Weapons, Culture, and Self-Interest: Chapter 5

Kimberly Marten Zisk

1997

5. Conclusions and Implications

In the preceding chapters, I have posed against each other arguments drawn from two competing perspectives on political and economic behavior--rational self-interest and socialization--to see how they serve to explain the actions of defense enterprise managers in the new Russia. I examined three arenas of managerial activity: the enterprise itself, the business and lobbying networks connecting enterprises and authorities at the ministry and local levels, and the spin-off firms that have emerged from mother enterprises. In each arena, the fundamental logic driving managerial behavior has important real-world implications for Russian domestic stability and international security. In this chapter, I will first summarize the findings of chapters 2, 3, and 4. Then I will spend some time discussing the implications these findings have for three endeavors: analysis of postsocialist transitions, theorizing about political economy more generally, and designing practical Western aid, trade, and investment policy toward the Russian defense sector.

Summary of Findings

In chapter 2, I noted that Soviet-era defense enterprises have endured in the new Russia with much of their old structures intact. Through 1995 they tended to retain large workforces (where older workers were particularly well represented) even in the absence of orders and markets. Managers continued to show a great deal of concern for maintaining worker housing and health care benefits.

This particular list of findings is very well explained by the rational self-interest model, but it does not contradict any of the predictions made by the socialization model. From the socialization perspective, those who had spent the longest time in the old system would be most likely to seek the comfort of continuing paternalistic care and job provision by the enterprise, whereas the youngest and most worldly members of the community would be more likely to adopt market values of independence and self-sufficiency and thus would be the most likely to leave. Managers would see it as their appropriate role to continue to fulfill the obligations of "mayor" at the enterprise and would value the continuation of paternalism as much as their collectives did.

From the rational self-interest perspective, older and female workers often would have had little economic choice except to stay at their old positions, since families depended on the health care and housing they provided, even if younger people and men went off in search of other opportunities. Hiring discrimination would furthermore have prevented many of them from obtaining good jobs on the open market. In addition, managers would have found that their specialized skills and information networks were fairly useless outside their home enterprises and would have been bound by their economic interests in linked spin-off firms to retain their footholds in the mother enterprises. People had strong economic motives to stay in Soviet-era institutions.

For this set of findings, then, the structure of the economic situation created incentives for managers and many workers to continue to make the kinds of choices that reflected long-standing cultural norms. Economic and political change in Russia was insufficient to unbind rational self-interest from Soviet-era behavior patterns. Capitalism there has unique attributes because the aftereffects of the Soviet system linger on. In particular, the enterprise as an institution has continued to take on the kind of social welfare duties that the state fulfills in other countries. Capital and labor immobility have acted as a brake on deeper market restructuring.

But two additional strands of evidence indicate that cultural norms mattered more than rational self-interest calculations in explaining the particular form that enterprise continuity took. First, many enterprise managers gave more attention to retaining (or making only minor modifications to) the enterprise's old mission and divisional structure than they did to the economic health of the enterprise as a whole. Managers at enterprises ranging from scientific institutes (including VNIIEF in Arzamas-16 and TsAGI in Zhukovskii) to design bureaus (Malakhit in St. Petersburg) to production facilities (the Sokol aircraft plant in Nizhnii Novgorod, the Mashinostroenie aerospace facility in Reutov, the Elektron Association in St. Petersburg, and the Almaz and Krasnoe Sormovo shipbuilding plants) all expressed an overwhelming desire to retain their enterprises' high-technology profiles and the associated high-priced collectives, sometimes even in the absence of sufficient orders to keep the enterprises solvent. While keeping a large workforce served the self-interested ends of managers, basing the activity of most enterprises on high-tech, one-of-a-kind orders did not. Managers focused on maintaining the profiles their enterprises had acquired over the years (even in the absence of present orders) and on fostering their enterprises' reputations for glory. The strategies that enterprise managers pursued in the transition era bear the marks of a unique Soviet defense sector heritage.

