in a political system. This focus has not yet gained much attention in the literature on neopatrimonialism. Research has so far dealt with political and, to a substantially lesser degree, with economic consequences of this specific mode of organisation. International business aspects, however, have been widely neglected.

This chapter deals with the following questions: What is the state of art on neopatrimonialism in general? Which specific factors are characteristic of neopatrimonial orders? How can they be associated with political risks to international businesses? In a first step, the study delivers basic insights into the concept of neopatrimonialism. It also highlights some of its basic strengths and weaknesses when analysing modes of political organisation in non-OECD countries. Step two provides an in-depth analysis of specific factors characteristic of neopatrimonial modes of organisation. Step three delivers a review on studies on Black Sea Region countries, dealing with neopatrimonialism and/or factors worked out in section two. By drawing conclusions from the previous sections, in step four this chapter offers a model of how to conceptualise political risks in the context of neopatrimonialism. More specifically, it defines systemic corruption, systematic favouritism and institutional ambiguity as political risks to international businesses. It moreover highlights the interdependencies of these factors and their relation to the phenomenon of state capture. The chapter finally provides summarising conclusions (step five).

The concept of neopatrimonialism

Neopatrimonialism is a concept mainly used in political science. It has a universalistic claim and is well established in most area studies. The roots of neopatrimonialism go back to the studies of Max Weber, who distinguished between traditional forms of legitimacy and authority and modern ones (O’Neil, 2007, p. 2). According to Weber, under patrimonialism, power relations between ruler and ruled are all personal relations, both in the field of politics and in the administration. Moreover, there is no differentiation between the private and public sphere (Erdmann & Engel, 2007, p. 105). Power is characterised by personal and traditional domination, since power relations involve individuals or groups drawing on traditionalism to perpetuate their domination. In contrast to patrimonial states, Western democracies feature impersonal relations and obligations as well as legal-rational institutions (Sindzingre, 2010, p. 4).

As we can hardly find pure forms of traditional rule anymore, the concept of neopatrimonialism has been subject to change. Today, neopatrimonialism mingles with modern forms of rule. This phenomenon was first seized by developmental studies of the late 1960s and the early 1970s as part of the debate of a grand theory of modernisation (Erdmann, 2012b, p. 44). When Zolberg (1969) and Eisenstadt (1973) applied the concept of patrimonialism to contemporary societies, they added the term “modern” or “neo” (von Soest, et al., 2011, p. 6). Put in global terms, neopatrimonialism is widespread.

For a long time, the concept used to be ill defined before Bratton and Van de Walle (1997) and Erdmann and Engel (2007) made efforts to specify it. According to Erdmann (2012a), neopatrimonialism refers to a system in which two institutional patterns exist next to each other: the patrimonial system of personal rule, clientelism and patronage, and the legal-rational system of modern statehood (Erdmann, 2012a). At the same time, the two spheres conflate. “The patrimonial system (of personal rule) penetrates the legal-rational system, twists its logic, functions and output (…), as formal and informal institutions and behaviour are intimately linked to each other in various ways and to varying degrees and this mixture becomes institutionalised”. (Erdmann, 2012a, p. 47) As Erdmann and Engel (2007) put it:

Under neopatrimonialism, the distinction between the private and the public, at least formally, exists and is accepted. (…) Neopatrimonial rule takes place within the framework of, and with the claim to, legal-rational bureaucracy or “modern stateness”. Formal structures and rules do exist, although in practice the separation of the private and public sphere is not always observed.

(Erdmann & Engel, 2007, p. 105)

The definition highlights that neopatrimonialism refers to hybrid types of statehood. It is a mode of organisation in which “the public and the private, the political and the economic, the individual and the collective, the ‘old’ and the ‘new’ ” overlap. In this context, certain groups of individuals dominate the system. They appropriate gains, privatise public resources and use them for private consumption (Sindzingre, 2010, p. 4). In other words, formal state bureaucracies are infused with the particularistic politics of the rulers (von Soest, et al., 2011, p. 4).

A big number of empirical studies focuses on mechanisms of “patron-client relationships” (Heinemann-Grüder, 2012, p. 60), i.e. how political leaders gain political support in exchange for public goods and services, which they privatise to distribute to their clientele. Other studies use the concept as an independent variable for explaining an ill-functioning democracy, a poor policy outcome (Erdmann, 2012a, p. 48) or political stability (Robinson, 2013). Though economics has been slow to include the concept (Laruelle, 2012, p. 303), development economics increasingly draws on neopatrimonialism, by “analysing causalities how neopatrimonialism leads into poverty traps” (Sindzingre, 2010, p. 3). Some recent conceptional studies aim at expanding the concept of political hybridity to economic hybridity, like Schlumberger (2008) and Robinson (2013) do with their concepts of “patrimonial capitalism” (Schlumberger, 2008; Robinson, 2013).

