the economic transition and the rise of alternative ... · the economic transition and the rise of...

The Economic Transition and the Rise of Alternative Institutions:

Political Connections in Putin’s Russia

Natalia Lamberova, UCLA

Konstantin Sonin, University of Chicago

Corruption, Tax Evasion, and Institutions

SSE-Riga, May 11-13, 2017

Road map

Some general observations on 25 years of transition

Some puzzles that I derive from these general observations

A (very simple) model of crony capitalism

A (very simple) exercise on political connections in Russia

Some very general conclusions

Economic Transition and the Rise of Alternative Institutions | May 2017 | 2

25 Years of Transition

Transition is a giant natural experiment

Does transition experience confirm our hypotheses?


25 Years of Transition

Formerly socialist economies become market economies

� different paths with similar outcomes

There is a whole range of political regimes in formerly

communist dictatorships

� from stable democracies to sultanistic dictatorships, covering whole

spectrum without holes

[Putting the same idea differently:] political institutions are

way more dissimilar than economic ones

� even controlling for history, oil, proximity to the West


Politics of Institutions

Institutions [that protect property rights]

� good laws, independent courts, efficient regulators

� alternative institutions

Political regimes produces institutions

Efficiency requires good institutions

� normatively - for an economy to grow, it needs good institutions

� positively - people want to get rich


20 Years Ago

Shleifer (1995): “.. there is simply no political interest in governance

mechanism before privatization. This interest emerges during privatization,

as large outside shareholders are created and come to realize their needs

... Pressure from these new owners can then convince the government to

adopt regulations that foster corporate governance. Under pressure, the

government begins to protect property rights. ... The transfer of control

rights from politicians to private parties gives the process of establishing

property rights a jump-start by creating the political demand for the

protection of property rights.”

� Aslund (1995): ''... [once] the fundamental issues [of] the mutual

independence of enterprises from one another (as well as from the state)

and their profit orientation [have been addressed], under such conditions

owners will forcefully try to ascertain their property rights''.


Alternative Institutions

Taking a step back, demand for good economic institutions

needs to result in a demand for good political institutions

� which is obviously not there

� Polishchuk and Savvateev (2004), Sonin (2003), Glaeser, Sheinkman, and

Shleifer (2003), Stiglitz and Hoff (2004), Gradstein (2007), Acemoglu (2008),

…, Guriev and Sonin (2011), …

So, demand for economic institutions should result in

alternative institutions

� as there are certainly some institutions


A Small Exercise

“Crony capitalism” as an example

Institution: leaders appoint cronies

� instead of building up impersonal institutions

� bureaucratic positions or state-companies


Why Appoint a “Crony”?

An easy question to a lay person (or a journalist ☺), but a

difficult one for an economist

Naïve: a crony will give your more benefits, than a non-crony

� economics: that’s naïve

Coasian logic

� total surplus is higher under non-crony

� you could get more from having a higher total surplus


“Dictators and their Viziers”

Egorov and Sonin (2011)

� loyalty as equilibrium behavior

� dictator appoints vizier to guard his door against enemy

� competence is ability to distinguish strong enemy from weak one

� incompetent vizier cannot be bribed into betrayal

Does “dictators and viziers” logic help when appointing oil or

railroad monopolist head?

� yes, as “betrayal” might be money to support opposition

� no, as competence in running business is not same as political acumen


Model

Incumbent leader

� maximizes chances to stay in power + peoples’ welfare

� chooses either rule-of-law or a personalistic regime

� under personalistic regime, chooses a subordinate

Subordinate

� is interested in rent and continuation payoff under either incumbent, or

challenger

� might be either competent or incompetent, a crony

� collects payments from business

Challenger

Business

PeopleEconomic Transition and the Rise of Alternative Institutions | May 2017 | 11

Trade-offs

Institutionalized regime vs. personalistic

� personalistic regime allows to collect rents to stay in power

� institutionalized regime maximizes people’s welfare

Competent subordinate vs. crony

� competent collects more rent as he is able to discriminate business

� a crony collects less rent as he has to charge a flat price

Support incumbent vs. “betrayal”

� subordinate may stay with incumbent or finance opposition


The Empirical Exercise

Russia, Putin

list of “inner circle” members

business elite (top-200 Forbes list)

stack two lists

for each pair of people scrap joint mentions in news section of

top Russian search engine for 2004-2005

� controlling for positive coverage

check whether or not early connections matter


Connections 2004-05


What is “a Connection”?

Connections

� 1 and 2 are inner circle members

� A,B,C, and E are businessmen

� 3 is member of both groups

Proximity

� A has 3-step connection

� B has 2-step connection

� C and E are directly connected

� D is unconnected


Connections 2014-15


Density of Network Increases


Summary Statistics


Distance

At a Glance


First Results, OLS


Effect of Oil


KLRS

Misspecification?

� OLS assumes that marginal effect remains the same at all levels.

� logistic regression assumes that log-odds remain constant across different

levels of other variables

Kernel Regularized Least Squares (Hainmuller, 2013)

� to use leverages similarity between observations, so that the closer are

two observations, the more weight it has

� with infinitely many higher-order terms and interactions in the model,

should be penalty on complexity to avoid overfitting

� KRLS helps to address the misspecification bias, yet does not protect from

he omitted variable bias; also does not allow clustering of standard error


KLRS Results


Direct Connections and Oil


Connection to Foes Always Bad


Conclusion

Alternative institutions such as personal connections work

when appropriate institutions would not develop

Their existence reconciles similarity of economics and

dissimilarity of politics in transition


the economic transition and the rise of alternative ... · the economic transition and the rise of...

Documents