Slapping the Grabbing Hand:
Credible Commitment and Property
Rights in Russia
Timothy Frye
Frye.51@osu.edu
Ohio State University
Hobbes
Private predators are the greatest threat to
property.
Effective state is central to secure property
rights.
To make property secure, increase state
capacity.
Locke
State agents uniquely positioned to threaten
property rights.
A government that is strong enough to protect
property and enforce contracts is also strong
enough to confiscate the wealth of its citizens.
To make property secure, place constraints on
state agents.
Preview
Russian legal system is not uniformly weak.
Managers said that arbitration courts do not work badly in cases
involving private agents, but are ineffective in disputes with state
agents.
Constraints on state officials are central to secure property.
Managers who said that courts could protect their interests in
disputes with state officials were more likely to invest controlling
for a range of factors.
Other factors associated with secure property rights.
Membership in business organizations.
Confidence in President Putin’s commitment to a market economy.
Property Rights
Bundle of rights that include the power to consume, obtain income
from, and alienate assets, such as land, labor, or capital.
Important Dimensions of Property Rights
Clarity of allocation
Ease of alienability
Security from trespass
Credibility of property rights – how likely are property rights to be
subject to arbitrary change over time.
Importance of Property Rights
The most significant lesson of the postsocialist transition is that without
the appropriate transformation of the legal infrastructure and the
enforcement of the law, a market economy cannot function properly.
Janos Kornai 2002.
No challenge in Russia today seems greater to me than the
establishment of property rights and contract enforcement.
Lawrence Summers 2000.
The lack of a market-oriented legal structure appears to have been the
Achilles heel of the first dozen years of transition.
Jan Svejnar 2002.
Not everyone agrees
Who is the Master: We (the Party) or the Law? We must
use the Law to allow us to shoot the speculators when
necessary.
Khrushchev
Roots of Secure Property
State Institutions
Because administering justice is a public good, effective state
institutions are essential to defend property against private
predators, including competitors, mafias, and various frauds.
Need well-funded, well-equipped, well-trained, and technically
proficient courts and police to create secure property rights.
If this view were correct, then ineffectual or corrupt state agencies
should be associated with insecure property rights.
Credible Commitment
Arbitrary use of state power may attenuate property rights.
A government that is strong enough to protect property and enforce
contracts is also strong enough to confiscate the wealth of its
citizens.
State agents uniquely positioned to threaten property rights.
To make property secure, place constraints on state agents.
If this Lockean view were correct, then constraints on state power
should lead to more secure property rights.
Discretion
Commitment may come at the cost of flexibility.
One of the main priorities in Eastern Europe today is to preserve the
government’s capacity to readjust to changing circumstances.
Politicians must therefore be able to renegotiate the rules while they
are playing the game.
Holmes 1995
Advocates of the “China model” for transition countries.
This “Helping Hand” model suggests tight constraints on state
powers may reduce the security of property rights.
Societal Factors
Social Trust:
Create norms of extended reciprocity.
Civic Participation:
Members of business organizations may be better
placed to punish state officials who violate property
rights.
Countervailing power rather than trust is critical to
secure property rights.
Committed Political Leaders
“Washington Consensus” emphasizes having a political
leader committed to a market economy.
Creating secure property rights requires short-term costs
in order to get long-run economic gains so one needs
committed “marketizer” in power to defend property.
If this view were correct, then business managers who
believe that government officials are committed to
building a market economy should view their property
rights as more secure.
The Survey
500 Firms in 8 Regions in Russia in November 2000.
Moscow, Nizhnii Novgorod, Novgorod, Smolensk, Tula,
Ufa, Voronezh, Ekaterinburg.
10 Economic Sectors – not agriculture.
Talked with CEO or CFO.
At least 60 firms per region.
Survey Details
Firms stratified by size and sector in each region then
selected at random within each strata.
Response Rate (completed interviews): 56%
Call Back Rate: At least 20% in each region.
Many Pilot Surveys
Survey Conducted By VCIOM.
