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CIAO DATE: 03/02
Social Sciences
"Where's the Beginning of That End...?"
(On the End of the Transition Period in Russia)
Rostislav Kapelyushnikov
This work is not a mere academic study but, rather, subjective note within the framework of a discussion that has not yet commenced (so far?). In many cases I had an opportunity to use observations and considerations which my friends and colleagues shared with me in the course of our private talks and I would like to express my gratitude. I should add that it is no accident that I chose an informal way of narration: I think it best of all tallies with the subject of our discussion.
The Institutional Nature of Transition Economies
At what moment the economy that has entered a strip of in-depth reformation ceases to be a transition one? The answer we may encounter in some transitological studies is rather simple: when the pre-reform level of GDP (or industrial output) is exceeded. From that point of view Russia's economy will need quite a few time to acquire the status of "post-transition" one. The advantages of such a purely statistical criterion are evident: strictness and unambiguity. However, it tells little about the inner content of the process of systemic transformation. Possibly, using this criterion we can date more or less accurately the end of the transition crisis but the transition crisis and the transition process are not necessarily one thing at all.
But the modern institutional theory proceeds from this approach. The transition ends when the formation of a new institutional foundation is mostly completed. One of such attempts to use such a criterion of assessing the degree of completion of the transition process was made by A. Nesterenko who drew an impressive picture of law-making progress in post-Communist Russia. 1 To his mind, by the late 1990s new "rules of the game" have been established in the principal segments of Russia's economy; hence the conclusion: it should be regarded as one which departed from the number of economies of the transition type.
Unfortunately, this imposing conclusion is formulated without regard to the real operation of newly introduced political, economic and legal institutions. The vulnerability of Nesterenko's position is in excessive "juridism"; indirectly it implies that any institution turns into an acting one as soon as it has been formerly established. In is no accident that the mechanisms of enforcement which are called upon to protect laws and contracts from possible violations are mentioned in his work only once and by passing.
Let us try, in an unbiased manner, to look at today's institutional framework of the Russian economy. It is generally accepted that it is still deprived of clear "rules of the game" that are reliably protected, which set straight the behavior of market agents and which make it predictable. The institutional matrix remains quite imperfect as it has been. In some key branches the general rules have not so far been worked out (the most well-known example is the lack of regulation of the problems in land purchasing and selling); others have in parallel the norms which evidently contradict each other, which makes it possible to treat and use them arbitrarily (according to V. Gutnik's smart formulation that Russia's legal system hinges on the principle: "what is not prohibited is allowed, if not specified otherwise by the law"); thirdly, the laws which are "good" at first glance do not work because nobody and nothing compel to reckon with them.
Of course, this does not imply the literal absence of any generally accepted norms and procedures. 2 We can speak only about the unproportionally great significance of informal relationships and institutions as compared with the formal relationships and institutions. To my mind, this moment is central for the understanding of the institutional nature of Russia's transition economy, and more broader Russia's transition society.
In all chains of the economic mechanism-on the market of capital, on the labor market, in relationships between enterprises, between enterprises and the state, between different branches and levels of power-unwritten rules and agreements predominate over the requirements of the law, conditions of contracts and other formal limitations. Even the contracts that are concluded in accordance with all formalities are taken by the participants as a certain conventionality and are met according to the circumstances. Using O. Williamson's terms, the matter is such as if the main resources which the Russian economy possesses refer to the rank of "specific", requiring exclusive "relationship" contracts for transactions with them. 3 This creates a medium for developing diverse "non-standard" forms of adaptation-non-payments, barter, the non-purposive use of budget means, trade with tax advantages, delays of salaries and wages, non-paid administrative leaves, secondary employment, concealed labor payments, and so on. All they happen to be included into complex non-formal relationship nets and cannot exist beyond them.
Historical experience shows that rather large groups are not capable of supporting their existence without at least a minimal set of formalized "rules of the game." Societies which we use to call "Western" found out at a certain stage of development that the best results are produced by the basic principles: a) maximally broad in coverage (at best, universal) and b) maximally poor in content (that is those which detract from the special circumstances of time, place and mode of action). This allowed Friedrich von Hayek to determine societies of the modern type as "abstract" because their institutional foundation is made of abstract rules of just behavior. 4 The paradox is in that, given Russia's context, any abstract rules change their nature and begin to act in accordance with the situation.
A minor digression. Of late, many people were troubled to note the growing "criminalization" of the Russian language but it would be naive to reduce this to the general drop in morals and culture. Even the top figures-supreme officials of the state, renowned politicians, big businessmen, honored writers and popular actors-already cannot do without the slang words. And the matter is not possibly in the drastic rise in crime in the reform period and that influence it has on people's minds. To my mind, there is a more general and fundamental reason for that. The world of professional criminals is a paradigmal case of the fairly representative community which sticks exclusively to unwritten laws and which does not use the public mechanisms of enforcement. Its attraction is related primarily with that it offers a ready-made language for describing the life tenor with inactive formal institutions and convenient schemes for its comprehension.
