Transforming Post-Communist Political Economies (1998) / Chapter Skim
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5 Rule Evasion in Transitional Russia
5 Rule Evasion in Transitional Russia
Pages 118-130
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From page 118... ...
policy analysts. As a result, the potential for rules to be evaded clouds the relationship between policy changes and economic outcomes.
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From page 119... ...
Breaking a good law probably makes society worse off. While evasive behavior complicates the analysis of policies, it simultaneously can promote reform.
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finds a negative correlation between official wages and the potential for informal earnings through the workplace, suggesting that in effect planners offered lower official wage rates in those occupations with good opportunities for theft or bribe income.
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Massive reforms will tend to be enacted when they offer significant net social benefits and when relatively few are harmed by them a notion formalized in the "political cost-benefit ratio" of Rodrik (1991~.7 Wide-scale evasion, however, by generating a de facto, informal reform, improves the political cost-benefit ratio for liberalization. Legalization of the existing market activity can then proceed with diminished distributional consequences, while still offering social benefits by removing the need to conduct economic activity with stealth.
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Liberalization during the Russian transition has resulted in substantially loosened controls on private economic behavior. Forms of rule breaking that were prevalent in the proreform system, such as circumvention of price con 8This discussion echoes Rubin's (1977)
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In the same locality, the owner of a private bread store indicated that his biggest problem was the "state racket" and the need to keep on the good side of local officials.ll Local control of commercial real estate provides one important source of official leverage over private businesses. The continuing practice of selling identical goods to different customers at different prices with the traditional state-sector customers receiving the lowest prices is another indication that some elements of the planning system have outlived the system's formal apparatus.
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From page 124... ...
(Another frequently employed substitute for public protection, however, is to deal only with those with whom one has strong personal connections.) In this sense they are in a similar position to that of proreform enterprise managers who were required to deal on black markets.l4 A survey of Western firms that have invested in Russia indicates that the largest obstacle to foreign direct investment is the legal uncertainty; fear of crime or the mafia is a relatively minor concern.l5 For many Russian businesses, as for most Western firms, security and protection are a standard business expense.
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From page 125... ...
Evasion of the economic restrictions of the planned economy often was socially beneficial, and in many instances even promoted plan fulfillment.l6 In a liberal market economy, however, widespread evasion can be quite detrimental. 17 Present-day Russia has neither a planned economy nor a liberal market economy.
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From page 126... ...
Nonetheless, the ability to evade rules during transition helps prevent increased government regulation, and in the case of tax evasion is leading to simplification and rate reduction in the tax code. In other areas as well, the potential for corruption serves to limit the amount of discretion available to governmental officials.
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From page 127... ...
Strengthened resolve with respect to macroeconomic stabilization has decreased access to legal "loopholes" in tax laws and limited the subsidies through which localities can sustain price controls. Many severe violent crimes showed downward trends in 1995; in 1996, murder and attempted murder again decreased, as did recorded crime overall.l9 The current situation in Russia, however, remains far from a U.S.-style market economy.
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. The transition period in Russia has been marked by radical changes in the official rules and by significant individual responses to the new rules including widespread evasion.
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1995 The costs of enforcing legal rights. East European Constitutional Review (Summer)
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East European Constitutional Review (Summer)
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