Firm Characteristics
Average number of employees
Industrial Firms
Retail Trading Firms
Construction/Transport/Communications
Owned their Building
Members of Business Association
Average Age of the Manager (yrs)
Average years as director of the firm
Privatized firm
State-owned firm
Denovo private firm
Members of Financial-Industrial Group
Autonomous Firm
840
55%
20%
25%
61%
31%
46
6-10
65%
15%
20%
2%
72%
Property Rights Indicator
% Yes
Build new buildings
21
Credit to customers or suppliers
40
Major investment in the
in the coming year
33
Performance on a
Scale of 1-5
Tax Inspectorate
3.31
(.92)
The Arbitration Court
3.19
(.93)
The Tax Police
3.17
(1.0)
Regional Bureaucracy
2.99
(.94)
Federal Bureaucracy
2.83
(.83)
The Court of General Jurisdiction
2.82
(.82)
Court Bailiff
2.75
(1.12)
Regional Duma
2.75
(.88)
The Federal Government
2.72
(.98)
The Police
2.64
(.90)
Credible Commitment Question
“In the case of an economic dispute with the local or
regional government do you believe that the state
arbitration courts could protect your legal interests?”
1) yes
2) no
3) it is hard to say.
“In the case of an economic dispute with a business partner
do you believe that the state arbitration courts could
protect your legal interests?”
1) yes
2) no
3) it is hard to say.
Credible Commitment
Yes
(%)
Courts can defend interests against
local/regional government
39
Courts can defend interests against
business partner
76
70% of all firms had a dispute sufficiently serious to
consider taking to court in the last two years.
Of those who had a dispute with:
The Regional Government:
A Private Firm:
44% took at least
one to court.
66% took at least
one to court.
Societal Factors
•
•
•
•
Trust
In general can one trust business people in your region to fulfill their
contractual obligations in their dealings with other business people?
(%)
Yes, one can generally trust
13
More or less yes,
61
More or less no,
25
No, one cannot trust others
2
Civic Participation
Membership in a Business/Professional Organization 31%
Elite Commitment
“What do you think, what type of economic system is most appropriate
for Russia today: One based on state ownership of property and
central planning or one based on private property and market-based
exchange?
Please place yourself on a 5-point scale where 1 indicates a strong
supporter of state ownership and central planning and 5 indicates a
strong supporter of private property and market relations.”
And how do you think that President Putin would answer this question?
Self-Placement
1 = state 5 =market
3.7 (1.30)
President Putin
3.3 (.93)
Market-Specific Factors
Obstacles (1-small, 5 large problem)
Strong competition
2.90
Difficulty finding credit
2.74
Corruption in the
state bureaucracy
2.43
New Building
Credit
Credible
Commitment
.41***
(.15)
.18**
(.09)
.34***
(.10)
Arbitration
Courts
.12**
(.06)
.01
(.04)
.14***
(.05)
President
Market
.01
(.08)
-.003
(.08)
.17***
(.05)
Trust
-.05
(.10)
.14**
(.07)
.08
(.13)
Lack of Credit
(as obstacle)
.03
(.07)
.02
(.04)
-.006
(.04)
Corruption
(as obstacle)
.05
(.05)
.06
(06)
.01
(.03)
Competition
(as obstacle)
.05
(.06)
.10*
(.05)
.03
(.05)
Profitable
.24
(.16)
.20
(.15)
.23**
(.11)
Private
-.41*
(.23)
-.31
(.22)
.02
(.21)
Business
Organization
.20*
(.12)
.47***
(.11)
.34**
(.11)
Police
-.07
(.09)
.10
(.07)
.03
(.05)
Constant
-1.10
(1.00)
.44
(.40)
-1.31*
(.75)
435
435
435
Prob>Chi2
.0010
.0000
.0000
Model
Sector
SectorDummies
SectorDummies
N
New Investment
Investment
Dummy Variable
Investment
Index
Credible Commitment
.32**
(.15)
.38***
(.06)
Arbitration Courts
.18**
(.06)
.10
(.03)
President Market
.06
(.07)
.07
(.05)
Trust
-.05
(.12)
.06
(.07)
Lack of Credit
(as obstacle)
-.03
(.04)
.01
(.04)
Corruption
(as obstacle)
.02
(.05)
.05
(04)
Competition
(as obstacle)
.07
(.05)
.07**
(.05)
Profitable
.20
(.14)
.27**
(.11)
Private
-.53**
(.23)
-.31**
(.12)
Business Organization
.59***
(.16)
.46***
(.11)
Police
-.01
(.06)
.03
(.05)
Constant
.70
(.67)
--
N
435
435
.0000
.0000
Sector Dummies
Sector Dummies
Prob>Chi2
Model
The Impact of Credible Commitment
on Property Rights
For managers who expect that
they…
Probability that firms…
Cannot take
government to
court
Can take
government to
court
.35
.45
Extend credit to suppliers
or customers
.59
.64
Plan new investment
.46
.55
Construct new building
Robustness Checks
Split the sample into respondents who had and had not:
– experienced any property rights violation
– experienced a property rights violation by the state
Political Power might be associated with both ability to take
state to court and investment.