In the known sense, such a situation may be regarded as natural and inevitable for any transition society. Social systems that have gone through an in-depth transformation are deinstitutionalized sort of by definition: their former institutional framework has been broken and the new one has not been built because it is always an uneasy and protracted process with results which cannot be guaranteed. In the first approximation, societies of the transition type may be characterized as societies with formal regulators which have been put off or destroyed.
Naturally, the dynamics of the transition process is preset mostly by the scales of initial institutional shifts. Most of all they touch upon no more than one or two key segments of the social organism; total institutional crises occur only if the plurality of extraordinary events happen to be imposed. Unfortunately, Russian society appeared to be dangerously close particularly to such an extreme situation. Despite the great dimensions of the tasks that have been solved by other post-socialist countries, the institutional breaking went on there less painfully and dramatically.
Firstly, as regards Russia the farewell to communism signified not only the transition from one political system to another (from Communist ideocracy to modern democracy) and from one type of economy to another (from the planned system to a market order) but also the disintegration of the former state (the USSR) and creation of a new one (the Russian Federation). 5
Secondly, although the base state institutions in all former socialist countries were strongly tied up with the party machine, possibly in Russia their mutual impregnation was especially deep. The dismantling of the Communist regime was accompanied by not only a refusal from repressive mechanisms but also by a collapse and disappearance of many regulating structures that performed "standard" state functions.
Thirdly, because of the specifics of the administrative set-up of the USSR Russia lacked many important attributes of statehood which, for instance, were possessed by the countries of Central and East Europe. As a result, the institutional voids that appeared turned to be greater and deeper than those in the majority of other transition economies. According to the apposite definition by political scientist A. Zudin, over the whole of the 1990s Russian society remained in a weak state condition. If we take into consideration the number of the formal regulators that were put off, it could be rightly qualified as "super-transition."
However, the social systems which were complex in terms of their organization were unable to exist in the absolute institutional vacuum. The voids that have set began to be immediately, and at a high rate, be filled with non-formal institutions, implicit contracts and shadow practices. In the known sense, that was society's response to the liberation of the former economy from the burden of overregulation. The exit from the superrigid administrative "corset" let free the individual initiative, pushing it to the search for non-standard decisions, clearing the ground for the processes of self-organization. Non-formal models of interaction turned to be an important adaptation resource which allowed us to alleviate the initial costs of the transition crisis and to adapt to the new changing conditions with minimal losses. It is particularly they that helped to amortize the numerous shocks that accompanied the process of systems transformation.
Here and further on, the terms "non-formal relationships," "shadow practices" and the like were used neutrally without any assessment load. Unfortunately, in the majority of Russian discussions on the latent, shadow processes in the economy we can trace distinctly the fiscal undertones: in fact, all is reduced to the problem of tax evasion. Such a fiscal implication tacitly implied that the state per se is beyond the zone of non-formal agreements and shadow transactions while in real it often appears to be their initiator of active participant. From the theoretical point of view, the issue how the interaction between the participants in the market is done, the formal regulators being put off fully or partly, is more general and fundamental than the issue how the interaction with state's agents is built given these conditions.
Thus, characterizing transition societies, we should rather speak about a deformalization of institutional space of transition societies because the formal "rules of the game" retreat here to the background, yielding to the non-formal relationship nets. In the final count, this shift from formal institutions to non-formal ones, from direct contracts to indirect ones, from standard transactions to personalized deals determines their institutional nature.
All economies under reform appeared to be engulfed with this process. But its rates in Russia were likely to be higher and broader than the scales while the invented "gray" schemes astounded with their complexity and diversity. At this point we should take into account several circumstances. Firstly, as is well known, the planning system could not avoid the formation of a diverse network of non-formal relations within its margins. All in all, inner erosion of the official economy in the Soviet Union succeeded to go especially far (suffice it to refer to the conception of administrative market that has been discussed many times). Secondly, as is shown by the world experience, in case of natural or social cataclysms formal institutions always give up to non-formal ones. In critical situations the rigidity of the law and other formal regulators becomes an obstacle to society's survival and can provoke additional social strain. In that case, non-formal institutions go to the foreground-norms of solidarity, personal support and the like. Regarding the depth and duration of the transition crisis, Russia surpassed many times the majority of the countries of Central and East Europe. Respectively, the "demand" for diverse models of non-formal or semi-formal interaction was incomparably higher.
But together with the filling of institutional voids by non-formalized schemes and practices another process began to evolve-mass introduction and assimilation of new formal institutions (political, economic and legal) according to those that operate in developed societies with stable democracy and the effective market economy. In the long run, the import of the systems transformation consists particularly in this-in renewal of formal "rules of the game" which govern different spheres of society's life. A faster introduction of new institutions was promoted by great scales of their "import" without which the transition process would inevitably get prolonged for a more durable period or would be paralyzed at all.
