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CAPITALISM FOR THE FEW FREEZESTRANSITION AND IMPEDES CAPITALISM FOR ALL
OLEH HAVRYLYSHYNCERES , University of Toronto and IMF
PRESENTATION TO POLITICAL ECONOMY RESEARCH GROUPUNIVERSITY OF WESTERN ONTARIO, FEB 19,2007
The author is on special leave from the International Monetary Fund , and the views presented here are his alone and do not represent in any way those of the IMF or its Board of Directors.
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I 3
OUTLINE
I: TYPES OF STATES
II: TRANSITION OUTCOMES AFTER 15 YEARS
III:EVOLUTION OF OLIGARCHS AND STATE CAPTURE
IV:RECAPTURING STATES AND COLOUR REVOLUTIONS
V: CONCLUSIONS
II 4
I:TYPES OF STATES
• DEVELOPMENTAL –State promotes business with rule-of-law environment, but regulates monopoly, fraud, commercial disputes
• PREDATORY- State provides framework of laws-regulations , but is dominant and may decide arbitrarily to prohibit, usurp assets, establish own business
• CAPTURED STATE- relatively new category ; state can act in predatory fashion , but under control of an oligarch clique which is not subject to predation by state , to the contrary directs state predation upon rest of economy
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II.OUTCOMES OF TRANSITION
• EARLY EXPECTATIONS, DEBATES• PROGRESS TOWARDS MARKET• DEMOCRATIZATION• SOCIAL IMPACTS • POST-COMMUNIST REGIMES
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BIG-BANG vs. GRADUALISM DEBATE
Gradual reforms: allow time to create new industries and jobs as old eliminated, put in place ROL institutions;this reduces social cost
Big-Bang: change incentives, close rent-seeking opportunities and lobbying by Red Directors, prevent reform opponents delaying process for own interests. Institutions follow more slowly
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DEMOCRACY VS MARKET REFORM DEBATE
• Przeworski –INCOMPATIBLE: market reforms cause pain,democratic elections bring back renamed communist parties,reforms reversed.
• Balcerowicz –COMPLEMENTARY : early democratization gives historical opportunity to move from communism to full liberalism of markets and polity. (Bunce calls this “Dual Liberal Vision”)
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EBRD TRANSITION PROGRESS INDICATOR 2004
CE BALT SEE CISM CISLChart 2.1 EBRD TRANSITION PROGRESS INDICATOR 2004
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
HU
N
CZE
CH
POL
SVK
CR
O
SVN
EST
LVA
LITH BU
L
RO
M
MA
C
ALB BiH
S&M
KY
R
AR
M
GEO RU
S
KA
Z
UK
R
MO
L
AZE TA
J
UZB BEL
TUR
K
COUNTRY BY GROUP
TPI
VA
LU
E
Series1
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DEMOCRACY AND MARKET LIBERALIZATION
Figure 2.2: Constitutional liberalism and progress in transition
LTV, LTU
SVN
BGR, HRV
ROMMKD
KAZ
MDA
AZE
BIH
YUG
TJKUZB
TKM
BLR
ALB
UKRRUS
GEOARM
KGZ
POL,SVK
CZE
HUN
y = 0.1988x - 0.1302R2 = 0.7231
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1.0 1.5 2.0 2.5 3.0 3.5 4.0
EST
Transition Progress Indicator, 2004
Con
stitu
tiona
l Lib
eral
ism
, 200
4
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HUMAN DEVELOPMENT INDICATOR
(UNDP: Highest Value Norway=0.944; Lowest Value Sierra Leone=0.275)
Country groups: EBRD rank
1990 1995 2001 2003
Central Europe(Change from 1990)
.815 .821(+.006)
.845(+.030)
.864(+.049)
Baltic(Change from 1990)
.812 .779(-.033)
.822(+.010)
.847(+.035)
SEE(Change from 1990)
.752 .749(-.003)
.772(+.020)
.793(+.041)
CISM(Change from 1990)
.772 .721(-.051)
.737(-.035)
.730(-.042)
CISL(Change from 1990)
.767 .743(-.024)
.760(-.007)
.739(-.028)
CONCLUSION:GRADUAL REFORM CAUSES MORE PAIN
Memo Item 1990 1995 2001 2003
Ukraine (Change from 1990)
.795 .745(-.050)
.748(-.047)
.766(-.029)
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REGIME TYPES: 15 yrs. Later
Liberal societies with “capitalism for all”, open markets (CE, BALT [Bul, Cr,Ro-marginal])Still-undetermined polities but progressing. (other SEE)Oligarch societies, with “capitalism for the few”non-competitive markets (most CISM)Unreformed polities, still very soviet-like (CISL)
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State Capture Index, 1999
Source: Author’s calculations averaging two concepts of state capture, pervasiveness and concentration,
as reported in Figure 3 of Hellmann and Schankermann (2000). For bracketed cases, no values are reported in the 1999 study; 1999 values are pro-rated using a 2003 World Bank study of ‘crony bias’ (a related but different concept), Hellmann and Kaufmann (2002)), Chart 2.