As an explanatory model, the major strength of neopatrimonialism lies in the fact that it does not stand for any particular institutional, social or economic system. It rather describes “a social and political order of conflicting modes of organisation and their legitimation” (Robinson, 2013, p. 137). Regime types like democracy, authoritarianism and totalitarianism (established by Linz, 1975) and their subtypes (cf. Merkel, 2000) have often failed as explanatory models for not leaving enough space for non-Western cultural and historical peculiarities of the countries under examination. Neopatrimonialism, by contrast, enables the combination of modern forms of stateness, as developed in industrialised countries, with non-Western modes of organisation with all its cultural particularities transmitted by traditions. As area studies pay attention to such aspects, the concept is well established.¹ From the perspective of this chapter, neopatrimonialism offers basic explanations of why many countries in the world fail to guarantee a legal-rational framework of institutions businesses can rely on.

However, concerning its analytical strength, the concept suffers from major weaknesses. One of them is the “demarcation or benchmark problem” (Erdmann, 2012a, p. 49). There is a fluent transition between the two poles of legal-rational and patrimonial rule. As Erdmann (2012) puts it: “Where precisely is the border between patrimonialism, neopatrimonialism and legal-rational bureaucratic domination? And how big is the share?” (Erdmann, 2012a, p. 49). The literature has not yet suggested any clear answer to the question of how much informality is required to speak of neopatrimonialism. Informal structures and practices can be found in OECD countries as well (Erdmann, 2012a; Erdmann, 2012b). However, there are some individual attempts for delineation, albeit vague and ambiguous. O’Neil (2007), for example, highlights that neopatrimonial states distinguish themselves “by the patrimonial logic being widespread and, often, dominant” (O’Neil, 2007, p. 3). Von Soest (2010) emphasizes that “neopatrimonial practices must be found on various instances in a state” and that “more than half of the state institutions must be characterized by neopatrimonial behavior” (von Soest, 2010, p. 5). Moreover, von Soest (2010) points to a time dimension that has to be fulfilled, stressing that the underlying logic of neopatrimonial behaviour “must have been dominant for at least some years, far more than a legislative period” (von Soest, 2010, p. 5).

Factors related to neopatrimonialism

Another weakness lies in a lack of clear-cut criteria defining neopatrimonialism. Given that there is at least a common understanding about the concept, various authors give different weight to different factors. However, almost all “failed to sufficiently elaborate on the constituting elements of this form of hybrid structure” (Erdmann & Engel, 2007, p. 17). Bratton and Van de Walle’s (1997, pp. 63–68) conception, for example, focuses on three dimensions: (informal) concentration of power, systematic clientelism and corruption (von Soest, et al., 2011, p. 7). According to Sindzingre (2010), studies on economic consequences of neopatrimonialism have mainly focused on corruption. Further determinants and consequences of neopatrimonial processes are clientelism, cronyism, captures and the personalisation of power. However, the author also highlights that these concepts are generally related to, but still distinct from, neopatrimonialism. Notwithstanding this, neopatrimonialism has deepened the understanding of such phenomena and has helped demonstrating interdependencies (Sindzingre, 2010, p. 8).

One factor that has regularly been discussed as part of neopatrimonialism is “presidentialism”. Bratton and Van de Walle (1997) define it as “systematic concentration of political power in the hands of one individual, who resists delegating all but the most trivial decision-making tasks” (Bratton & Van de Walle, 1997, p. 63). However, Erdmann (2012) argues that strong presidential powers can also be based on formal rules (Erdmann, 2012a, p. 50). O’Neil (2007) adopts a broader perspective, introducing “personalism” as a crucial feature of neopatrimonialism. The author argues that personalism “suffuses neopatrimonial states and expresses itself both in the form of leadership (‘presidentialism’) and in the nature of power and relations throughout society” (O’Neil, 2007, p. 3). However, concepts such as “presidentialism” and “personalism” must not exclude the fact that neopatrimonial states are not necessarily characterised by a monopolisation of power. They can rather feature a certain degree of competition, too.

Closely connected to this, there is another factor that has gained major attention: clientelism. Erdmann and Engel (2007) specify it as the exchange or brokerage of specific services and resources in exchange for political support (Erdmann & Engel, 2007, p. 20). In this context, a “president or strongman relies on the awarding of personal favours, for example the distribution of public sector jobs through licences, contracts and projects” (Bratton & Van de Walle, 1997, pp. 65–66; von Soest, et al., 2011, p. 8). As the basic structure of neopatrimonial regimes consists of three groups – “the ins, the outs and the government” (Nawaz, 2008, p. 2), neopatrimonial systems are characterised by “brokers” that mediate the exchange process (Erdmann & Engel, 2007, p. 20; von Soest, 2010, p. 9).