I would like to make a special emphasis on the fact that there is nothing unusual in the import of institutions. As is shown by history, neither dynamically developing society could do without it. In the sphere of institutional construction the strategy of "resting on one's own forces" is fraught with impermissible costs. It is not known at what stage of development the humanity was if less successful groups did not poach the "rules of the game" elaborated by more successful groups.
But it is another thing what particular formal institutions were borrowed by transition societies and how effective was their "tuning" to local conditions? It seems that the countries of Central and East Europe succeeded in both trends to be more rational and productive. But although Russia's activity in devising and tuning the new system of formal regulators possibly was less effective to differ with smaller efficiency, nevertheless, the contrast between its institutional rigging in the early and late 1990s was drastic.
Thus, from the institutional point of view the systems transformation appears to be a combination of several parallel processes having a different direction. Generally, the logic of transition could be described in the following way: the initial point-the breaking of the "old" institutional framework; society's protective response-the filling of institutional vacuum with various models of non-formal interaction; the principal content of changes-elaboration and approval of new formal "rules of the game" as well as the mechanisms enforcing their observance; the final point-"normalization" of the institutional space to find a new stable balance between formal and non-formal regulators. The scheme suggested has a fairly high degree of communion to be applied to the opposite cases of "transit" whether it is movement from the market order to the planning system or, the other way around, a retreat from the centralized economy to the market.
It is important we reserve one moment: the end of the process of systems transformation and its success are not one thing. History gives many examples when the reconstructed system of formal institutions appears to be worse than the former system, thus dooming society to stagnation and regression. The issue of the effectiveness of institutional reshaping should not be mixed with the issue of the limits of the transition process. Using D. North's terms, transition societies are societies which are in the state of institutional imbalance, the search for a new point of balance in an n-dimensional institutional space means the termination of "transit".
"A Stationary Transition Economy"?
Despite the differences in the initial conditions, forms, rates and the sequence of reforms, the institutional evolution in Russia and the countries of Central and East Europe was subordinated to the common logic regardless of the national specifics of a certain economy. However, beginning from some moment their routes began to diverge and the breach became more distinct with time. The reverse advent of the formal regulators in the countries of Central and East Europe resulted in the narrowing of the zone of non-formal relationships and the gradual loss of specifically "transition" characteristics by their economies. We may expect with a high degree of probability that in the nearest years their new, non-transition status will be "certified" by their reception in the European Union (it is true not all are ready for that).
The "implantation" of new formal regulators in Russia resulted in a quite different, unexpected effect-it led to a greater activization of "non-standard" behavioral models and the continuous expansion of their assortment. The introduction of new "rules of the game" went quite well with the escalation of non-payments, moneyless exchanges, delays in payments of salaries and wages and so on which seemed to come to nil in the course of advancement to a new, market system-but all this was only the top of the iceberg consisting of the gigantic massive of implicit contracts and various "gray" schemes. And although the rise that had just commenced narrowed the sphere of their application (often quite drastically), the institutional nature of the Russian economy has not become qualitatively different because of that.
However, it would be erroneous to oppose the formal and non-formal institutions according to the principle "or-or". The stable operation of large communities needs both. In the effectively operating institutional system they do not exclude but, rather, complement each other, the non-formalized relationships and implicit contracts always making the base level. The availability of formal "rules of the game" creates conditions for the elaboration of other models of non-formal interaction (more often more complicated) which could not appear if they were absent. To put it another way, the introduction of formal regulators leads not so much to ousting as to restructuring unwritten laws and norms of behavior. In a sense, any institutional reform is a search for their optimal combination.
Observations show that, getting into the Russian medium, any formal institutions immediately grow with non-formal relationships and personal contacts. The point is so as if they were subjected to mutation to become, as a result, incapable to perform their function-to serve as generally significant "rules of the game". To use V. Naishul's words, the effective work of the market needs institutions perpendicular to it. Given Russia's conditions, such institutions turn to be parallel to the market, switching into the mode of bilateral (or multilateral) personalized bargaining.
Such a metamorphosis took place with regard to different laws and contract arrangements and with such inevitability that this compels us to put forth a hypothesis about the possibility of existing a special type-a stationary transition economy. (In old Marxist terms that means that, given certain conditions, the transition institutional regime acquires an ability to stable self-reproduction.) It appears that particularly such a social set-up has formed in Russia over the years of reforms. One cannot but agree that the "revolutionary" stage in establishing new "rules of the game" has already been passed and that by the late 1990s the Russian institutional system appeared to be stabilized significantly. But that is a quite peculiar stabilization in which base formal institutions continue to function like before in the manner of non-formal. What I mean is not merely the weakness of general "rules of the game" but their inner deformation when they cease to be universal, losing their automatism being deprived of "transparency". 6
Several illustrations which characterize the operation of the "stationary transition" institutional system from different sides. The most typical example when everything began from the establishment of seemingly "transparent" unique rules but ended with the dispatch of "exclusive" rules-that is of course the history of Russian privatization. At the start there was the state program that introduced rigid standards and procedures, at the finish were pledge auctions whose fate was determined in advance by latent agreements.
