- Email: [email protected]
Without a Map. Political Tactics and Economic Reform in Russia
210
Book reviews
Chapter 3 explores coordination failures between Congress and the FCC, by reviewing stock market reaction to the major legislative and regulatory events. In this way, the authors reveal a serious disjunction between the legislative and regulatory bodies in the case of the telecommunications sector in the US. In the fourth chapter, the authors provide a jurisdictional model that reveals how the shared regulatory jurisdiction of the FCC and the States may result in setting interconnection prices below cost. In their view, there is a structural problem due to mixed jurisdiction, even when the FCC’s goal is economic efficiency, and the principal-agency problems become even more pronounced, according to the extent to which FCC objectives differ from those of Congress. In Chapter 5, the authors provide a theoretical analysis of the FCC’s efficient-firm cost standard, and show that the FCC’s interpretation of cost does not rest on solid theoretical foundations, and that it may actually tend to weaken incentives for innovation. In their sixth chapter, the authors search for the theoretical prescription for ‘‘costs’’ that serve as the foundation for determining wholesale prices, and highlight how misguided regulatory implementation has played a major role in the failure of the 1996 Act to actually bring about deregulation. In Chapter 7, the authors review the Act’s implementation at the state level, while their final chapter provides conclusions concerning the possible future outcomes resulting from misguided implementation of the 1996 Act. To sum up, this book is a thought-provoking critique of the 1996 US Telecommunication Act and its future prospects, and should be read by all those who are interested in the issues of market, government, and regulatory failure. Eli Goldstein Department of Economics, Bar Ilan University, 52900 Ramat Gan, Israel E-mail address: [email protected] PII: S 0 1 7 6 - 2 6 8 0 ( 0 1 ) 0 0 0 3 7 - 4
Without a Map. Political Tactics and Economic Reform in Russia by Andrei Shleifer and Daniel Treisman. (MIT Press, Cambridge, MA, 2000) pp. ix+223. ISBN: 0-262-19434-1 The literature on Russia, Russian business people and politicians is at present, copious and expresses differing opinions and views regarding their roles in this challenging country. This literature is enriched by the contribution of Shleifer and Treisman, who perceive Russia’s reforms in terms of the vastness of its territory, the conflict between power groups, and the variety of political tactics and compromises. This book analyses the reforms of the 1990s and the complex cobweb of affairs and power groups that have dominated Russia’s panorama from both inside and outside the Kremlin. In this respect, they offer a very innovative and proper interpretation of the past, ‘‘what has been done, what has not been done, and how well has it been done’’ (p. 19), which in my view, can also be of use to understand Putin’s perspective.
Book reviews
211
The central message of the authors is threefold. First, despite the many compromises made, some reforms were successful, such as the privatization process from 1992 onwards, and the macroeconomic stabilisation in 1995 –1996. And although the reforms were not as successful as they might have been — had less compromise been necessary — their partial success is, as the authors note ‘‘an accurate assessment of the balance of power and interests among economic groups, an appreciation of the opportunities and limits on expropriation and cooptation, and a central strategy to play off some groups against other’’ (p. 18). Second, other reforms were not successful when compared with what took place in other transition economies, because obstacles in Russia ‘‘were simply harder to overcome’’ (p. 20), according to the authors. Third, in their view, we cannot underestimate the effects of (a) the decentralised political structure, (b) the concentration of profitable enterprises in a few raw materials-rich regions that generated economic inequalities, and (c) the semi-presidential political system that led to a struggle between parliament and presidency. Shleifer and Treisman observe that ‘‘implementing reform in Russia was neither straightforward nor impossible’’ (p. 3), and disagree with the experts who believe either that the reforms could have been more successful or that ‘‘rent seekers’’ stopped socially desirable changes. In the first part of the 1990s, economic and political goals moved together towards laying down market principles, but in their view, by the mid-1990s, politics became more sensible in order to get Yeltsin reelected in 1996, and in so doing, became an obstacle to finding the proper equilibrium between ‘‘economic objectives and the political compromises’’ (p. 4). The authors also maintain that it is not true that reformers implemented only macroeconomic policies without recognizing the necessity for institutional reforms. Indeed parallel legal, security market and trade liberalisation reforms were carried out to ensure at least a moderate success. On the contrary, the less successful reforms in the sphere of regulatory bureaucracies and the tax system, in their view, ‘‘cannot simply be attributed to neglect, ideology, or lack of efforts’’ (p. 11). Such an inherent contradiction in Russian society led to two extreme political groups (which can be called the anticommunist ruling elite and radical procommunist nationalists). And this, in addition to the growth of regionalism and