In at least several cases, including those of Reutov's Mashinostroenie and the Impuls' facility in downtown Moscow, retaining the profile also meant retaining essentially the same divisional structure that had existed before, even if some divisions lacked customers. The exception on this last point is TsAGI, which actively discouraged the maintenance of certain divisions. TsAGI's example indicates that some enterprise managers are less culture-bound than others and more willing to force their enterprises to adapt their behavior to the structural incentives provided by the new economic system. TsAGI managers have probably learned a great deal from the opportunities provided by their well-established and extensive relationships with a variety of U.S. and other Western firms and governments. It seems unlikely that such contact alone is responsible for the willingness to adapt, however, given that many Westerners have privately expressed the opinion that TsAGI's managers are unusually receptive to change and to Western-style business practices. Variation in the attitudes of individuals matters, despite the existence of generalizable patterns of continuity across enterprises.

The second strand of evidence indicating that cultural norms endure in Russian defense enterprises today is the fact that a great number of enterprises, including those that were unable to pay their workers for many months (such as plants in Zelenograd and Nerekhta, as well as Mashinostroenie in Reutov and VNIIEF in Arzamas-16), continued to put significant resources into maintaining family-oriented social facilities for their employees. Provision of housing and health care was probably necessary for the enterprises to function at all. The maintenance of other costly facilities, however, indicated that managers were responding to employees' social expectations, above and beyond what the enterprise needed to survive. Even the most seemingly market-oriented enterprises, such as the successful world arms dealer MAPO and the strong U.S. investment partner TsAGI, made budget allocations for such things as heavily subsidized children's camps, rather than distributing those resources as cash wages or reinvesting them in future ventures. Russian defense enterprises continued to operate under norms of paternalism that differ from those of their U.S. counterparts.

It is impossible to tell whether managers preferred to retain old profiles, divisions, and social facilities in the absence of outside pressures or whether instead the collectives pressured the managers into keeping them. What we can say definitively, however, is that cultural norms continue to operate within this sector and these patterns of expectations have constrained directors' pursuit of rational self-interested goals. Socialization has limited enterprise flexibility to respond to economic upheaval.

Chapter 3 revealed that the rational self-interest perspective and the socialization perspective do an equally good job of explaining the endurance of one type of Soviet-era social network: the links tying managers to each other and to authorities at the local and regional levels. The strength of these networks supports the socialization model's argument that there should be continuing feelings of obligation toward a primary circle of mutual help (the krugovaia poruka) and that the nurturing and expansion of those trust-based relationships should have eased the transition to the market. Defense enterprises in particular had always been connected to each other and to figures of authority through local and regional soviets (and for a significant period, through the sovnarkhozy ) and always came to each other's aid in times of need. These norms were upheld as local authorities continued to provide benefits to enterprises in exchange for loyalty and cooperation.

At the same time, under the rational self-interest model, it is clear that both enterprises and local and regional governments objectively needed each other and benefited from their relationship with each other during this transition period. Local governments wanted to ensure the functioning and health of enterprises located nearby in order to avoid paying subsidies and unemployment benefits, to limit the potential for mob unrest (which was realized in both Nizhnii Novgorod and Nizhnii Tagil), and to prevent the kind of influence wielded by trade union unity in St. Petersburg. Enterprise directors, in regions ranging from Moscow and Nizhnii Novgorod to Yekaterinburg and Tatarstan, saw the maintenance of close ties with regional leaders as a means for expanding their lobbying influence on the federal government. Managers were rewarded for maintaining these relationships in areas ranging from tax relief and state credits to arms export independence.

But chapter 3 also showed that the socialization perspective cannot explain the pattern of ties that remained at the ministry level, a pattern the rational self-interest model can explain quite well. Enterprise managers socialized into the old system should have been wary of their old ministerial bosses, given their experiences in Soviet times when they tried to free themselves from strict planning oversight. At the same time, if the krugovaia poruka mattered, managers should have continued to feel obligated to help each other (as opposed to the political authorities) and to maintain ties to the enterprises that had been their buyers and suppliers in the previous era. Instead the pattern is exactly the opposite: enterprise directors from Yekaterinburg to St. Petersburg and Moscow deserted their former business partners when more profitable opportunities presented themselves but allowed former ministry personnel operating inside Goskomoboronprom to regain control over parts of their operations in the guise of financial-industrial groups (particularly in the field of aviation).