Another example is from the sphere of politics. It is no secret that the leading Russian political parties widely practice the "lease" of places in their electoral lists to the interested business structures. Pay attention to one fact: it is not a banal representation by political associations of interests of certain organized groups in exchange of their financial or electoral support. It is a real market of deputies' mandates where the places at the top of the list have higher prices, the places in the next ten have smaller prices, and so on. It is hard to assert with sureness that such a practice is very alike the purely Russian "know how."
The last illustration refers to the field of tax administration. It seems that automatism which intrinsically belongs to formal rules must find a higher expression in the activity of fiscal bodies. However, the Russian experience compels us to doubt that. As is known, A. Pochinok, the former minister of taxes and collections, introduced regular meetings with big tax payers at which he came to an agreement with them on the sizes of the forthcoming payments. All was done quite openly (the agreements made were highlighted by the press) and, what is most curious, nobody was surprised. Pay attention to one fact: that was neither lobbyism (tax payers did not demand from the authorities to reconsider the legislation in effect), nor corruption (nobody was bribed), nor the evasion from taxation (nobody tried to effect smart schemes to reduce the taxation commitments)-although such a system of relationships of course promoted the first, the second and the third. But lobbyism, corruption and evasion from taxes are all universal phenomena which are present everywhere where the redistribution of income is practiced in large scale. But the bilateral non-formal bargaining between fiscal bodies and tax payers is above the established formal rules and procedures, being a phenomenon which cannot be encountered very often. Yes, head of the tax office negotiated only with those companies to which the state per se had great reciprocal arrears. According to the assessments of experts, the tactic selected by Pochinok in the given conditions was quite effective, if not the only possible. But these clarifications only emphasize that the situation is extraordinary: it appears that a state body switched into the regime of the bilateral bargaining not to avoid fulfillment of the functions empowered to it but, on the contrary, to fulfill them. It seems this is an example of mutation of formal institutions in the clearest and most finished form. 7
Similar tendencies can also be found at organizational level of the institutional system. Let us take at least the major Russian corporations which remain creations of the clan type with indistinct margins and the "non-transparent" inner structure, submerged into complex symbiotic relationships with the state. According to Ya. Pappe's expressive characteristic, any of them appears to be "a cloud of off-shore firms which possess packages of producing companies." However, each "cloud" of this kind has an invisible "point of crystallization"-an informal team which is united by stable personal ties.
According to the classical definition by W. Meckling and M. Jensen, a firm is a net of contracts. 8 But if its "nucleus" in mature market economies is made up of a certain set of formal contracts, in transition economies it is a certain set of non-formal contracts between the leading "gamblers." This inevitably imposes an imprint both on the distribution of control and on the process of decision-making as well as on the character of interaction with the environment. As a result, even the leading Russian business structures act not so much as public corporations but as family or, rather, "friendly" firms.
Now let us ask a question: how is the matter with the base element of the institutional system-transactions, contracts, deals? One should not prove that over the whole of the transition period Russia's economy has demonstrated an amazingly low degree of contract abidance, if I may say so. Payments for the products supplied were not done on time, salaries and wages were delayed, dividends not paid, and credit commitments not met. But given all that, in the majority of cases suppliers did not break their contracts with the agents who failed to pay, workers were not fired and no strikes were organized, the shareholders did not protest, and the creditors did not demand arrest of the debtor's property. The outside-the-contract behavior became an everyday practice and, in fact, a norm of business relationships.
It is for this reason we call transition societies transition because they, as is believed, intrinsically are not stable, and cannot remain for long such as they are. However, the specific model that has set up in the Russian economy compels us to suppose that, given certain conditions, the transition state of the institutional system may became a terminal station, rather than a span from point A to point B, acquiring features of a stable balance.
Undoubtedly, even in developed countries there are vast zones which are free from the action of formal regulators-the shadow economy in the narrow sense of the word. But there is a distinct border in these countries between the official and non-official sectors. Contrary to them, it would be wise to call the Russian economy a two-layer, rather than two-sector one: it is practically impossible to draw a delimitation line between legal and illegal businesses in it. When speaking about such companies as Microsoft or General Motors, it is natural to proceed from the presumption that they do not take part in any shadow activity. With respect to Russian companies, the opposite orientation will be right: even the biggest ones of them stand with one leg in the official economy, and with the other in the non-official. It seems this is one of the most visible manifestations that characterize the remaining "transition" nature of the Russian institutional system.