separatism, has hampered Russia’s reforms. While Yeltsin bore the main responsibility for strengthening the unity of the Russian federal state, he also had to rely on separatist forces that formed his main political support base during the 1990s. The authors see this as a ‘‘compromise made to coopt certain stakeholders into supporting privatization and macroeconomic privatization’’, while at the same time, empowering ‘‘these same stakeholders to obstruct later attempts at tax reforms’’ (p. 19). However, in the author’s view, such cooptation ‘‘through the creation of new rents for these stakeholders to replace the hold ones. . . create new distortions’’ (p. 19). Shleifer and Treisman concentrate their attention, in particular, on privatization, macroeconomic stabilisation and fiscal reforms. With regard to privatization, the first wave was intended to be a universal approach, encompassing a voucher method of privatization to bypass an enormous amount of corruption in the state system and to sell off most of the inefficient state-owned enterprises which lacked financial resources. It is worth saying that the public did not display ‘‘antipathy’’ to this because it prevented the programme from being changed in mid-stream, and expanded the power of the state
212
Book reviews
privatization agency at the expense of the ministries. Russian privatization resulted in ‘‘insiders’’ finally possessing the assets, and the performance was not as efficient as expected. Indeed, as the authors note, Kenneth Arrow called Russian privatization a ‘‘predictable economic disaster’’ (p. 34), because of a limited restructuring and weak corporate governance. Nevertheless, in the author’s view, when everything is taken into account, Russian privatization worked better than the only politically feasible alternative of ‘‘doing nothing’’ (p. 38), and they do not deny the positive effects of privatization on restructuring and labour productivity in large enterprises, with even better results in small firms. However, apart from the authors’ viewpoint and the empirical works cited in the text, it is also worth noting that Chubais felt the need to start a second phase of privatization (July 1994) soon after the resignation of Gaidar (January 1994) and enabled a larger ‘‘outsider’’ ownership by reducing insiders’ power to buy shares (10% instead of the previous 51%). Nowadays, Putin is committed to advance the third phase of privatization. With regard to macroeconomic stabilisation (inflation is viewed by the authors as a monetary phenomenon), the authors remind us that early attempts (from the beginning of 1992 to mid-1993) had only temporary success. It was only in 1995 that the actions started to achieve notable stabilisation (in particular, during the period July 1995 – September 1998, when monthly inflation remained below 5%). The reasons for this were twofold, apart from Fyodorov’s policy to restrict the non-Russian Republics’ access to rubledenominated ‘‘technical’’ credits, and the 1995 Central Banking Law guaranteeing central bankers more financial independence. First, the cooptation of the commercial banking sector in the anti-inflation campaigns was pursued in exchange for more privileges for insiders. Second, a bargain with the energy sector was made through the tolerance of tax arrears and export privileges in exchange for cheap or free energy to insolvent farms, enterprises and state sector organisations. This type of macroeconomic stabilisation was essential for the Yeltsin reelection in 1996, but the authors say that it exacerbated cash and revenue crises. A previous attempt at reforming the tax system failed because authorities would have had to coopt regional governors and big businesses, and ‘‘to create a coalition of all the other stakeholders to isolate one of them’’ (p. 150). Actually, it turned out to be a mixture of incentives to move into the unofficial economy, barter, parallel currency, a depressed growth rate, and what the authors call (following William Riker) ‘‘peripheralized federalism’’, where the ‘‘division of rights over different tax bases and of control over the tax collectors and regulators led to a pernicious competition between levels of government’’ (p. 135). The authors then move to propose a new plan of finance reform characterised by separating the tax bases assigned to different levels of government and separate tax collection agencies for each government level. To sum up, Shleifer and Treisman have laid the basis for understanding Russia by discussing its inherent nature and components — from the vastness of its territory to the cobweb of groups of power within the energy, banking and natural resource sectors, in addition to the political power groups at federal, regional and local levels. All these power groups have seized upon the contradictions of transitional challenges to pursue their own interests, the implications being political and economic compromises. Although according to Shleifer and Treisman, a well-founded economic strategy would have guaranteed a better outcome, they do not express an overall negative appraisal of what was done in
Book reviews
213
Russia. Their short book is clearly written, and should appeal to a wide readership. It is well worth reading. Bruno S. Sergi Dipartimento di Economia, Statistica e Analisi Geopolitica del Territorio, Facolto di Scienze Politiche, Universita` di Messina, Via Tommaso Cannizzaro 9, I-98122 Messina, Italy and Contemporary Europe Research Centre, University of Melbourne, Melbourne, Australia E-mail address: [email protected] Fax: +39-0965-27974 PII: S 0 1 7 6 - 2 6 8 0 ( 0 1 ) 0 0 0 3 8 - 6
