Transforming Post-Communist Political Economies (1998) / Chapter Skim
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3 Missed Markets: Implications for Economic Behavior and Institutional Change
3 Missed Markets: Implications for Economic Behavior and Institutional Change
Pages 80-101
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From page 80... ...
Despite recent signs of economic and political stabilization, few will disagree with the proposition that Russian reform has hardly been a success story. Economic decline has slowed, but only after the country's gross domestic product (GDP)
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From page 81... ...
It argues that major lacunae and deficiencies in the institutional infrastructure of the Russian economy, and in particular the unavailability of functional markets for factors of production, are largely responsible for the lack of progress in the Russian reform enterprise. Policy measures that would have enhanced efficiency if implemented in a completely functioning institutional environment in fact stimulated counterproductive behavior and imposed substantial efficiency losses when they were implemented in what might be termed an "institutional void."
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From page 82... ...
However, given the pervasive structural distortion, the prevalence of distorted incentives, and the narrowness of those pockets within which productive activities are properly rewarded, the missing components of the institutional framework of a fully operational market economy stand little chance of emerging spontaneously in Russia. Russian reformers chose the spontaneous scenario in the first place largely in response to the perception that the weakened central state structures would not be capable of creating the necessary new institutions.
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From page 83... ...
The institutional deficiencies of the Russian market make such an outcome anything but a sure bet. The remainder of this chapter examines in turn the principal institutional factors that threaten the success of reform in Russia: a weak state and the "organic growth" of institutions, the institutional void in the exchange economy, structural distortions and suppressed input markets, market reallocation versus extra-market redistribution, monetization of the economy and rent seeking, nonpayment as a spontaneously developed institution, evolving patterns of rent seeking, and what is termed the B-o Law." A WEAK STATE AND THE "ORGANIC GROWTH" OF INSTITUTIONS Russian radical reform began in earnest in 1992 in the context of the rapid disintegration of the central institutions of the state.
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From page 84... ...
The state's active role in the economy, both in the tsarist and Soviet periods, and the perpetual failure of reform efforts were traditionally attributed to a lack of grass roots demand or support for institutional, organizational, and technological changes (see, e.g., Gerschenkron, 1962~. In sharp contrast, post-Soviet reform was predicated on grass roots demand becoming the locomotive that would propel the process forward.
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From page 85... ...
The fact that Russian reform initially met little resistance and that protests and signs of discontent were few and far between allowed monetary policy to be kept under tight control, thereby preventing the one-time dramatic price increase from triggering an ongoing inflation. It should be stressed, however, that this initial success was accomplished within what was essentially a simple exchange economy, where institutional lacunae and deficiencies were less damaging than they would be in a full-scale trading economy with production and distribution based on market mechanisms.
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From page 86... ...
STRUCTURAL DISTORTIONS AND SUPPRESSED INPUT MARKETS All the post-communist economies were characterized by profound structural distortions at the beginning of their reform processes. Since allocation decisions under central planning were based largely on the political preferences of the ruling communist elites, cost structures, output mixes, and intersectoral proportions were divorced from market demand, rendering them unsustainable in the new economic environment.
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From page 87... ...
But market returns were impossible unless restructuring freed factors of production to move among firms, industries, and regions on an unprecedented scale. Unfortunately, the embryonic state of the input markets, particularly the labor market, meant that such movement was scarcely possible.
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From page 88... ...
As a result, the spatial disproportions of population and labor created by decades of decisions based on nonmarket principles continue to be sustained during the transition. In short, "the Russian labor market remains characterized by low interregional labor mobility, significant inefficiencies in labor allocation, and a large employment overhang" (Commander et al., 1995:148~.
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From page 89... ...
As a result, the fairly substantial pool of private savings that does exist in Russia is prevented from being transformed into investment capital. Blocked channels for the reallocation of economic resources, in combination with the deep structural distortions that pervade the Russian economy, have produced vast efficiency losses and, perhaps even more critically, had a profoundly distorting impact on the patterns of economic behavior emerging in transitional Russia.
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From page 90... ...
Whether a rational individual seeks economic gains by productive or nonproductive means will depend less on his/her innate preferences or merits than on prevailing institutions, available opportunities, and anticipated payoffs (see, e.g., Buchanan, 1980~. The inability to utilize complementary inputs effectively makes socially inefficient and/or nonproductive activities preferable to market production by rational agents.
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From page 91... ...
The resort to these extra-market mechanisms by a large contingent of the Russian labor force should be recognized not simply as a matter of rational choice based on a cost-benefit analysis of alternative activities, but as a requisite for economic survival. To summarize the argument to this point, the institutional void in the Russian economy is responsible for the fact that massive extra-market redistribution of the national product is taking place instead of the badly needed market reallocation offactors of production.
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From page 92... ...
As a result, the contested rent was often dissipated, and the resources invested in rent seeking were partly absorbed within the community of lobbyists, with little impact on the government. When the Russian economy was monetized, however, rent seeking, while still to some extent retaining the characteristics of a competitive activity, developed features of collective ac
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From page 93... ...
Second, and most important, in the absence of conventional corporate control and functional input markets, the Russian economy has spontaneously switched to an alternative institutional arrangement, one that promotes collusion rather than competition. This institutional arrangement is based on mutual nonpayment.
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From page 94... ...
In other words, the second-best dictum has both static and dynamic aspects: an incomplete set of market institutions will not only stimulate counterproductive behavior on the part of individual agents, but also give rise to alternative institutional arrangements of a collective nature that further undermine economic efficiency. Mutual arrears are an example of such an arrangement: they have become institutionalized as a stable convention, so that "the members of the community come to treat this rule as the appropriate and just form of behavior" (Knight, 1992:6)
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From page 95... ...
Preferential tax regimes, access to regulated activities, de jure control over resources, and advantages in privatization have become the targets of choice. On the one hand, this is undoubtedly an encouraging sign, as it indicates that Russia's economic agents expect the rule of law to prevail ultimately in the Russian economy and society.
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From page 96... ...
The same factors help explain the excessive fragmentation of the Russian political scene and the proliferation of liberal and conservative political groupings, incapable of creating stable alliances despite shared platforms and values. Ideological differences are frequently of secondary importance, since the main reason for creating a new political movement is yet another interest group's perceived need to gain direct access to public policymaking.
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From page 97... ...
CONCLUSION The analysis and evidence presented above suggest that Russian economic reform is trapped in the following vicious circle. Restructuring requires publicly provided and maintained institutions that support the creation and effective functioning of input markets, corporate control, and social safety
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From page 98... ...
Where structural distortions in a yet-to-be-reformed post-communist economy are modest, rent seeking should be relatively contained and subject to being overridden, if not suppressed, by emerging market-based interests. In such a case the government usually will not meet much resistance in implementing its reform program.
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From page 99... ...
The same argument, applied in reverse, serves to explain the success stones of economic reform. Where the initial structural distortion was limited, the amount of resources directed to rent seeking will be relatively modest, and the process of institution building will not be delayed by the actions of selfaggrandizing lobbies.
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From page 100... ...
Polishchuk, L 1996 Input Markets Development, Property Rights, and Extra-market Redistribution.
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From page 101... ...
Pp. 171-197 in Proceedings of the World Bank Annual Conference on Development Economics 1994.
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