The Role of Enforcement Mechanisms
What can explain the emerging discrepancy between the trajectories of institutional evolution in the countries of Central and East Europe and Russia? Why the "transition" nature is overcome successfully in one case while in the other it acquires an in-built character? The answer given by modern institutional theory is rather simple: the point is not in establishing formal "rules of the game" which differ in quality and intrinsic coordination, and not so much in that (although the significance of this factor should not be neglected) as in different abilities to enforce the fulfillment of these rules with the help of effective strict mechanisms. In the long run, it is particularly the absence of workable mechanisms of enforcement that explains why any laws and contract provisions begin to act in the Russian context not automatically as it should be with regard to formal institutions but in the ad hoc mode, depending on the fact whether the interested parties have enough resources to trigger them off or, on the contrary, to block them.
The Russian system of corporate governance is a vivid example of that. As is shown by comparative analysis, Russia belongs with regard to the quality of corporate law to the number of natural leaders among the countries having a transition economy. 9 De jure Russian shareholders are protected from management abuses even more reliably than the German or French ones are. But here is the paradox: wonderful legislative provisions exist in parallel with the extremely low protection of the shareholders' rights de facto and overt use of violence in settlements of corporate conflicts.
Using the sports analogy, we may say that the really critical problem on the public field of game is not so much the renewal of obsolete rules as the position of referees who would honestly sanction a penalty, without coming into an agreement with the teams. Or to use other terms: when attempts are made to establish a system of the rule of law, that is, introduce law is much more easier than enforce the rule. This is related not in the least with the fact that contrary to the "rules of the game" per se the mechanisms of enforcement practically are not subject to be imported. They are seldom borrowed in ready form, but more often one has to stand for them using one's forces one way or another. 10
The exclusions available only prove this conclusion. One of the most known is the experience of the postwar reforms in Germany and Japan. Of course, their success was essentially promoted by the US impressive financial support and the assistance of Western states in the renewal of legislative systems, and the rather short period of suppressing the market mechanisms. But no less important is the fact that the very process of systems transformation was performed under actual control of the occupation authorities. They appeared to be that instance which rigidly restricted the opportunist behavior to ensure the observance of the newly introduced rules and procedures at first stages of the transition process.
In this respect, the countries of Central and East Europe were in a remarkably better situation than Russia. And not only owing to the obtaining traditions of the "rule-abiding" behavior, a higher degree of society's consolidation and the elites' greater readiness to self-restriction. They had mighty additional stimuli to begin to live according to "rules" as soon as possible and tune all law-enforcing mechanisms necessary for that. The role of a sort of external anchor was played by a provision which was shared by practically all significant political forces-to the soonest return to Europe, integration into the principal European institutions (I am thankful to V. Himpelson who pointed out to this important circumstance). The need of harmonization of legislations with the legislations of the EU member-states left them no margin for institutional improvisation, causing them to manifest greater consistency and rigidity in building the strict disciplinary mechanisms called upon to defend new formal "rules of the game".
If the Russian economy did not begin to live according to laws that are clear and compulsory to all with the use of "transparent" and uniform procedures, that is primarily because of the absence of effective public mechanisms of control over the observance of laws and contract commitments. Their formation was blocked by many factors: an exclusively high degree of uncertainty that appeared at the initial stage of reforms; weak traditions of the "rule-abiding" behavior; society's ideological split; the immaturity of elites; the shortage of political will of the top administration of the country; the lack of the external anchor, and, finally, the general weakness of the stimuli which would impel to move in the desired direction. Having no reliable mechanisms of protection and control, formal institutions ceased to act automatically; losing their automatism, they inevitably began to be commanded by unwritten rules and norms, and be used as tools in conducting non-formal transactions.
Pros and Cons
Let us now deal with a key problem. What does the formation of a "stationary transition" model of the social set-up mean from the point of view of the system's short-term stability and its perspectives of the long-term development? In order to answer this question we will have to once again get back to the discussion of the general principles of action of formal and non-formal regulators.
Thanks to that the formal institutions, written laws and evident contracts receive a rigidly fixed expression, possessing public mechanism of protection, their action is automatic in character which does not depend on any external circumstances. As a result, we observe a decrease in uncertainty of the economic medium, an expansion of the field of impersonal exchange, complex transactions become possible for a long perspective and covering many participants. At the same time, at sharp turns of history the rigidity inherent in formal institutions may become counterproductive, impeding the search for new effective models of adaptation. Besides, around some of such institutions we often observe consolidation of mighty groups with special interests whose influence may retard the process of systems transformation or guide it to the wrong direction.
