The Transition to the Market and Corruption in Post-socialist Russia
| Published date | 01 August 1997 |
| Date | 01 August 1997 |
| Author | Federico Varese |
| DOI | 10.1111/1467-9248.00097 |
| Subject Matter | Article |
The Transition to the Market and Corruption
in Post-socialist Russia
FEDERICO VARESE1
The end of the State Socialism in Russia was greeted with near universal
enthusiasm. The Western public and the people who had endured the economic
absurdities of the Soviet system expected economic performance to improve
dramatically and the country to turn overnight into a well-functioning and
prosperous market economy. Such optimism was loosely based on an `invisible
hand explanation': as in Adam Smith's classical example of `the butcher, the
brewer or the baker', agents pursuing their own individual interest would
produce an unintended bene®t for society as a whole.2
In practice, this idyllic picture did not quite materialize: the economic system
is under great strains and Russia is far from being a well-functioning market
economy. According to an index of `economic freedom' recently constructed by
the Heritage Foundation, Russia ranks 117 in a list of 150 countries. This index
measures how well countries score on a list of ten factors, including trade policy,
taxation policy, level of privatization, monetary policy, property rights, anti-
trust regulations, and the extent of the black market. Not only is Russia at the
bottom end of the list, but its position has worsened over the years. The authors
of the index point to the strong correlation between economic freedom and
development, the implication being that Russia is not likely to prosper
economically.3
This index measures how much `market economy' (or `capitalism') there is in
a country. Other indicators show that standards of living havedropped since the
beginning of the transition and economic disparities increased substantially.4
Much of the health-care system has collapsed, mortality rates have risen
alarmingly and life expectancy has fallen.5Russia has not yet reaped the bene®ts
of capitalism but it has lost the safety nets of socialism.
#Political Studies Association 1997. Published by Blackwell Publishers, 108 CowleyRoad, Oxford OX4 1JF, UK and 350 Main
Street, Malden, MA 02148, USA.
1Gerry Mackie, Cecilia Garcia-Penalosa, Mark Philp and Marc Stears have made extremely
valuable suggestions. I am also grateful to StephanieChester, who read a version of this paper. The
usual disclaimers apply.
2A. Smith, The Wealth of Nations (London; Penguin [1776] 1986), p.119.
3Heritage Foundation, `1997 index of economic freedom', Transition, 7/11±12 (November±
December, 1996), 22±24.
4N. V. Chernina, `Bednost' kak sotsial'nyy fenomen rossiyskogo obshchestva', Sotsiologicheskie
issledovaniya, 21/3 (1994), 54±61.
5A US-Russian study presented in Moscow in June 1995 reported that male life expectancyhas
declined from 64.9 years to 58.3 since 1987. The study also predicted that the number of suicides
and cancer cases would continue to rise and that tuberculosis cases would remain at the levelthey
were in developed countries 30 to 40 years ago. According to the Collegium of the Ministry of
Natural Resources, half of Russia's population drinks waterthat does not meet acceptable hygiene
standards, water puri®cation systems are in critical condition, and the danger of dams breaking has
increased (OMRI Daily Digest, 5 June 1995 and 6 February 1997).
Political Studies (1997), XLV, 579±596
The end of socialism has generated another surprise: an extraordinary
amount of ocial corruption and Ma®a-style crime. Westerners, at least, did
not expect that lifting the iron curtain would yield such a dismal picture. Rather
than a virtuous `invisible hand' bringing about a colle ctive optimum, Russia
appears to be suering a collective failure, more akin to `the tragedy of the
commons'.6By pursuing individually rational goals, agents bring about a less-
than-optimal collective outcome.
This is a puzzling result. The Soviet regime devoted an extraordinaryamount
of resources to the protection of positive, welfare-type rights, which imposed a
signi®cant burden on public ®nance. With the end of the regime, the costs of
enforcing the economic plan, supporting inecient enterprises, ®nancing
welfare provisions and repressing crimes such as speculation and pro®teering,
disappeared. The new Russia should have had at its disposal more resources to
de®ne and protect property rights, which are the cornerstone of a market
economy and less costly than positive rights. This did not occur. Here I study
why this outcome did not materialize. In particular, I focus on enterprise
managers and the eects of their lobbying on the de®nition of property rights
over shares. I argue that they were able to in¯uence the initial distribution of
property rights, had incentives to prevent the clear de®nition of property rights,
and lobbied the government in order to obtain protection against imports,
government subsidies, nearly free loans and tax exemptions. Once these goals
were realized, the remaining section of the private sector was exposed to a
predatory tax system and was led to bribe ocials in order to avoid paying
taxes. This occurred at a time when there was an immense rise in opportunities
to commit crimes and a parallel increase in demand for trust and protection
took place. Since the private sector was greatly involved in corrupt practices, it
had an incentive to avoid courts and state-supplied forms of protectionand seek
extra-legal means to settle disputes.
Privatisation and the Building-blocks of a Market Economy
A preliminary distinction between what the expected point of arrival was
supposed to be, the often invoked well-functioning market economy, and the
privatization process is required. There can be no denying that massive
privatization has taken place in Russia. Data released by the Goskomstat show
that a substantial portion of the Russian economy is in private hands. By the
end of September 1995, 77.2 per cent of the total number of industrial ®rms were
privatized, producing 88.3 per cent of industrial production and employing
79.4 per cent of industrial personnel.7As of November 1994, privatization was
most advanced in personal services, where 78 per cent of ®rms had already been
privatized.8Housing stock has also been privatized at spectacular speed.9Land
is the only sector where the privatization process is lagging behind.10 The data
6G. Hardin, `The tragedy of the commons', Science, 162 (1968), 1243±48.
7GRF/RECEP Russian Economic Trends 1995, 4/4 (London, Whurr, 1996), pp. 98± 9.
8GRF/RECEP Russian Economic Trends 1994, 3/4 (London, Whurr, 1995), p. 97.
9R. J. Struyk and J. Daniell, `Housing privatization in urban Russia', Economics of Transition,
3/2 (1995), 197± 214.
10 S. K. Wegren, `Trends in Russian agrarian reform', RFE/RL, 2/13 (26 March 1993), S. K.
Wegren, Building market institutions', Communist and Post-Communist Studies, 27/3 (1994),
195±224.
580 Corruption in Post-socialist Russia
#Political Studies Association, 1997
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