Book reviews
Chapter 3 explores coordination failures between Congress and the FCC, by reviewing stock market reaction to the major legislative and regulatory events. In this way, the authors reveal a serious disjunction between the legislative and regulatory bodies in the case of the telecommunications sector in the US. In the fourth chapter, the authors provide a jurisdictional model that reveals how the shared regulatory jurisdiction of the FCC and the States may result in setting interconnection prices below cost. In their view, there is a structural problem due to mixed jurisdiction, even when the FCC’s goal is economic efficiency, and the principal-agency problems become even more pronounced, according to the extent to which FCC objectives differ from those of Congress. In Chapter 5, the authors provide a theoretical analysis of the FCC’s efficient-firm cost standard, and show that the FCC’s interpretation of cost does not rest on solid theoretical foundations, and that it may actually tend to weaken incentives for innovation. In their sixth chapter, the authors search for the theoretical prescription for ‘‘costs’’ that serve as the foundation for determining wholesale prices, and highlight how misguided regulatory implementation has played a major role in the failure of the 1996 Act to actually bring about deregulation. In Chapter 7, the authors review the Act’s implementation at the state level, while their final chapter provides conclusions concerning the possible future outcomes resulting from misguided implementation of the 1996 Act. To sum up, this book is a thought-provoking critique of the 1996 US Telecommunication Act and its future prospects, and should be read by all those who are interested in the issues of market, government, and regulatory failure. Eli Goldstein Department of Economics, Bar Ilan University, 52900 Ramat Gan, Israel E-mail address: [email protected] PII: S 0 1 7 6 - 2 6 8 0 ( 0 1 ) 0 0 0 3 7 - 4
Without a Map. Political Tactics and Economic Reform in Russia by Andrei Shleifer and Daniel Treisman. (MIT Press, Cambridge, MA, 2000) pp. ix+223. ISBN: 0-262-19434-1 The literature on Russia, Russian business people and politicians is at present, copious and expresses differing opinions and views regarding their roles in this challenging country. This literature is enriched by the contribution of Shleifer and Treisman, who perceive Russia’s reforms in terms of the vastness of its territory, the conflict between power groups, and the variety of political tactics and compromises. This book analyses the reforms of the 1990s and the complex cobweb of affairs and power groups that have dominated Russia’s panorama from both inside and outside the Kremlin. In this respect, they offer a very innovative and proper interpretation of the past, ‘‘what has been done, what has not been done, and how well has it been done’’ (p. 19), which in my view, can also be of use to understand Putin’s perspective.
Book reviews
211
The central message of the authors is threefold. First, despite the many compromises made, some reforms were successful, such as the privatization process from 1992 onwards, and the macroeconomic stabilisation in 1995 –1996. And although the reforms were not as successful as they might have been — had less compromise been necessary — their partial success is, as the authors note ‘‘an accurate assessment of the balance of power and interests among economic groups, an appreciation of the opportunities and limits on expropriation and cooptation, and a central strategy to play off some groups against other’’ (p. 18). Second, other reforms were not successful when compared with what took place in other transition economies, because obstacles in Russia ‘‘were simply harder to overcome’’ (p. 20), according to the authors. Third, in their view, we cannot underestimate the effects of (a) the decentralised political structure, (b) the concentration of profitable enterprises in a few raw materials-rich regions that generated economic inequalities, and (c) the semi-presidential political system that led to a struggle between parliament and presidency. Shleifer and Treisman observe that ‘‘implementing reform in Russia was neither straightforward nor impossible’’ (p. 3), and disagree with the experts who believe either that the reforms could have been more successful or that ‘‘rent seekers’’ stopped socially desirable changes. In the first part of the 1990s, economic and political goals moved together towards laying down market principles, but in their view, by the mid-1990s, politics became more sensible in order to get Yeltsin reelected in 1996, and in so doing, became an obstacle to finding the proper equilibrium between ‘‘economic objectives and the political compromises’’ (p. 4). The authors also maintain that it is not true that reformers implemented only macroeconomic policies without recognizing the necessity for institutional reforms. Indeed parallel legal, security market and trade liberalisation reforms were carried out to ensure at least a moderate success. On the contrary, the less successful reforms in the sphere of regulatory bureaucracies and the tax system, in their view, ‘‘cannot simply be attributed to neglect, ideology, or lack of efforts’’ (p. 11). Such an inherent contradiction in Russian society led to two extreme political groups (which can be called the anticommunist ruling elite and radical procommunist nationalists). And this, in addition to the growth of regionalism and separatism, has hampered Russia’s reforms. While