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derstand the prereform conditions and choose inappropriate reforms. The problem is reproduced in assessing the impact of reforms, both because the starting point is misunderstood and because postreform evasive behavior may be uncounted. It cannot be assumed that unrecorded activity remains constant: systemic reform often changes the extent and character of hidden behavior.

Not all rules, of course, are created equal. A gross oversimplification is that laws that seek to prohibit voluntary exchanges (in the absence of negative third-party effects) are socially inefficient, while laws that prohibit or regulate coercive relations are good rules (see Epstein, 1995). Somewhere in between are rules that seek to tax or regulate, rather than to prohibit, voluntary exchanges. Breaking a bad law can result in a Pareto improvement. Breaking a good law probably makes society worse off.

While evasive behavior complicates the analysis of policies, it simultaneously can promote reform. Evidence of widespread evasion often will prompt a policy change. Wide-scale evasion of good rules, such as those against violent crime, will tend to be met with stricter enforcement or harsher punishment. Inefficient rules that are violated with abandon, however, will be more likely to be altered, or to become effectively dead letters through a lack of enforcement.

The transition from central planning to a "normal market economy" in Russia highlights the various roles played by the circumvention of rules in reform. The prereform economy included extensive second-economy dealing, very little of it captured in the official statistics.1 One paradox of reform is that despite significant liberalization, subterranean economic activity apparently has increased during the reform era. Tax evasion is rampant. Crime, including organized crime, is a serious problem. The circumvention of government rules is so pervasive that some commentators question the efficacy of any policy change.

The purpose of this chapter is to examine more closely Russian economic reform and evasive behavior. The next section reviews the prereform situation, while the section that follows investigates those aspects of rule circumvention that have become important during the transition. The final section is devoted to the specific conditions of Russia and the role evasion might play in future reforms.

RULE EVASION DURING THE SOVIET ERA

After 60 years of experience with a Socialist economy run by government agencies, nearly everyone seems to have devised ingenious ways to turn its shortcomings to his individual advantage (Schroeder, 1979:340).

1  

Grossman (1977) defines the second economy as any activity conducted for private gain or performed in knowing, nontrivial contravention of the law. A large part of the Soviet second economy thus consisted of the legal collective farm markets.



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