Immediate self-interest easily explains these relationships. Goskomoboronprom flexed its muscles and punished managers who sought too much independence, using its legal ability to influence state military orders (as in the case of several electronics firms in Zelenograd), to hinder the privatization process (in a legion of cases cited in the press), and to unseat directors in enterprises where it retained share ownership (as in the case of Rybinskie Motors). Goskomoboronprom also held out a variety of positive incentives that encouraged defense enterprise cooperation during the transition era, organizing international arms exhibitions, providing advertising assistance to enterprises, and setting up corporations to distribute the booty of sectoral lobbying efforts.

What chapter 3 indicates overall is that the krugovaia poruka of interenterprise ties in and of itself is not very strong, except when immediate material interests are at stake. Yet the particular incentives that structured business activity in the Soviet Union have continued to shape those interactions in Russia today. Directors used their old connections to gain information about new business opportunities, and long-standing ties to local and regional political bodies allowed directors to find a means for influence in the new era. It did not seem to be trust that mattered here so much as the convenience of turning to established connections that remained useful under new conditions. Economic history turned out to be path-dependent, because the structures of the old system channeled the options considered when that system fell apart. New channels of influence and economic activity did not arise from scratch but instead out of the well-worn procedures of the old system.

Chapter 4 returned once more to the notion of the manager having moral obligations to the collective. It became clear that the continuing authority of such collectivist norms was very limited indeed when the possibility for profit through spin-off activity presented itself. Many managers (especially midlevel managers) running spin-off firms used enterprise intellectual property, equipment, and resources such as heat and electricity without compensating mother enterprise budgets, thereby draining resources from collectives whose members were on reduced wages or forced leaves. Such cases were documented in a multitude of examples, ranging from electronics enterprises in Zelenograd to the nuclear scientific institute in Arzamas-16 and including many cases from Moscow, St. Petersburg, and their surrounding regions. Managers did not give up opportunities for private gain in order to support the larger group, even though the collectives who were left behind complained vociferously about the lack of paternalistic care showed to them by the new entrepreneurs.

Yet norms and old social connections still mattered to managers at the level where they had always had the greatest emotional impact: the subdivision and the work group. The new small firms tended to be based on old workplace personnel connections more than is the case in the United States, and many of the spin-offs (as I illustrated with examples from Arzamas-16, Moscow, and Zelenograd) continued to supply the same kind of paternalistic social benefits to their employees that the old mother enterprises had given them. The exception here was ELVIS+, which gave its employees cash instead of benefits. Undoubtedly other such exceptions exist, but the variety of cases where paternalistic care continued was striking.

Once again, as in the case of benefits provided by the old enterprises, this paternalism on the part of new spin-offs may be due to pressure emanating from the employees themselves, rather than from ingrained managerial preferences. If this is the case, then cultural norms are nevertheless limiting the flexibility of many new firms emerging from the Russian defense complex. Those norms seem to carry resonance even for the young, talented, and worldly workers who have left the safety of their mother enterprises to strike off in new directions.

One additional cultural factor may also be operating in the case of spin-offs: the apparent preference of managers to rent out space to insiders and friends and to keep outsiders from utilizing areas that are otherwise empty. It is difficult to know, however, whether this is a reflection of the fact that managers have been socialized into exercising power over the lives of those who depend on them or whether instead it is a rational response to the possibility of mafia infiltration.

Implications for the Study of Transition Economies

The first obvious conclusion to be drawn from these findings is that rational self-interest is operating very strongly within the Russian defense complex. Managers from the Soviet system have quickly adapted to new structural incentives. They immediately recognized the value of enterprise ownership; they used the state property available to them (including intellectual property, floorspace, and equipment and flow resources) for their own individual profit; and they worked with local authorities to align themselves into powerful blocs that can manipulate the fragility of Russia's federal constitution to their own economic and political benefit. Once it became clear that intellectual property mattered, managers did all they could to control it or to take it back, even though their initial naïveté about the market may have cost many of them dearly in this regard.

Interestingly enough, ministerial figures and Goskomoboronprom personnel have also acted in ways that Western positive political economists could have prescribed for them if the goal were resource maximization. They have formed lobbying groups as exclusive (and hence selective incentive-based) corporations, gaining partial control over members by exchanging ownership shares for credit assistance. They have also held on to the shares of privatizing enterprises for as long as possible, in order to influence directoral appointments and the strategic direction of enterprise activities.