Hungary
0.10
Armenia 0.11
Poland 0.17 Georgia 0.34Czech Republic 0.16 Kazakhstan 0.18Slovakia 0.34 Russia 0.45Croatia 0.43 Kyrgyz Republic 0.41 Central Europe
0.20 Moldova
Ukraine 0.520.45
Estonia 0.14
Azerbaijan Tajikistan
0.58--
Latvia (0.22) Lithuania 0.17 CISM 0.38 Baltics 0.18
Uzbekistan Belarus
0.080.12
Bulgaria 0.40 Turkmenistan --Romania 0.30 Macedonia (0.35) CISL 0.10Albania (0.35) Bosnia-Herzegovina
(0.40)
Serbia-Montenegro
(0.50)
South-East Europe
0.35 (0.38)
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Concentration of Forbes Billionaires No. of
Billionaires 2006
% of Billionaires
% of World GDP
2005
Ratio of % of Billionaires to World GDP
%Bill> %GDP
Kazakhstan 2 0.3 0.1 3Russia 34 4.2 1.7 2.4Ukraine 3 0.4 0.2 2USA 371 46.7 28.1 1.7Sweden 8 1.0 0.8 1.2Germany 55 6.9 6.2 1.1Canada 21 2.6 2.5 1.04 %Bill<%GDP Poland 3 0.4 0.5 0.8Mexico 10 1.2 1.7 0.7UK 24 3 4.9 0.6Spain 10 1.2 2.5 0.5France 14 1.7 4.7 0.4
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III: EVOLUTION OF OLIGARCHS:THE NAVIGATION MODEL
-Uncharted waters: Debate and delay cause slow and partial reforms, postpone adjustment
-Pirate raids: Rent-seeking stronger if reforms are slow and partial, capital accumulation rapid, concentration into oligarch power
-Safe havens: integration in global institutions disciplines reform and ensures steady progress; most powerful was EU membership
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VICIOUS CIRCLE OF DELAYED REFORM AND OLIGARCHIC DEVELOPMENT
Creates Rent-Seeking Opportunities / Old
Elite Revived
Delayed Reform
EU Membership Offer (Weak) EU Membership
Desire (Weak)
START
Captures State Policy For Self-Interest
Oligarchy Develops
New Entrants SME’s Face Difficulties
Weak Rule-of-Law
Weak Support for EU Membership
Against Competition, Prefer Status-Quo,
Prefer Non-transparent Procedures
Fear EU Membership Discipline
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State Capture Higher the Longer Delay in Stabilization
Figure 6.4: State capture and delay in stabilization
y = 0.0057x + 0.143R2 = 0.4882
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0 5 10 15 20 25 30 35 40 45 50 55 60
Sta
te C
aptu
re In
dex,
199
9
Months to 5% / Month Inflation
HUN
CZE
SVK
SVN
LTU
POL
EST
HRV
ALB MKD
KGZ
MDA
AZE
RUS
BGR
ROM
UKR
ARMKAZ
GEO
III 19
State Capture Lower the More Rapid Reforms
Figure 6.5: State capture and delay in reform progress
y = -0.2306x + 0.9239R2 = 0.4545
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1.5 2 2.5 3 3.5 4
Transition Progress Indicator after 4 years
AZE
ALB
MDA
RUS
KGZ
UKR
ROM
ARMKAZ
BGR
MKD GEO
HRV
SVN
SVK
POL, LTU
HUN
EST
CZE
Sta
te C
aptu
re In
dex,
199
9
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OLIGARCHS, MINI-GARCHS AND LOBBYISTS
• Important to define terms here-oligarch not simply= capitalism private ownership
• Lobbyists:capitalists who try to influence govt laws to favour their firm/industry ( Iacocca, Can. auto industry, Bombardier)
• Oligarchs: capitalists with enough power to capture state, determine election results, broad policy lines ; no demarcation possible, but $ Bil+ seems minimum
• Mini-garchs: those big enough to aspire to oligarchy
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RENT-SEEKING,GRAND CORRUPTION AND PETTY CORRUPTION
• Rent seeking: lobby for gov. privileges ( e.g:exportlicense,subsidised energy ) to increase profits -the extra profits from lobbying =rents
• Grand Corruption: large scale bribing of high-level officials by rent-seekers; includes major campaign funding for friendly politicians—the domain of oligarchs and mini-garchs
• Petty Corruption: small bribes to police, health inspectors , tax inspectors – the domain of individuals, SME’s
• IN A CAPTURED STATE ANTI-CORRUPTION CAMPAIGNS FOCUS ON PETTY CORRUPTION
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IV: RECAPTURING STATES
BB v. GRAD debate is history; new debate is : “Transition Inevitable”(TI) vs. “Transition Frozen” (TF)TI argument: high degree of ownership eventually leads even oligarchs to seek security of property rights [Coase Theorem: in market any demand, including for institutions, will generate supply: Schleifer (1995) Aslund (1997) (Buiter (2000), “Yesterday’s thief is the staunchest defender of property rights”]TF counter argument: as long as rents and privileges from non-transparent lobbying exceed value of equal property rights for all, oligarchs prefer status quo [Havrylyshyn (1995); Hellman (1998); Polischuk & Savateev (2004); Sonin (2003) Havrylyshyn(2006)]