Clientelism and patrimonialism are closely related to each other, as there is no patron without any client and vice versa. Heinemann-Grüder’s (2012) analysis of “patron-client relations” is based on the assumption that they also exist in modern societies (Heinemann-Grüder, 2012, p. 62). Although his approach is thus broader in scope than neopatrimonialism, it offers additional insights into the logic of such systems, including a business perspective. As such, the study offers explanations on how phenomena such as “presidentialism” and “clientelism” impact on international businesses. The author defines patron-client relationships as

direct, hierarchical (unequal, asymmetrical), mutually useful, particular, repeated and regularised transactions between a governmental patron and a societal client, in which the individual or collective client obtains privileged access to scarce, publicly controlled resources, goods, services or veto powers in exchange for services to the public patron.

(Heinemann-Grüder, 2012, p. 58)

Such informally traded goods can be “privileged regulative market arrangements” (Heinemann-Grüder, 2012, p. 60). As the author stresses, patron-client relations are frequently characterised by “an autocratic president with a high degree of discretionary power over the distribution of public goods”, while “followers often include business people who are kept dependent” (Heinemann-Grüder, 2012, p. 61).

Closely related to clientelism, the literature discusses some farther-reaching terms and concepts. Laruelle (2012), for example, speaks of (state) “capture” and “predation” as defining elements of neopatrimonialism (Laruelle, 2012, p. 305). As outlined in the Introduction, this volume speaks of “state capture” when private actors seize public institutions and legal-political processes to realise their particularistic interests of accumulating power and private wealth. For that reason, they “more or less systematically abuse, side-step, ignore, or even tailor” formal institutions to fit their interests (Amundsen, 1999, p. 3). Likewise, Sindzingre (2012) examines the capture of political processes, policies and legal institutions by private actors, who aim at accumulating power and ever more wealth. At the same time, political elites and business groups overlap. Another term used in this regard is “cronyism”, meaning that firms are politically connected to the government, enjoying “benefits that unconnected firms do not” (Sindzingre, 2010, p. 10). This goes hand in hand with bribes on the part of the businessmen. As Schlumberger (2008) points out, under such conditions, highly profitable sectors of the national economy are controlled by members of the ruling elite. At the same time, foreign investment is impeded by weak property rights and high transaction costs (Schlumberger, 2008, p. 638).

Concerning “corruption”, the literature draws a distinction between “political or grand corruption” on the one hand and “bureaucratic or petty corruption” on the other hand. The first form takes place at high levels of the political system, with political decision makers being involved. The latter form takes place in public administration, particularly in the field of policy implementation, when civil servants charge prices (Amundsen, 1999, p. 2; von Soest, 2010, p. 8). In practice, however, there is a blurred line between these two forms. As Amundsen (1999) puts it, “the state is always involved” as corruption “is a particular (…) state society relation” (Amundsen, 1999, p. 2). Moreover, the two forms are mutually reinforcing (von Soest, 2010, p. 8). This holds particularly true for neopatrimonial systems, as the separation of politics from administration is weak (Amundsen, 1999, p. 3). As several authors highlight, clientelism goes hand in hand with corruption (O’Neil, 2007, p. 10; Bratton & Van de Walle, 1997, p. 66; Amundsen, 1999, p. 2; von Soest, et al., 2011, p. 8).

As Amundsen (1999) highlights, political corruption leads to institutional decay. Political corruption is not simply a contradiction to the rational-legal principles of modern statehood, its formal norms, professional ethic codes and court rulings. It rather affects the way decisions are made (Amundsen, 1999, p. 3). As ruling elites more or less systematically misuse laws and regulations for private gain, not stepping back from tailoring them to fit their needs, neopatrimonial states lack a common set of predictable formal rules (O’Neil, 2007, p. 3). They are rather characterised by incomplete and incompatible laws and regulations.

However, as O’Neil (2007) stresses, neopatrimonial states are not only characterised by the ambiguity of formal rules, but also by contradicting formal and informal institutions (O’Neil, 2007, p. 3). Informal institutions are “socially shared rules, usually unwritten, that are created, communicated, and enforced outside of officially sanctioned channels” (Helmke & Levitsky, 2004, p. 727). In neopatrimonial states, there is a contradiction between formal institutions (the legal-rational system of modern statehood) and informal rules (referring to the patrimonial system). Schlumberger (2013) notes in that respect that

in neopatrimonial states, formal and informal rules (laws on the one hand and values and behavioural patterns on the other) are not mutually supportive but work against one another, with informal rules generally trumping formal ones. The rule of law is weak so that property and contract rights are secured best through personal connections, the development of which is highly costly to “outsiders”.

(Schlumberger, 2008, p. 638)

As O’Neil (2007) puts it, under such conditions, the “legitimate rules of the game” are unclear. The result is a high degree of uncertainty about which rules will be enforced (O’Neil, 2007, p. 3). Actions of state institutions and officials cannot be fully anticipated (Erdmann & Engel, 2007, p. 19). All actors are thus confronted with a general systemic u...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures and tables
• List of contributors
• Acknowledgements
• List of abbreviations
• Preface
• Introduction: State capture, political risks and international business
• Part I Theory
• Part II Country case studies
• Part III Company case studies
• Conclusions
• Index