Download Rent seeking

The Political-Economic and Institutional
Framework for Assessing the Business
Environment in Ukraine
Vladimir Dubrovskiy
CASE Ukraine
www.case-ukraine.kiev.ua
Keywords for the framework
CASE Ukraine
Societal structures:
Blat networks of interpersonal exchange with favors
Institutions:
Discretionary rule; selective law implementation (enforcement)
The nachal’niks as opposite to bureaucrats
Political economy
The “vicious triangle” of legislation-corruption-discretion
Rent seeking, overappropriation, and “arbiter-client” relations
Paternalism and its consequences
“State capture” by corrupt networks
In place of conclusions
Some notions concerning the institutional changes
Some examples
Keywords: Discretionary rule
CASE Ukraine
Karamsin, 19th century
Russian historian
Institutional legacy of the former empire:
“The severity of the Russian laws is alleviated only by discretion
in their enforcement” “… just this disorder makes life in Russia
possible”
Gertzen, 19th century
Russian social thinker
Legislation is designed (intentionally?) in such a way that almost
EVERYONE must become a lawbreaker
Discretion is the only resort from such a “total guilt”
Every business is subject to the authorities’
arbitrary, discretionary power
Nachal’niks: not the bureaucrats!
Bureaucracy (by Weber)
Administrative power in
Ukraine
Highly-paid professional public
servants facilitating rational processes
of control.
Implements legislation in a strictly
formal (impersonal) way
Poorly-paid and dependent upon
administrative rents (in money or
barter)
Relies upon discretionary power and
vague and arbitrary informal rules
Operates under constant public
scrutiny and political oversight
Controls politicians rather than vice
versa. Tries to control mass-media to
avoid public scrutiny
No decision-making power
Clear separation of “powers” from
branches of State
Possesses the political power to
magnify ambiguity and nontransparency in legislation
Strictly controlled and
separated from business
Uncontrolled and mostly
affiliated with business
CASE Ukraine
Corruption
INTEREST
ALLEVIATES
INTEREST
FACILITATES
Legislation
(flawed,
ambiguous,
impracticable)
ENHANCES
Discretion
Decreasing the demand for improvements
Keywords: Blat networks
CASE Ukraine
Forced modernization, especially the Communist regime:
Legislation violated the natural law
Normal economic activities were considered illegal
No contract enforcement was officially available
Ledeneva,
1998
Reputation-based informal networks of interpersonal mutual
exchange with “favors of access” (blat)
Emerge to facilitate the illegal transactions of all kinds
Litwak,
1991 (!)
Weak rule of law
while
“One has to deserve a
right to pay a bribe”
Keywords: The Rent Seeking
Profit seeking
CASE Ukraine
Rent seeking
Creation of the value apprised
by a competitive market
Appropriation of a value created
by others or already existed
A positive-sum game (“cooking A zero- or negative-sum game
a pie”) increases the public
(“cutting a pie”) usually
wealth
decreases the public wealth
Players can agree on certain
mutually-beneficial rules and
enforce them
Usually requires a coercive
force to arrange appropriation
and/or prevent
overappropriation (“tragedy of
the commons”, overfishing)
Manufacturing, trading, financial
operations, etc. – if conducted under
the fair competition and an even
“playing field”
Robbing, fraud, racketeering, and ANY
economic activities, to the extent they
involve privileges, abuses of
competition (like protectionism), etc.
CASE Ukraine
Rent as an exhaustible common resource
Authoritarian arbiter
player
client
A renewable
rent source
(as a state
budget)
player
client
player
client
client
player
Effects of an authoritarian rule
Rent seeking sector
Competitive market
sector
clien
player
t
Monopoly
rent
clien
player
t
Increase in the social
wealth
CASE Ukraine
clien
player
t
clien
player
t
Decrease in the social
wealth
Enterprises’ rents depend primarily on the arbiter’s discretion
Paternalism towards the enterprises
Paternalism results in crises
CASE Ukraine
The government commits to “support a domestic producer”
“support Protectionism
of the
effective
demand”
monetary
emission
Tolerating
barter
monopolism
Tolerating
arrears
Forced
crediting
Soft
crediting
Direct
subsidies
Fiscal deficit
Credit emission
Price growth out of control
Rents for the nachal’niks and oligarchs at the
expense of the population; deadweight loses
Evolution:
CASE Ukraine
The rent seeking is costly for a society
It takes certain cost of an arbiter to coordinate and control
the rent seekers
The rent seeking contracts
With exhausting of the available rents, and
complicating of control and coordination
Whither “captured state”: a dead
end?
Administrative
Business:
a “Milk caw” or
a “Rent pump”
for officials
Property
rights, rents
Sources of
rents
power:
Provides
protection and
patronage for
business
Perceived
Perceived
totally rent- manipulated Perceived totally
seeking
corrupted
Blat
Public
As a result of the revolution:
CASE Ukraine
Public is not passive anymore, it became a “principal” of the
politicians
The oligarchs are not the main players anymore
Political market emerges
Executive power officials have lesser impact on the legislature
Politicians appeal to the broad groups of population
while
Public consciousness is still immature:
does not properly distinguish profits from rents
supports redistributive activities (as “re-privatization”)
supports “coordination and control” (e.g. price regulation)
Threat of populism and paternalism
towards large groups of population
Formal and actual institutional
changes
Property rights
Still controlled
by the directors
and bureaucrats
by the means of
paternalism
CASE Ukraine
The title property rights
The residual rights of
control
“captured” by the directors
and bureaucrats
Time
CASE Ukraine
Evolution of the informal property rights
120
30
100
25
80
20
60
15
40
10
20
5
0
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
% of entities privatized by the moment in the total number of privatized entities
ACTUAL percentage of the total labor force working at the private sector
PERCEIVED working in the private sector (IS NAS survey)
Depletion of the rent sources
Market
imbalances
Financial
instability
Cheap energy
and credit
Subsidies and
government contracts
Close collaboration of business and officials based on blat
«intermediate winners»
Sources of Rent
1988 - 1994
Dependence on government's redistributive power
Stripping of the fixed assets
(“end game”)
Sources of Rent
1995 – 2004???
Thanks for
your attention!