Yeltsin bore the main responsibility for strengthening the unity of the Russian federal state, he also had to rely on separatist forces that formed his main political support base during the 1990s. The authors see this as a ‘‘compromise made to coopt certain stakeholders into supporting privatization and macroeconomic privatization’’, while at the same time, empowering ‘‘these same stakeholders to obstruct later attempts at tax reforms’’ (p. 19). However, in the author’s view, such cooptation ‘‘through the creation of new rents for these stakeholders to replace the hold ones. . . create new distortions’’ (p. 19). Shleifer and Treisman concentrate their attention, in particular, on privatization, macroeconomic stabilisation and fiscal reforms. With regard to privatization, the first wave was intended to be a universal approach, encompassing a voucher method of privatization to bypass an enormous amount of corruption in the state system and to sell off most of the inefficient state-owned enterprises which lacked financial resources. It is worth saying that the public did not display ‘‘antipathy’’ to this because it prevented the programme from being changed in mid-stream, and expanded the power of the state
212
Book reviews
privatization agency at the expense of the ministries. Russian privatization resulted in ‘‘insiders’’ finally possessing the assets, and the performance was not as efficient as expected. Indeed, as the authors note, Kenneth Arrow called Russian privatization a ‘‘predictable economic disaster’’ (p. 34), because of a limited restructuring and weak corporate governance. Nevertheless, in the author’s view, when everything is taken into account, Russian privatization worked better than the only politically feasible alternative of ‘‘doing nothing’’ (p. 38), and they do not deny the positive effects of privatization on restructuring and labour productivity in large enterprises, with even better results in small firms. However, apart from the authors’ viewpoint and the empirical works cited in the text, it is also worth noting that Chubais felt the need to start a second phase of privatization (July 1994) soon after the resignation of Gaidar (January 1994) and enabled a larger ‘‘outsider’’ ownership by reducing insiders’ power to buy shares (10% instead of the previous 51%). Nowadays, Putin is committed to advance the third phase of privatization. With regard to macroeconomic stabilisation (inflation is viewed by the authors as a monetary phenomenon), the authors remind us that early attempts (from the beginning of 1992 to mid-1993) had only temporary success. It was only in 1995 that the actions started to achieve notable stabilisation (in particular, during the period July 1995 – September 1998, when monthly inflation remained below 5%). The reasons for this were twofold, apart from Fyodorov’s policy to restrict the non-Russian Republics’ access to rubledenominated ‘‘technical’’ credits, and the 1995 Central Banking Law guaranteeing central bankers more financial independence. First, the cooptation of the commercial banking sector in the anti-inflation campaigns was pursued in exchange for more privileges for insiders. Second, a bargain with the energy sector was made through the tolerance of tax arrears and export privileges in exchange for cheap or free energy to insolvent farms, enterprises and state sector organisations. This type of macroeconomic stabilisation was essential for the Yeltsin reelection in 1996, but the authors say that it exacerbated cash and revenue crises. A previous attempt at reforming the tax system failed because authorities would have had to coopt regional governors and big businesses, and ‘‘to create a coalition of all the other stakeholders to isolate one of them’’ (p. 150). Actually, it turned out to be a mixture of incentives to move into the unofficial economy, barter, parallel currency, a depressed growth rate, and what the authors call (following William Riker) ‘‘peripheralized federalism’’, where the ‘‘division of rights over different tax bases and of control over the tax collectors and regulators led to a pernicious competition between levels of government’’ (p. 135). The authors then move to propose a new plan of finance reform characterised by separating the tax bases assigned to different levels of government and separate tax collection agencies for each government level. To sum up, Shleifer and Treisman have laid the basis for understanding Russia by discussing its inherent nature and components — from the vastness of its territory to the cobweb of groups of power within the energy, banking and natural resource sectors, in addition to the political power groups at federal, regional and local levels. All these power groups have seized upon the contradictions of transitional challenges to pursue their own interests, the implications being political and economic compromises. Although according to Shleifer and Treisman, a well-founded economic strategy would have guaranteed a better outcome, they do not express an overall negative appraisal of what was done in
Book reviews
213
Russia. Their short book is clearly written, and should appeal to a wide readership. It is well worth reading. Bruno S. Sergi Dipartimento di Economia, Statistica e Analisi Geopolitica del Territorio, Facolto di Scienze Politiche, Universita` di Messina, Via Tommaso Cannizzaro 9, I-98122 Messina, Italy and Contemporary Europe Research Centre, University of Melbourne, Melbourne, Australia E-mail address: [email protected] Fax: +39-0965-27974 PII: S 0 1 7 6 - 2 6 8 0 ( 0 1 ) 0 0 0 3 8 - 6