Subject: New evidence on Russian state "normalcy"
Date: Mon, 4 Jul 2005
From: Vladimir Ivanenko <Vladimir.Ivanenko@bof.fi>
Some time ago Shleifer and Treisman (Foreign Affairs, 2004) returned to the discussion on Russian conformity with the Western ideas of capitalism and democracy under the heading of "Normal Country". They claimed that while Russia may under-perform by the G7 standards its position is strong enough to qualify for "a typical middle-income capitalist democracy". Their work raised heated debate at the JRL circa February 2004 with many contributors disagreeing with the position expressed by Shleifer and Treisman.
Recently, I have decided to answer formally on the question of Russia's normalcy. This answer helps to understand the relative Russian position in the world, to highlight most troubling among its weaknesses and to suggest optimal policy. To this end, I have defined the concept of normalcy using the OECD criteria on accession of new members. The concept is organized in three groups - free-market economy, democracy and state efficiency - that I substantiate using general descriptions of free market and democracy and linking the concepts to the indicators reported by the World Bank, World Economic Forum, Polity IV and other organizations. The study compares Russia with the average of the G7 group. Following Shleifer and Treisman's proposition to judge Russian progress by the standards appropriate for, say, Brazil; I compare this country with its peers in the 'Big Five' group (B5: Brazil, China, India, Indonesia, and South Africa) that is suggested by the OECD. Several of my findings may be interesting to JRL readers.
First, somewhat unexpectedly, Russia underperforms not only relative to the G7 average (with Italy being the closest target). This country assumes the bottom position in the B5 group where it competes with Indonesia for the last two places. This result is statistically significant (I use the test of the equality of means) and consistent across the range of indicators. Thus, the claim of Shleifer and Treisman about Russian normalcy relative to middle-income capitalist democracies is unsubstantiated.
Second, the comparison of various indicators reveals an interesting pattern. Russia performs better that the B5 average in the areas where it can rely on the Soviet legacy (physical infrastructure and the quality of labor market) but fails predominantly in the areas that require trust. The incidence of mistrust among Russians is common and its price is dear in many respects. For example, Russian banks request stricter collateral requirements and, correspondingly, Russian firms report lower use of financial credit than firms do in the B5. Russian managers insist on closer monitoring of workers that their counterparts in Brazil, China or India. Firms view their suppliers with more suspicion in Russia than elsewhere and lower quality of supplied products. Particularly damaging are the consequences of mistrust in the areas of judiciary and state bureaucracy. Public perception of courts or civic servants by the couts of independence or corruption is dismal in Russia relative to the perceptions of residents living in the B5 countries. One should note that the 'halo effect' (extrapolation of bad experience in one area to the other where the respondent has no experience) is unlikely to be a significant factor because perceptions are consistent with 'hard' data for many indicators.
The phenomenon of mistrust in Russia deserves special attention because it explains the dilemma that the government of President Putin faces. Mistrust prompts citizens to behave non-cooperatively but the prevalence of non-cooperative behavior is conducive to coalition building. There is nothing wrong with this process because coalitions provide public goods (like contract enforcement, collateral, credits) for the members. However, coalitions differ. There is reason to believe that business conglomerates corrupt public officials in Russia. This statement is important because it is common to hear that the Russian state preys on hapless businesses. Data indicate that the opposite is true. Russian firms claim that government agencies are inefficient and corrupt. Then, if the state elicits bribes, one should find that businesses report heavy government interference in their affairs. In fact, it is not. Firms do not consider that state regulations are as "burdensome" in Russia as they are elsewhere. Importantly, the level of perceived "burden" is the lowest with the agencies that are seen most corrupt (courts, customs). On the contrary, businesses view the least corrupt tax agency as the most difficult to deal with. Symptomatically, only Russian data show this negative correlation between relative corruptibility and efficiency of public agencies. This evidence points out strongly that corporations are the main source of corruption in Russia.
This logic leads to the following policy recommendation. It is uncontroversial to say that corruption creates unfavorable business environment. It represents a serious threat to Russian democracy. However, save unrealistic proposition "respond to corruption through building a civic society", the main solution to the problem of corruption is to limit the role that the government plays. This solution is appropriate if public agencies are the main source of corruption. My results indicate that this is not the case. Thus, the solution to the problem lies in 'internalization of benefits' associated with corruption or, in other words, in putting the main "culprit" under the state control. This is evidently what the Putin's administration is doing consolidating its hold on YuKOS, Rosneft, or Gazprom. Does this policy defeat corruption in Russia? No, it does not. Corruption will remain after re-nationalization but its incidence will shift from private affairs to public sphere. Without doubt, infighting for the top executive position (presidency) will intensify. Money will play increasing role in electoral process. Voting tricks will become dirtier. However, these unpleasant prospects are tempered by greater visibility of cash flows that increases competition for funds among state agencies. More importantly, the play level becomes even as previously private-owned, state-influenced "heavyweights" stop corrupting courts and withdraw from meddling in regional affairs. On the balance, I think that taking key corporations under the state control will boost Russian chances of joining the G7 group as an equal partner rather than derail its attempts to move forward with reforms.
The last proposition is controversial and requires further substantiation. It goes beyond the original goal of my research. I would be interested to hear your critical comments in this respect. The full text of the paper is available on request.
Vlad Ivanenko, PhD economics,
visiting researcher at BOFIT and University of Western Ontario
email: Vladimir.Ivanenko@bof.fi