In other words, rational actor models arising from the Western political economy tradition are not culture-bound. Some scholars have argued that it is inappropriate to apply such models to postsocialist transitions.¹ This study proves that argument false. While it may have been naive for Western economists to believe that they could transplant market reform models appropriate to the United States and Western Europe wholesale to the post-Soviet context, culture was not the major impediment to the success of reforms. Instead, political and economic considerations were at work that may have been hidden from Western observers lacking experience in the Soviet context. It makes perfect sense that managers whose skills and resources were meaningless outside the context of their particular enterprises would do everything possible (from lobbying to lying to organizing worker protests) to maintain those enterprises and their workforces rather than allowing them to go bankrupt (as a neoclassical economist might have preferred). It also makes perfect sense that workers who lacked the opportunity for job mobility would do everything possible to keep their enterprises open and to subvert the spin-offs that refused to employ them.

The two major factors impeding the smooth progress of defense enterprise reform in Russia--namely, the refusal of the old enterprises to die and the fights between mother enterprise collectives and spin-off managers--can be easily explained using objective structural variables such as property rights and asset immobility. This means that, at least in theory, reform policies that took those considerations into account could have been implemented successfully. One could imagine a Russia in 1992 where budget resources previously allocated toward enterprise subsidization and weapons purchases were newly channeled into programs designed to jump-start the market and relieve worker dependency on old enterprises. The state could have created subsidized retraining programs resembling U.S. community and technical colleges, encouraged the free flow of information about relocation and job opportunities by subsidizing reading rooms at local libraries throughout Russia, established better business bureaus and local chambers of commerce to encourage business information exchange across sectors, and enacted and enforced fair hiring and fair trade laws.

Of course, as always, politics intervenes. It is not clear that any of these measures would have received the support they needed for implementation from the variety of sectoral and regional actors whose power depended on the endurance of old operational structures. But it is rational economic motives that are at work here, not culture.

At the same time, we must recognize that enduring cultural values and patterns do matter. Russian capitalism is uniquely Russian. There are two levels in particular where culture has repeatedly insinuated itself into the story presented here. First is the manager's conception of what his or her own social role involves. The manager must protect the core definition of the enterprise, including its high-technology profile and collective and its past glory and achievements. The manager must also protect his or her immediate social group. Second is the matching societal conception of what duties the manager owes to the collective. Under new economic circumstances, it is especially the immediate work group that imposes these obligations, which center on the paternalistic provision of family-related goods and services, such as summer camps for the children, sports facilities, and assistance with major appliance purchases.

The fact that many managers are willing so blatantly to use the resources of the collective for their own private ends indicates that it is not simple moral considerations that are at work here, nor is it some general set of communitarian and other-oriented norms. Many managers do not appear to be altruistically oriented toward their employees. The fact that many Labor Collective Councils (STKs) have criticized managers stridently for predatory behavior indicates that the expectations of the two sides on that issue often do not converge. And the fact that former ties outside the enterprise are sacrificed when they do not serve managers' self-interested ends further indicates that the perceived obligations of managers are centered on a very limited definition of insiders. They do not extend out along the entire chain of social and economic relationships dating from Soviet times.

Yet it is also clear that the Russian defense-related economy continues to be characterized by both an in-group orientation and a level of paternalism with regard to insider social services that leaves it distinct from the U.S. experience of the market. Socialization into long-standing cultural norms matters. This means that where such norms are powerful, the post-Soviet transition is likely to differ from the trajectories of other democratic and free-market reform efforts.

It also means, however, that the search for areas where those norms matter must be painstaking and complex, since the rational self-interest model has done such a good job of explaining much of what has happened in the Russian defense political economy. Surface-level stereotypes about managers' inabilities to adapt to new structural constraints have proven inaccurate. Instead it is obvious that those new structural constraints differ from what the distant observer might have believed. This finding could extend to other areas of inquiry. It would not be surprising, for example, to find that some common surface-level stereotypes about the inability of post-Soviet Russia to adapt to and accept a system of institutionalized representative democracy were also faulty. Yet at the same time it would not be surprising to find at a more fine-tuned level that strong and unique political norms continue to operate in post-Soviet Russia. Russia could in the future have a strong and legitimate democratic governance structure while still maintaining its own set of social expectations about how politicians and officeholders should act, norms that might differ significantly from those found in the United States.

