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Lawless Capitalism Grips Russian Business
Lawless Capitalism Grips Russian Business
Majority prefers building value under the rule of law to stripping
Majority prefers building value under the rule of law to stripping
Two more value functions
Two more value functions
Economic and Political Behavior
Economic and Political Behavior
2. History affects the distribution of wealth and power Muckraking
2. History affects the distribution of wealth and power Muckraking
Economists conventionally treat an individuals political interests as determined by his preferences and endowments

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Economists conventionally treat an individuals political interests as determined by his preferences and endowments

Economists conventionally treat an individuals political interests as determined by his preferences and endowments.ppt
1Economists conventionally treat an 18ability. Payoffs: 1.
individuals political interests as 19Payoffs. x. 0. 1. Increasing support
determined by his preferences and for the rule of law.
endowments. For many purposes, thats a 20Payoffs. 1. 1/4. x. 0. 1. Increasing
useful approach. But for other purposes, support for the rule of law.
it may not be. In particular, in the case 21Natural resource abundance, growth,
of large-scale institutional change, each and property rights insecurity. Percent
individuals own political interests may who believe legal system will not uphold
depend on the behaviors of others. Issues my contract and property rights in
of coordination arise. In that case, we business disputes. Wall Street Journal
need to consider the equilibrium set of Rule of Law index (10 = best, 0 = worst).
individuals economic actions and Fuel and mineral exports/ total exports.
political positions. This paper tries to 2000 GDP/ 1989 GDP. Average for countries
do that. The paper is motivated by a with less than 10% natural resource
particular puzzlethe weak demand for the exports. 6.81%. 89%. 40%. 7.5 score.
rule of law in Russia, the Czech Republic, Average: 10 - 20%. 15.22%. 84%. 42%. 6.9
and other countries of the former Soviet score. Average: greater than 20%. 41.88%.
empire. But the paper also applies more 66%. 68%. 4.2 score. Russia. 53.15%
generally to economies with weak (1996). 63%. 73%. 3.7 score.
institutions and with assets to steal. In 22Payoffs. 1. 1/4. x. 2/3. 0. 1.
this broader context, the paper can be Increasing support for the rule of law.
thought of as a theory of anarchy. 23Payoffs. 1. 1/4. x. 2/3. 0. 1.
2Lawless Capitalism Grips Russian Increasing support for the rule of law.
Business. - The Washington Post November 24III. Dynamic extension of the model.
7, 2000. But let them stealThey will then become
3After the Big Bang: Obstacles to the owners and decent administrators of their
Emergence of the Rule of Law in property. (Chubais, quoted in Freeland,
Post-Communist Societies Karla Hoff and 2000) Agents live forever. In each period:
Joseph E. Stiglitz September 2003. Stage 1. Agents observe the current state
4The Hope. Privatization offers an (N or L) and choose an action to build
enormous political benefit for the value or strip and a political position
creation of institutions supporting for or against the rule of law. Stage 2.
private property because it creates the The new state (N or L) is realized, and
very private owners who then begin agents receive state-contingent returns.
lobbying the government...for institutions 25Transition to the Rule of Law as a
that support property rights. Markov Process. The probability of
Murphy-Shleifer-Vishny 1998. transition from the no-rule-of law regime
5The Result in Russia. Broad private to the rule of law depends on the level of
ownership [didnt create] a constituency support in the current period: ?t = ? (xt)
for strengthening and enforcing [the new The rule of law is an absorbing state. We
Civil and Commercial Codes]. Instead, explore a subset of possible equilibria
company managers and kleptocrats opposed where, as long as the no-rule-of-law
efforts to strengthen or enforce the prevails, the level of support is the same
capital market laws. They didnt want a in each period.
strong Securities Commission or tighter 26Technology and payoffs. DEPLETION OR
rules on self-dealing transactions. And GROWTH OF ASSET. FLOW. STRIP.
what they didnt want, they didnt get. 27Majority prefers building value under
Black et al. 2000. the rule of law to stripping under no rule
6Central Argument. Individuals choose of law. In the rule-of-law state, ALL
the rules of the game in an incomplete prefer to build:
market setting. Actions have externalities 28Two more value functions. 1st term:
mediated through the political asset value if current expected flows
environment. which ? May lead agents to continued forever. 2nd term: capital gain
take actions that give them an (ex post) or loss from the transition to the rule of
interest in prolonging the no-rule-of-law law.
statean effect that isnt internalized 29Economic and Political Behavior. .
because the rule of law is a public good. 30Why cant society grandfather the