Proxies for political power in the model, e.g, size,
profitability, sector.
Also asked directly about firm’s ability to influence
legislation as a proxy for political power.
Added control for firms that used courts.
Re-estimated the model dropping Arbitration Court and
Corruption.
A Survey of Small Firms
190 small businesses in three cities in Russia:
Ulyanovsk, Smolensk, and Moscow in 1998.
Between 4 and 50 employees.
Indicator of Secure Property Rights:
– Renovation of their place of business:
Can take local government to court
Can take a business partner to court
63%
35%
55%
Comparative Data
Sibiu Warsaw
1997
1996
Warsaw
1998
Can take
Government to Court
53
62
Can take
Business Partner to
Court
N
69
45
83
(45)
(50)
(50)
41
Model 6
Credible Commitment
.55**
(.27)
Arbitration Courts
.03
(.20)
Corruption
(as obstacle)
-.10**
(.04)
Competition
(as obstacle)
.03
(.04)
Age
-.03**
(.01)
Number of Employees
.04**
(.02)
Type (Food =1)
-.18
(.25)
Private
.18
(.32)
Police
(as obstacle)
-.02
(.04)
Constant
N
1.05*
(.64)
137
Prob>Chi2
.0083
Model
Probit
Dependent Variable
Renovation
Caveats
Data are snapshots.
Need replication of these surveys.
Potential for survivor bias in the small firm sample.
Measuring Perceptions
Findings
Not so much “incapable” state institutions, but state
agents unconstrained by legal regime that threaten
property rights.
Civic participation in business organizations associated
with stronger property rights.
Confidence in President Putin’s commitment to a market
economy was associated with stronger property rights.
Implications
For Role of state in developing economies.
Commitment valued over discretion.
State predators more troubling than private threats.
Treatments of state capacity should factor in constraint as well as
discretion.
For Property Rights:
Secure property rights are neither seized from below or granted from above,
but emerge through interaction of state and market actors.
For The Postcommunist State:
That managers exhibited confidence in courts in disputes with private
agents suggests that purported ineffectiveness of Russian state is
exaggerated.
Courts are more important than many realize.
Results hold in both Yeltsin and Putin eras.
Policy
Analyses should distinguish between capacity of courts in
disputes with private and state agents.
Technocratic approach of training and equipping is
insufficient.
Put judges in jurisdictions which overlap electoral districts.
Governor Supports Elections
Can Take
Government to Court
Can Take Government
to Court
.23**
(.10)
.24**
(.11)
Governor Power over Legislature
.16*
(.08)
Years in the firm
-.17**
(.05)
-.18**
(.06)
Size (log number of employees)
.12**
(.05)
.10**
(.05)
Arbitration Courts
.22**
(.06)
.22**
(.06)
Trust
.01
(.12)
.02
(.12)
Competition
(as Obstacle)
-.06
(.05)
-.06
(.05)
Corruption
(as Obstacle)
-.06
(.04)
-.08
(.05)
Profit
-.13
(.14)
-.15
(.15)
Business Organization
.09
(.16)
.12
(.16)
Education
-.12
(.14)
-.14
(.14)
Constant
.61
(.50)
1.68**
(.72)
Prob > chi2
.0000
.0000
Who Puts Pressure on Judges?
•
•
•
•
•
•
•
•
% Yes Responses
The Governor
42
The Regional Duma
18
The Regional Bureaucracy
40
Federal Bureaucracies
33
The Mayor
15
The Security Forces (Siloviki)
32
Influential private citizens,
such as businesspeople
54
Criminal Structures
27