What we obviously cannot know yet, given that the transition is still in progress, is how long these unique norms will endure as Russia faces the global economy. Nevertheless, given that even the new defense sector spin-offs seem to exhibit a degree of managerial paternalism that separates them from most U.S. companies and given that hardly any of the old defense enterprise managers have voluntarily given up their local social roles (and were in fact continuing as of 1996 to receive state subsidies whenever possible, especially at election time, to maintain enterprise existence), it is a good bet that these norms will be around for at least a generation.

When we take into account the variety of forms of capitalism that exist among large states today, we should not be surprised that unique Russian economic norms might survive for the foreseeable future. Despite all the talk in the press, for example, of pressures for social and economic change in Japan and Germany, we know that these countries continue to operate under versions of capitalism that are recognizably their own.² Yet these are countries that (given the postwar occupation) encountered much stronger U.S. pressure and many more structural reasons than Russia has faced to adopt U.S. economic norms. In fact, in areas ranging from managerial paternalism to the structure of financial-industrial groups, the economies of Germany and Japan bear more than a passing resemblance to the type of capitalism emerging in Russia today.

Implications for Theories of Political Economy

What this means is that scholars from the rational self-interest perspective would be wrong to dismiss the independent effects of culture on economic behavior. Informal societal norms, never codified into explicit laws, rules, or taboos, continue to shape the behavior of powerful actors even in revolutionary circumstances and even when a long-term reputation for trustworthiness is irrelevant. Culture, in this sense, and culture's unwritten norms of social interaction are part and parcel of the structure faced by economic actors.

Some positive political economists have looked at culture as if it were a tool to be created and then used by self-interested actors to achieve their own ends.³ They have viewed social norms as if they were constituted for functional reasons, to enhance economic and political efficiency by causing actors' expectations to converge or to ease the difficulty of monitoring the behavior of others.⁴ But although there is a great deal of truth in these utilitarian descriptions of culture, what this book suggests is that cultural expectations are not merely objects utilized by self-interested actors; they also have an independent life of their own that constrains self-interest, even when the ultimate effect impedes efficiency. Politics and the drive for power over resources are not the only human tendencies that interfere with the real-world accuracy of the "economic man" model so dear to neoclassical economists. Culture and the drive to maintain long-standing social norms also intrude.

In recent years, some rational self-interest scholars have been willing to listen to psychologists who have told them that underlying tendencies in human behavior are incompatible with perfect rationality.⁵ For example, some economists have accepted the psychological arguments of what is called "prospect theory." This theory says that actors facing uncertain situations fear the potential loss of what they already own more than they welcome the potential gain of something new. People tend to avoid risky choices more often when a situation is framed in terms of potential losses than they do when the same situation is framed in terms of potential gains.⁶ Many rational self-interest scholars more or less accept the notion of bounded rationality:⁷ that the wiring of the human brain prevents people from being as objective as a computer might be in the same situation.

The findings of this study suggest that the psychological limits inherent in human information processing are not the only boundaries that rational self-interest faces. Culture and informal social norms also limit self-interested action. The complexity of my findings indicates that general, inculcated moral consideration for one's fellow human beings is not what limits behavior. And given that conflict over issues of intellectual property and resource ownership and theft is running rampant between managers and collectives, it is also not preservation of reputation per se that matters. Yet if preexisting norms and roles did not matter at all, then enterprise managers would not be so concerned about preserving enterprise glory or retaining the collective, and spin-off managers would not be providing paternalistic care to their employees. (One could even make the argument that this same expectation of paternalistic care from the enterprise has made enterprise provision of a low-cost "roof" for manager-sponsored spin-off activities such a common occurrence in Russia.)

The boundaries limiting and shaping self-interested behavior have their origins in well-defined expectations about roles. These expectations are likely to vary across national societies as well as across occupational and other social groups within those societies. Overall, the assumption of universal individual rational self-interest is not wrong and should not be discarded, but in order to explain the real-world choices made by individuals, we need an in-depth understanding of the social roles that those individuals adhere to within the culture where they are comfortable. Even revolutionary circumstances will not destroy the expectations held by both individuals and the broader society of what those roles mean. Self-interest is seen through the lens of those role conceptions.