7What I am going to talk about. I. control rights of the asset strippers?
Overview of Russian privatization II. Dynamic consistency problem-- The security
Static model of the demand for the rule of of such rights depends on the social
law (coordination game) III. Infinite consensus that underlies them. Not just
period model (Markov). any distribution of property can be
8I. Timeline for Russia. planning for protected under the rule of law.
mass privatization 1991 dissolution of 31Dynamic model. ? x. 0. 1. Increasing
USSR 1992 Big Bang voucher privatization support for the rule of law. Increasing
starts 1994 14,000 medium & large support for the rule of law.
enterprises privatized 70% insiders 14% 32Multiple equilibrium levels of demand
outsiders 16% government 1995 Loans for for rule of law. ? Political switch line,
Shares 1995-2001 Massive capital flight ?*. x. 0. 1. Increasing support for the
~$15 - $20 billion per year. rule of law.
9Growth and property rights insecurity 33Time path of expected GDP. GDP along
in 20 transition economies. The index of expected growth path. time, t.
insecurity is the fraction of respondents 34Summary of model: A tale of two
who disagreed with the statement: I am distortions. 1. Externalities from actions
confident that the legal system will (stripping or building value ) on the
uphold my contract and property rights in political and legal environment.
business disputes.. GDP 2000/GDP 1989. 35Rapid privatization: neither a cul de
Index of insecurity of property and sac nor a sure way to create a demand for
contract rights (BEEPS). 1.4. 1.2. 1.0. law. Under the no-rule-of-law state, some
.8. .6. R2 = 0.3452. .4. .2. 20. 30. 40. agents strip assets (since VN < SN ) ?
50. 60. 70. 80. POL. SVN. HUN. SVK. UZB. which gives them an interest in prolonging
CZE. BLR. EST. HRV. ROM. KAZ. KGZ. BGR. the no-rule-of-law state ? weakening the
LTU. RUSSIA. ARM. AZE. UKR. GEO. MDA. constituency for the rule of law ?
10The no-rule-of-law state. criminal capitalism . Under the rule of
Corruption in the organs of government law, agents choose to build value (since
and administration is literally corroding VL > SL) ? which ensures a constituency
the state body of Russia from top to for rule of law ? beneficent capitalism.
bottom. Speech by President Yeltsin, 1993 36And (2) the tortoise may beat the
Russia is the only country we know hare. If VN < SN , there may exist an
whereeven retail businesses often operate equilibrium where many strip and so many
from behind unlabeled doors Black et al., wish to prolong the no-rule-of-law state.
2000. Big Bang privatization may put in place
11Each individual votes for the regime forces that delay the rule of law.
that enhances his own welfareand 37Caveats: The actual process of legal
stripping may give him an interest in regime transition is not Markov 1. History
prolonging the absence of the rule of law. affects norms. Vladimir Rushaylo has
12II. Static Model. Agents A fixed set flatly denied the allegations that 70 per
of agents have control rights Agents cent of all Russian officials are
differ in their ability to strip, ? They corrupted Only those who have links
seek to maximize expected wealth. with the organized criminal gangs can be
13I. Static model: The controllers regarded as corrupted officials. Do not
dilemma strip assets of build value. mistake bribe-taking for corruption, the
14Notation. ? = probability that the Russian Interior Minister stressed. (BBC,
rule of law is enacted x = fraction of March 13, 2001).
agents who strip assets ? = ? (x) a 382. History affects the distribution of
decreasing function. wealth and power Muckraking Governor Slain
15Equilibrium. ?* = g - ?(x) I L - By Sniper on Moscow Street Wall Street
[1-?(x)] I N Switch line Agents with a Journal, October 19, 2002.
comparative advantage in stripping assets 39Future Work. Here we made 3 very
relative to ?* (i.e., ? > ?*) will special assumptions: No individual agent
choose to strip assets and thus x = 1 exercises power Only 2 possible legal
H(?*) Stripping ability curve. regimes: one good for investment, the
16Dual stable equilibria. Payoffs. 1. other bad A fixed set of agents (no new
17Example. ? = (1-x)2 , ? is uniformly entry) We relax these assumptions in
distributed on [0,1], g I L = 1 g I N on-going work, where our focus is the
= ?. conflict between rules for all (rule of
18Rule of law is the Pareto efficient law) and rules biased in favor of the
rule of the game Will agents vote for powerful. Rule of law. Security of returns
it? OR. ? Rule of law. No rule of law. to building value. Biasedness. Oligarchy.
Payoffs from ? to 1 depending on stripping
Economists conventionally treat an individuals political interests as determined by his preferences and endowments.ppt
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Economists conventionally treat an individuals political interests as determined by his preferences and endowments

Economists conventionally treat an individuals political interests as determined by his preferences and endowments

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