Contrary to the formal institutions, unwritten laws and implicit contracts are deprived of rigid automatism, leaving an opportunity for flexible adaptation to the changing conditions. From the point of view of short-term amortization of shocks this is quite an advantage. With their help the initial adaptation takes less painful forms than it takes place in conditions of excessive institutional "overregulation." Impeding the consolidation of group interests and increasing the costs of collective actions, the "stationary transition system" absorbs possible explosions of social discontent. 11 It is a most ideal shock absorber. However, the predominance of non-formal institutions in the long-term perspective turns into essential losses. Firstly, the range of participants in transactions begins to get limited by the agents who are capable of maintaining regular personal contacts with each other. This leads to segmentation of market relationships, leaving inactive many potential opportunities for the mutually beneficial exchange. Secondly, a drastic narrowing takes place in the temporal horizon of decisions made. To effect long-term projects without clear fixation of future commitments of all sides means to go to a great risk. 12 Thirdly, there becomes open a wide field for abuses and opportunist behavior because a non-formal transaction is formulated in general terms, without ensuring reliable sanctions against possible violations. Fourthly, since they by definition are deprived of the public mechanisms of enforcement, their participants have to either remain without protection or resort to the services of "private justice" which is extremely expensive and burdensome. Either thing is fraught with great losses and costs. Finally, the general level of trust between the market participants appears to be quite low and, as is known, trust is a sine qua non for any workable institutional system. 13 All that means the inevitable primitivization of transactional space. Such complex non-temporal deals as investment or crediting appear to be difficult to be effected. That impedes the opportunities of growth.
Thus, although non-formal institutions allow us to smooth the fall, this does not mean that they are capable of promoting a "faster rise." Restructurization, contrary to short-term adaptation, is impossible without establishing formal "rules of the game" which would allow us to plan the economic activity for a long term.
In this case, it would be wise to make an analogy with the shadow economy in the narrow sense of the word. There is no doubt that in crisis conditions it appears to be the most important absorber of social outgoings but it cannot ensure economic growth, remaining within its own borders. The frameworks of the shadow sector make possible to effect only simplest transactions which do not need much time and which hinge on the obtaining personal contacts. Complex non-personalized deals which cover a durable temporal horizon turn to be tied up with great risks and prohibitive transactional costs. The reduction of costs which accompanies such deals can be attained only if all participants have a code of universal "rules of the game" observed by all and provided with the public mechanisms of protection.
On the one hand, it is amazing how a country with the multi-million population, a diverse system of division of labor, a dense network of exchange relationships, modern education and high culture succeeded in existing so many years with a minimal set of workable formal institutions. On the other, it is difficult to get rid of the impression (although strict proofs in this case are hardly possible) that such a "soft" state of the institutional system had a direct relation to the fact that the transition crisis the Russian economy had gone through turned to be unprecedented in scale and prolonged over the whole decade.
The spread of the network of non-formal institutions has an inertia of its own and can acquire a character of the self-sustainable process. If the restricted nature of unwritten rules and implicit contracts is not compensated by the effective formal institutions which themselves begin to operate in the non-formal regime, the prospects of stable long-term developments appear to be precluded. The decisive factor of success consists non in competitive advantages but in an ability to operate above the legislative or contract limitations. Hence the inevitable losses in effectiveness.
In fact, the Russian economy got caught in a sort of "institutional trap": the refusal from non-formal deals fully paralyzed its current operation. At the same time, their domination spoils the factors of long-term stable growth. The economy appeared to be in "bad" institutional equilibrium which may be defined in terms of the "dilemma of the prisoner". On the one hand, the preservation of the situation with the semi-put-on formal regulators contradicts the interests of the overwhelming majority of participants in the "game" (everybody is dissatisfied with the absence of order-rank-and-file citizens, businessmen and the state). On the other, nobody is prepared to take the costs of changing the situation because all adapted to the situation, being afraid to lose in the disturbed status quo.
The economic rise that has just begun decreased the sphere of action of some "non-standard" forms of adaptation introduced into the complex relationship networks (non-payments, barter, etc.). Since their main function is amortization of the consequences of negative shocks, it is quite natural that, given a better demand, the need in them has diminished. Similar tendencies have been noticed also in the countries of Central and East Europe where the exit from the transformational recession was accompanied by a significant reduction in the scales of the non-official economy.