At the same time, culture alone does not explain the continuity between the Soviet and Russian defense economies. Many of the objective structural attributes of the Russian polity and economy are unique and lasting by-products of the Soviet system. Political institutions, such as the connections between enterprise directors and local authorities, and legal institutions, such as the fact that ministries were the owners of enterprise property, both tend to take on lives of their own. Once in place, they limit the range of choices that people can consider. They confer privileges on particular actors, such as gubernatorial or mayoral administrations or Goskomoboronprom personnel, who can then use these privileges to their long-term advantage. These powerful people can thereby gain control over the future policy agenda. This argument is not new. It has been forcefully made by positive political economist Terry Moe, who writes that political institutions in the U.S. context are "weapons of coercion and redistribution" ensuring that the winners of any one round of a game can set the rules of the next round.⁸

Although the argument is not new, its applicability to the Russian context has a consequence that most positive political economists have overlooked: any relatively closed economic system, including any state whose domestic political economy is even partially resistant to foreign influence, will have unique political structural attributes that significantly affect its economy. These political attributes go beyond such basic factors of structural economic difference as the quality and size of land, labor, and manufacturing capabilities. Natural endowments are not all that determines national differences or even what economists call comparative advantage, that is, the particular strengths and weaknesses of a country facing the global economy. Politics limits the flexibility people have when they try to respond to economic signals. It can even distort those signals. In Russia labor and capital mobility are currently artificially constrained by politics, even though it is obvious to outside observers that a potentially huge consumer market and a highly qualified labor force are waiting there to be utilized, if only the economic incentive structure were changed. The power structure of any existing system continues to shape system change in any particular country. Thus it should not be surprising to anyone that history is path-dependent and that different varieties of capitalism endure.

When social norms developed in the old system continue to act on people's choices in new circumstances, they serve to cement further and even extend existing structural power relationships. As the cases reviewed here have shown, this has meant that employees may actually have more control over the behavior of managers than it might seem, because the webs of in-group paternalism appear to be limiting the choices that managers make. At some level, despite massive economic eruption and dislocation and incredible political upheaval, something fundamental has not changed in Russia. Yet it is not some mythical national character that endures. Instead, it is the mutually reinforcing impact of objective economic and political structures and the socialization patterns shared by those inside a common system.

Implications for Western Policy

Three basic intertwined problems have impeded (and will likely continue to impede) the prospects for the successful market transition or fadeout of Russia's defense complex: (1) the dependence of large communities of workers and locally powerful enterprise directors on the continued existence of the old enterprises and their paternalistic functions; (2) the financial and political dependence of many local and regional authorities on the well-being of those enterprises, accompanied by opportunities to pressure or subvert relevant national policy in order to serve those ends; and (3) the mutual resentment and resulting economic gamesmanship that exists between many old enterprise collectives and new spin-off firms. As I demonstrated in the empirical chapters, each of these problems carries with it the possibility of negative consequences for Russian domestic stability or international arms control and proliferation.

What the theory employed in this study makes clear is that there is nothing that any outsider can do to end these problems, which all really center on the limits of labor and capital mobility in Russia and are supported by the continuation of paternalistic cultural expectations. Recently there have been a number of international calls for Russia to implement a universal social welfare system not based on the old enterprises,⁹ in the hopes that this might sever the connections to the old system. Yet no such policy seems forthcoming, and given the structural incentives and cultural norms noted here, it is unlikely that one will arise in the near future. Such calls, then, are not the basis for a realistic Western relationship with the Russian defense complex. Yet there are things that Western governments and private aid agencies can do to try to prevent the defense complex from moving in a direction inimical to Western interests in Russian political stability and international security. I will suggest three in particular.

First, Western states can use their trade promotion and investment insurance programs to help domestic firms to establish significant economic relationships with large Russian defense enterprises that might otherwise seek primary partners in rogue states or terrorist groups.¹⁰ The United States in particular has a tendency to view such promotion as a business activity separate from (or even opposed to) national security interests. As a result, there is a reluctance (especially in the U.S. Congress) to allow governmental agencies to assume the kind of political and economic risk that goes along with investment insurance and trade support, because it is sometimes seen as giving welfare to particular private businesses or even as providing economic aid to a once and possibly future military enemy.

But what this book suggests is that such enterprise-to-enterprise relationships should not be looked at only from a business economics perspective. They also have very positive national security repercussions. The interests of Russian defense enterprises differ from each other, and there is no evidence of the kind of sectoral cohesion that would allow a national conspiracy to undermine the West by misappropriating defense-related funds. Russian defense enterprises that become dependent on ties to Western businesses or government agencies are much less likely to risk offending Western governments through their arms sales or illegal proliferation practices than are enterprises that have no connections to the West.