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State Capture Leads to Frozen Transition
Figure 8.1: State capture leads to frozen transition
y = -2.4736x + 3.9725R2 = 0.7201
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0 0.1 0.2 0.3 0.4 0.5 0.6
Tran
sitio
n P
rogr
ess
Indi
cato
r, 20
04
State Capture Index, 1999
HUN
SVN
EST CZE
LTU
POLSVK
HRV ARM
KAZ
ROM
GEOALB
MKDKGZ
BGR
BIHUKR
RUS
YUG
MDAAZE
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CAPITALIST ELITES IN HISTORY
Rent-seeking and Oligarch resistance to liberalism not unique to Post-Communist economies;“Elite Entrenchment” = Resistance to liberal markets (see article by Morck et al, Journ.of.Econ.Lit., September 2005).Elite, or Incumbent Capitalist lobbies against competition (e.g.Glass-Steagall Act.,1934, USA: see Rajan and Zingales (2003) Saving Capitalism from Capitalists.Successful Rent-Seeking rewarded by shareholders: Lee Iacocca of Chrysler and US “quotas” on Japanese automobiles 1982.NEVERTHELESS post-communist degree and speed of oligarch creation very different and unique in history. Oligarchs NOT equivalent to US Robber Barons or Chaebol in Korea.
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REDUCING POWER OF OLIGARCHS
• Create open and environment for small business, ”level playing field”
• Transparent and equal application of tax licensing, tender, other government actions.
• Very judicious use of re-privatization,1-2 cases to signal new transparency-and only if clean legal case made.
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COLOUR REVOLUTIONS• Reflects view of the demos (“ENOUGH –Mc Faul )• Shows the demos can be very powerful; does this suffice
to change oligarchs?• History clearly shows entrenched elites do not give up
power easily (see: Morck et.al. 2005)• Frozen transition arguments and evidence, suggest
similar entrenchment taking place • e.g. Ukraine: bitter fight of Dec.04 election ; Mar. 06
results “suggest elites not giving up”(Wilson-2006)
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V:CONCLUSIONS• Early start and rapid resolute reforms prevented
extensive rent-seeking,oligarchy,state capture• Social costs lower with rapid reforms, contrary to theory
of gradualism: WHY? Connected to first conclusion• In post-communist episode,liberal market and liberal
democracy mutually reinforcing,not in conflict ( differs from evidence in devg countries)
• The key misunderstanding : Invisible Hand needs both private property and market competition
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Addendum:OLIGARCHS UKRAINE &RUSSIA
SIMILARITIES• Generally insiders but not top nomenklatura.• First wealth accumulation based on “rents”
available under partial/delayed reforms.• Bulk of eventual wealth from state asset transfer
not new-value creation until 2000.• Privatization via special privileges may be
morally unjust, but generally legal : insider advance info or special “legal” rules for auctions.
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OLIGARCHS UKRAINE & RUSSIA DIFFERENCES
• Russia privatization early late in Ukr but outcome same (cf ,Poland late but full reforms thus avoid state capture)
• Ukr. Probably even less transparent(loans-for-shares very insider but visible to all)
• Russia younger , non-politician insiders• Ukr. More regionally based (“clans”)
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STATE-BUSINESS RELATIONSRUSSIA AND UKRAINE
• RUSSIA; BIG BUSINESS ALLOWED EVEN ENCOURAGED, BUT STATE HAS FINAL WORD (e.g.-CONTROLLING SHARES OF STATE IN ENERGY SECTOR; BUSINESS KEEPS OUT OF PUBLIC POLITICS, EXPLICIT ROLE IN GOVERNMENT ,AVOIDS SUPPORTING OPPOSITION) : COHABITATION OF PREDATORY STATE AND CO-OPERATIVE OLIGARCHS?
• UKRAINE: BIG BUSINESS ALLOWED AND ENCOURAGED AND EFFECTIVELY CAPTURED STATE ( e.g – NO PERMANENT RENATIONALIZATION , PRIVATIZATION CONTINUES, MOST OLIGARCHS OPENLY INVOLVED IN POLITICS, PARLIAMENT, GOVERNMENT POSITIONS)
• COMPARISON : IS THIS A DISTINCTION WITHOUT A DIFFERENCE?