The prospects of growth inevitably bring about stimuli for switching from non-formal "rules of the game" to more formalized, from implicit contracts to explicit, from "non-transparent" shadow schemes to open legal transactions. Firstly, thanks to smaller uncertainty of the economic medium the temporal horizon of decisions made expands, which requires translation of business relations to the formal contract basis. Secondly, an ability of market participants increases to act in accordance with the conditions of the deals made, which tells favorably on the general level of contract discipline. Thirdly, the reduction in the number of "violators" allows them to distinguish more distinctly the opportunist behavior from the non-opportunist one, thus creating the prerequisites for selective use of sanctions. Fourthly, in the growing economy there is a drastic increase in the alternative cost of business exclusively through the non-formal relationship networks because this narrows the circle of potential counteragents, impedes the attraction of resources from external sources to expand business, blocks the exit to new market niches. Finally, there is a growth in costs which are related with the failure to observe the commitments given; a rise in risks that the partners will leave (given the changed conditions, it is easier to find another supplier, consumer or employer) while the loss of business reputation turns to be a missed advantage from future potential deals. This brings about a spontaneous shift toward greater formalization and "transparency" of the transactional space.
However, the shift per se has limited significance and is not able to change the situation qualitatively. It is not wonderful that from the beginning of the economic rise "non-standard" forms of adaptation began to be used less actively but that how wide-spread remains their application despite of all reasons. There is no doubt that any serious negative shock would immediately turn the Russian economy in the reverse direction. The economic growth per se cannot change the institutional nature of transition society; at best it can create favorable prerequisites for its gradual re-formatting.
The spontaneous shift "from below" in favor of greater formalization and "transparency" of methods of economic interaction may ensure a long-term effect only if it is supported "from the top-legislatively, organizationally and politically.
What is Behind the Turn?
The discussion of the "stationary transition" state of the Russian economy would be incomplete without an attempt to answer the question: to what extent is re-institutionalization possible and how can it be effected? The point is that after the change of Russian leadership new tendencies mark themselves which run counter to the inertia of previous institutional development.
It seems that the new Russian power began to understand that the obtaining situation is a blind alley. It was recognized openly that the system in which all state institutions are enmeshed with the dense network of non-formal agreements and personalized contacts has no prospects. Actually, society met with a project which is orientated toward an alternative institutional model. Its bearing members can be easily reconstructed from the program declarations and the first concrete steps of the new power. These are: establishment of "transparent" and uniform "rules of the game" for all in order that everything runs in compliance with the law; building of a "strong state" which can meet its commitments; liquidation of the multiplicity of power centers and ensurance of independence of state institutions from influential groups with special interests; the "breeding' of effective and uncorrupted (and, thus, highly paid) bureaucracy; delimitation of politics and the economy, adoption of the principle of equal distance in the relations between business and power; the narrowing of the space of "gray schemes" and "non-transparent" shadow practices; withdrawal of the non-official economy from the shadow wherever possible, and its inclusion into the normal legal field. It is easy to get convinced these tasks mostly correlate with the general conclusions that stem from our discussion of the "stationary transition" state of the Russian institutional system.
We can single out several key trends according to which initially the practical realization developed of what we could call "Putin's project:" 1) political and economic abatement of elite groups which are interested in retaining the status quo and which possess sufficient power and financial resources for "eroding" any formal regulators; 2) unification of the legislative space and elimination of contradictions between norms and procedures active in different chains and at different levels of the legal and administrative system; 3) reduction of the number and simplification of the content of formal limitations as well as the reduction of costs related with their observance; 4) making more rigid the sanctions for breaking the law and contract provisions (in other words, raising the costs which accompany the opportunist behavior).
Given the seeming diversity, these initiatives are reduced to one common denominator-the attempts to compel the mechanism of enforcement to work, providing the minimal acceptable level of protection of general "rules of the game." 14 The success in this domain would mean the exit of the Russian economy from the "bad" institutional equilibrium in which the economy appeared to be locked after almost ten years of reforms.
At the same time, I want to note that this "project" contains a fundamental contradiction which is capable of exploding it from inside. It consists in that the universalist program is yet to be brought to life by the apparat which itself is a product of the previous epoch, thinks exclusively in the categories of implicit transactions and is not able to work otherwise than by means of the same non-public shadow technologies. Of course, one may say that such a limitation is preset objectively: there is no place where we could take another apparat, with different ideas and habits of administration; an effective Weberian bureaucracy cannot be created overnight. But this puts the fate of the whole of the "project" under question.
Its failure may take a dual form. On the one hand, it is quite probable that everything will come to its place after a short period of storm and attack, personal promotions will not be accompanied by serious systemic shifts and, in the long run, the former paradigm of relationships will be restored practically intact. 15 Such a variant of development will mean the actual preservation of the "stationary transition" model of the social set-up.
On the other hand, we cannot exclude that the attempts to translate into a different, more orderly and "rule-abiding" regime may go by way of complicating and multiplying the number of prohibitions and limitations, incessant build-up and tightening of administrative control. In that case, we may meet with a real danger of formation of a model with distinct elements of authoritarianism incapable of dynamic development and suppressing an independent initiative, paralyzing autonomous forces of society's self-organization. (From the theoretical point of view, the system of authoritarian government may be determined as a regime in which bodies of enforcement possess the right to establish and change the general "rules of the game" any time on their own accord.) In the long-term perspective this variant of institutional evolution also seems to run to a blind alley.
