Slapping the Grabbing Hand: Credible Commitment and Property Rights in Russia

1
Slapping the Grabbing Hand Credible Commitment
and Property Rights in Russia

• Timothy Frye
• Frye.51_at_osu.edu
• Ohio State University

2
Hobbes

• Private predators are the greatest threat to
  property.
• Effective state is central to secure property
  rights.
• To make property secure, increase state
  capacity.

3
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.

4
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 Putins commitment to a
  market economy.

5
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.

6
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.

7
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

8
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.

9
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.

10
Discretion

• Commitment may come at the cost of flexibility.
  
• One of the main priorities in Eastern Europe
  today is to preserve the governments 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.

11
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.

12
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.

13
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.

14
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.

15
Firm Characteristics

• Average number of employees 840
• Industrial Firms 55
• Retail Trading Firms 20
• Construction/Transport/Communications 25
• Owned their Building 61
• Members of Business Association 31
• Average Age of the Manager (yrs) 46
• Average years as director of the firm 6-10
• Privatized firm 65
• State-owned firm 15
• Denovo private firm 20
• Members of Financial-Industrial Group 2
• Autonomous Firm 72

16
Property Rights Indicator

• Yes
• Build new buildings 21
• Credit to customers or suppliers 40
• Major investment in the
• in the coming year 33

17
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)

18
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.

19
Credible Commitment

Yes () Courts can defend interests
against local/regional government 39 Courts
can defend interests against business partner
76
20

• 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 44 took at least
• one to court.
• A Private Firm 66 took at least one
  to court.

21
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

22
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?
• 1 state 5 market
• Self-Placement 3.7 (1.30)
• President Putin 3.3 (.93)

23
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

24
New Building Credit New Investment
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)
N 435 435 435
ProbgtChi2 .0010 .0000 .0000
Model Sector dummies SectorDummies SectorDummies
25
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
ProbgtChi2 .0000 .0000
Model Sector Dummies Sector Dummies
26
The Impact of Credible Commitment on Property
Rights
For managers who expect that they For managers who expect that they
Probability that firms Cannot take government to court Can take government to court
Construct new building .35 .45
Extend credit to suppliers or customers .59 .64
Plan new investment .46 .55
27
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 firms 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.

28
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 63
• Can take local government to court 35
• Can take a business partner to court 55

29
Comparative Data

• Sibiu Warsaw Warsaw
• 1997 1996 1998
• Can take 53 41 62
• Government to Court
• Can take 69 45 83
• Business Partner to
• Court
• N (45) (50) (50)

30
Model 6 Model 6
Credible Commitment Credible Commitment .55 (.27)
Arbitration Courts Arbitration Courts .03 (.20)
Corruption (as obstacle) Corruption (as obstacle) -.10 (.04)
Competition (as obstacle) Competition (as obstacle) .03 (.04)
Age Age -.03 (.01)
Number of Employees Number of Employees .04 (.02)
Type (Food 1) Type (Food 1) -.18 (.25)
Private Private .18 (.32)
Police (as obstacle) Police (as obstacle) -.02 (.04)
Constant 1.05 (.64) 1.05 (.64)
N 137 137
ProbgtChi2 .0083 .0083
Model Probit Probit
Dependent Variable Renovation Renovation
31
Caveats

• Data are snapshots.
• Need replication of these surveys.
• Potential for survivor bias in the small firm
  sample.
• Measuring Perceptions

32
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 Putins commitment to a
  market economy was associated with stronger
  property rights.

33
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.

34
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.

35
Can Take Government to Court Can Take Government to Court
Governor Supports Elections .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 gt chi2 .0000 .0000
36
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