Obviously, governments in democratic free-market economies cannot instruct their firms about where they should consider investing their resources. What they can do, however, if political will allows, is to make business concerns about political and economic risk less salient, thereby encouraging private firms to consider such connections more readily. Business ties can have positive international security implications.

Second, Western investors in joint-venture or trading relationships with defense industrial spin-offs should be encouraged to take seriously the question of how their work will affect labor relations within the spin-offs' mother enterprises. Obviously, foreign firms are already highly attuned to the problem of intellectual property ownership and licensing, because they do not want to find themselves legally liable for patent or property theft committed by their Russian partners. This study suggests, however, that the interests of the broader international community extend beyond the simple question of legal ownership to include the perceptions of unfairness and the conflictual personnel relationships inside factories and institutes. Disputes between enterprises and spin-offs at a time when resources are tightly constrained but illegality is entrenched can both foment worker unrest and provide opportunities for smuggling and illegal proliferation. If a Western firm is involved in supporting a spin-off company, this can add fuel to the fire, even leading the West as a whole to be blamed for the inequities and impoverishment that the unfortunate mother enterprise workers perceive.

Such concerns will not often affect the profit calculations of the Western enterprises involved in these relationships, especially if the spin-offs are privatized and consider themselves separate from the mother companies. As a result these issues will not arise naturally in business dealings. An argument can be made, however, that spin-off activities' effects on labor relations with mother enterprises are an externality of the business relationship and thus morally equivalent to such societal concerns as industrial pollution or monopoly pricing. They are part and parcel of the national interest that any domestic company with international interests can either support through goodwill ambassadorship or undermine through bad reputation.

Attempting to force such concerns on Western investors would be counterproductive, in that it would serve to discourage the kind of investment in the Russian defense complex that the previous policy recommendation suggests we should promote. However, positive incentives might be created to encourage Western investors to confront such effects as part of their relationships with Russian firms. The raising of the issue alone would encourage Russian spin-off managers to resolve key mother enterprise conflicts in advance, because otherwise those conflicts would become a potential embarrassment for them. For example, a simple requirement could be added to Western investment assistance programs, mandating that Western firms receiving aid for joint ventures or trade with Russian spin-off companies hold annual informational exchange meetings with the Labor Collective Councils of the spin-offs' mother enterprises. From the perspective of the outside investor, the holding of such meetings need not be onerous, given that they would provide an ideal venue for public and community relations activities. At a minimum, such meetings would prevent Western support of the Russian defense complex from having the unpleasant side effect of encouraging anti-Western attitudes among the Russian populace.

Third, aid agencies (ranging from the International Monetary Fund and World Bank to the Soros Foundation) might focus their concerns on the construction of better information infrastructure in Russia's outlying areas, especially because the Russian state seems to be doing little in this regard itself. In particular, aid agencies could target their efforts on programs that would encourage the creation of the kinds of private firms and voluntary public organizations that aid economic relocation and business risk taking in capitalist countries.

Potential examples are legion. Aid agencies might focus in particular on providing seed money for the formation of the kinds of simple institutions that aid job mobility in the West: (1) privately owned employment services, ranging from headhunter consulting firms to temporary help agencies; (2) independent community colleges and vocational-technical institutes offering two-year training programs in fields ranging from translating and accounting work to plumbing and electrical repair, preferably under the direction of teachers with experience in a market economy; (3) local better business bureaus supported by those who own consumer goods and services companies in the area; (4) national and regional want-ad newspapers; and (5) independent local libraries stocked with training and educational manuals, newspaper and journal subscriptions (including local newspapers from other cities), and photocopy machines. The aid programs already in place to encourage private housing construction and transportation facility upgrades would also help in achieving these goals.

Whether or not these simple suggestions bear fruit, this study indicates that Western governments should take into consideration the potential unintended consequences of their policies toward the Russian defense complex. Conversion of the Russian defense complex has consequences for international security and stability that go beyond the more obvious and long-standing Western concern of military threat reduction. The political effects of conversion assistance also extend far beyond the more obvious financial concerns of risk and profitability assessment.