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I wanted to show in this paper that modern institutional theory may be interesting not only with its general ideas and approaches, it has something to say also with respect to real institutional "divarications" which lie open to transition societies. Today, the specific institutional model that has set up in Russia in the shock medium of the first reform years is on the cross roads. There are several quite probable scenarios of its further evolution. Which of them will be realized will possibly be clear in the nearest two or three years. Then we will be able to give a clear answer to the question which makes the heading of these notes.
Endnotes:
Note 1: FA. Nesterenko. "The Transition Period is Over. What Comes Next?" Voprosy ekonomiki, No. 6, 2000. Back.
Note 2: Strictly speaking, any generalizations which refer to the institutional system are subject to be translated into a probabilistic format. Having met an assertion "such a institute works so and so", one should read it with a necessary correction: "such an institute in the majority of cases works so and so".Back.
Note 3: O. Williamson. The Economic Institutions of Capitalism. New York, 1995.Back.
Note 4: From this point of view, a system of centralized planning may be regarded as an attempt to reconsider modern society with developed division of labor by replacing the abstract rules with ultimately concrete ones which, by concept, should be constituted by plan tasks clearly prescribing who, what, how and when be done. As is shown by economists of neo-Austrian trend, the socialist project was initially doomed to failure because it proceeded from utterly erroneous ideas about the informational nature of modern, complexly organized society. In Hayek's terms, it was an attempt to switch from the social set-up that hinges on abstract rules to the social set-up hinging on concrete orders and commandments from a certain single center.Back.
Note 5: If the countries of Central and East Europe started their reforms in the situation of mighty national rise, Russia did it in the suppressed psychological climate that set up after the collapse of the USSR. Hence the unequal perception of starting costs of the "transit", which could not but tell on the trajectories of their subsequent development.Back.
Note 6: "Transparency" may be defined as easiness in obtaining true information about how exactly certain sections of the market stick to the obtaining rules.Back.
Note 7: Many of them not only begin to function in the personalized non-universalistic regime but often acquire another sense. The common example is the institution of bankruptcy. One of its main functions is to protect from losses that may be inflicted to creditors by non-solvent borrowers. Given the Russian conditions, this institution mostly serves as a tool for establishing control over most attractive and potentially solvent companies.Back.
Note 8: M. Jensen, W. Meckling. "Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure". Journal of Financial Economics, 1976, Vol. 3, No. 4.Back.
Note 9: K. Pistor. "The Evolution of Legal Institutions and Economic Regime Transformation". Bank Conference on Development Economics in Europe on Governance, Equity and Global Markets. Paris, 1999.Back.
Note 10: When such an "import" does take place, more often it takes the form of "calling the variags" like in the famous episode from the history of Ancient Rus.Back.
Note 11: According to the average assessment of respondents of the Russian Economic Barometer, it will take six months running to pay workers nothing in order to stimulate them to a serious conflict with the enterprise management. Although this assessment is possibly exaggerated, it gives a good idea about how great the costs of collective actions are in society with put-off formal regulators.Back.
Note 12: One may object: although a non-formal transaction is not subject to official registration, nothing impedes a distinct fixation of its conditions. But, firstly, an attempt to rigidly write out all details of such a deal may undermine the very basis of non-formal interaction because it is a demonstration of mistrust to the partner. Secondly, although no contract can envisage all possible future complications, formal contracts have in this respect an important advantage. When lacunas are found in the content of formal deals, the law sort of "writes in" them all clauses that have not been specified by default. The incompleteness of non-formal deals is impossible to compensate for in such a way.Back.
Note 13: F. Fukuyama. Trust: the Social Virtues and the Creation of Prosperity. New York, 1995. It seems in this respect there is a fundamental discrepancy between Western and Russian business. In general form it may be expressed in such a way: in one case the set to "advancing" trust is initial, being correlated while one accumulates negative information about the partner (potential or real); in another-a set to "advancing" discredit whose rejection takes place in the course of an arising opportunity to become sure in the partner's reliability. As is shown by the theory of games, a sufficient number of gamblers with cooperative sets is a critical condition which allows them to avoid "bad" equilibrium.Back.
Note 14: The consciousness that got used to the "transition" tenor of life may take the shift from non-formal regulators to formal ones as a strangulation of freedom and, in a certain sense, it is really so. However, one should not forget that unwritten norms and rules are also limiters, although of a different kind. In what system the freedom of economic activity turns to be less tight-in which the businessman, once having deceived partners, loses his reputation, being deprived of doing his business further on, or in which he may break contract commitments an unlimited number of times, risking once in ten times to become a victim of an ordered killing? An unambiguous answer in this case is hardly possible.Back.
Note 15: Besides, the universalistic rhetoric may conceal quite material interests of certain influential clans.Back.