The end of the cold war and the resulting decline in the Russian defense budget has had profound social effects on members of the Soviet military-industrial complex. The fact that Russian political and legal institutions and Russia's underlying economic culture differ so markedly from those of the United States means that defense complex reform in the two countries is not really comparable. It is sometimes tempting to believe that the advent of the free market will somehow provide all those who have lost their previous jobs or status in Russia with new opportunities equivalent to those available to engineers or scientists laid off from U.S. defense enterprises. It might thus seem that these opportunities would be adequate to prevent instability. But this book suggests that a different and darker future might lie ahead, in view of the structural and cultural realities of the Russian political economy as it now now stands. Rather than complacently lauding the decline of the Russian defense complex as evidence of U.S. victory in the cold war, the outside world must regard with both sympathy and wariness the social, political, and international implications of the restructuring of this crucial sector of the Soviet economy.

Endnotes

Note 1: James R. Millar writes, for example, that reformers and their Western advisers were "led astray" because of their belief in the efficacy of rational choice, among other things; see "From Utopian Socialism to Utopian Capitalism: The Failure of Revolution and Reform in Post-Soviet Russia," Problems of Post-Communism 42, no. 3 (May-June 1995): 7-14. He states, "To one steeped in the rationality of the marketplace it is difficult to imagine why a transactor would not maximize profits if presented with the opportunity, but there is plenty of evidence that Russian managers have not done so" (p. 9). The rest of his article, however, completely supports the analysis presented here and stresses the importance of holdover Soviet political institutions that structure managerial behavior. It appears that Millar has simply defined "rational choice" more narrowly than has the literature on positive political economy. Back.

Note 2: See the essays by W. Carl Kester, "American and Japanese Corporate Governance: Convergence to Best Practice?" Yutaka Kosai, "Competition and Competition Policy in Japan: Foreign Pressures and Domestic Institutions," and Wolfgang Streek, "Lean Production in the German Automobile Industry: A Test Case for Convergence Theory," in National Diversity and Global Capitalism , ed. Suzanne Berger and Ronald Dore (Ithaca, N.Y.: Cornell University Press, 1996). Back.

Note 3: David M. Kreps, "Corporate Culture and Economic Theory," in Perspectives on Positive Political Economy , ed. James E. Alt and Kenneth A. Shepsle (New York: Cambridge University Press, 1990). Back.

Note 4: See the discussion and literature review on this point by Friedrich V. Kratochwil, Rules, Norms, and Decisions (New York: Cambridge University Press, 1989), . 21-94. Back.

Note 5: For an interesting discussion about how the real human thought process affects the assumptions of the neoclassical economics model, see Robin M. Hogarth and Melvin W. Reder, eds., Rational Choice: The Contrast Between Economics and Psychology (Chicago: University of Chicago Press, 1986). Back.

Note 6: The scholars who have most contrasted prospect theory with pure rational choice are Amos Tversky and Daniel Kahneman; see their "Rational Choice and the Framing of Decisions," in Rational Choice . For an example of economics scholarship that is compatible with prospect theory (even though it does not speak in terms of framing), see Raquel Fernandez and Dani Rodrik, "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review 81 (Dec. 1991): 1146-55. Back.

Note 7: See William H. Riker, "Political Science and Rational Choice," in Perspectives on Positive Political Economy , p. 172, who gets around the problem nicely by saying that the assumed set of choices includes all the choices that the actor believes are relevant. Back.

Note 8: Terry M. Moe, "Political Institutions: The Neglected Side of the Story," Journal of Law, Economics, and Organization 6, special issue (1990): 213. Back.

Note 9: See Michael McFaul, "State Power, Institutional Change, and the Politics of Privatization in Russia," World Politics 47 (Jan. 1995): 242; and Michael D. Intriligator, with Robert McIntyre, Marshall Pomer, Dorothy J. Rosenberg, and Lance Taylor, "Letters to the Editor: Checklist for Action in the Russian Economy," Transition (World Bank newsletter) 6, no. 9-10 (Sept.-Oct. 1995): 11. Back.

Note 10: The arguments of these paragraphs are explored in more depth in Kimberly Marten Zisk, "The Foreign Policy Preferences of Russian Defense Industrialists: Integration or Isolation?" in The Sources of Russian Foreign Policy after the Cold War , ed. Celeste A. Wallander (Boulder, Colo.: Westview, 1996). Back.