East meets West

The Role of Western Economic Theory in Russia’s Transition

John HamiltonNovember 2009

The theoryThe theory

The reformsThe reforms

The institutional backgroundThe institutional background

The legal system The legal system

Process of selection ofof laws by efficiencyProcess of selection ofof laws by efficiency

Priority is creation of efficient rules rather than efficient institutionsPriority is creation of efficient rules rather than efficient institutions

Assimilation of laws to pricesAssimilation of laws to prices

Atomistic view of man as rational utility maximiser

Coase theorem: “if one assumes rationality, no transaction costs, and no legal impediments to bargaining, all misallocations of resources would be fully cured in the market by bargains.”

Economic analysis of law

NEOCLASSICAL ECONOMICSNEOCLASSICAL ECONOMICS

Laws of economics are like the laws of engineering

Ordo-liberalism and the Freiburg school Ordo-liberalism and the Freiburg school

Problem of how to create an appropriate "economic constitution"

Focuses on the kind of legal framework required in order to create a market economy

Used as a basis of reforms in Post WWII Germany

Prescribes the need for an "economic constitution" and a role for government

THE REFORMS – the objectivesTHE REFORMS – the objectives

Create private propertyCreate private property

Reverse Marxism and create right incentive structure Reverse Marxism and create right incentive structure

Weaken the stateWeaken the state

"Depoliticise""Depoliticise"

Create a demand for law and institutional reformCreate a demand for law and institutional reform

Suppression of alternative interpretationsSuppression of alternative interpretations

THE REFORMS – implementationTHE REFORMS – implementation

Mass voucher privatisation 1992-1994

Face value RUR 10,000Face value RUR 10,000

TransferableTransferable

Concentrations of ownershipConcentrations of ownership

Loans-for-shares privatisation in 1996

Financed Yeltsin's re-election campaignFinanced Yeltsin's re-election campaign

Assets sold at an undervalueAssets sold at an undervalue

The 'privatisation of state power' The 'privatisation of state power'

THE REFORMS - consequencesTHE REFORMS - consequences

Ownership concentrationOwnership concentration

PerformancePerformance

Corporate governanceCorporate governance

Demand for law and the rule of lawDemand for law and the rule of law

DissatisfactionDissatisfaction

The return of the stateThe return of the state

THE INSTITUTIONAL BACKGROUNDTHE INSTITUTIONAL BACKGROUND

Marxism

Disappearance of law and the stateDisappearance of law and the state

Pashukanis

The return of lawThe return of law

Punishment as paymentPunishment as payment

Commodity theory of lawCommodity theory of law

Gulags Gulags

Terror and repressionTerror and repression

THE INSTITUTIONAL BACKGROUND THE INSTITUTIONAL BACKGROUND

Networks Networks

Personal and institutional trustPersonal and institutional trust

Decriminalisation of illegal activitiesDecriminalisation of illegal activities

UnemploymentUnemployment

Organised crimeOrganised crime

CorruptionCorruption

TransparencyTransparency

TrustTrust

THE LEGAL SYSTEMTHE LEGAL SYSTEM

The courtsThe courts

Civil law - advantagesCivil law - advantages

Civil law - disadvantagesCivil law - disadvantages

Law and governanceLaw and governance

ContinuityContinuity

RigidityRigidity

UncertaintyUncertainty

THE LEGAL SYSTEMTHE LEGAL SYSTEM

Corporate law - assumptions

SimplicitySimplicity

Slow and unreliable enforcementSlow and unreliable enforcement

Unsupportive normsUnsupportive norms

Problem of public enforcementProblem of public enforcement

THE LEGAL SYSTEMTHE LEGAL SYSTEM

Corporate law – self enforcing model

Bright line rulesBright line rules

Direct enforcementDirect enforcement

Minority shareholder protectionMinority shareholder protection

Procedural protectionProcedural protection

Strong legal remediesStrong legal remedies

THE LEGAL SYSTEMTHE LEGAL SYSTEM

Corporate law – interested party transactions

- 20% or more of shares- relatives- 20% or more of shares- relatives

Uncertainty moved from law to factUncertainty moved from law to fact

ConclusionConclusion

MARXISM NEOCLASSICAL ECONOMICS

An economic theory with implications for law.

An economic theory with implications for law

Law and the state will ‘wither away’. There should be deregulation and a ‘night watchman’ state.

Bourgeois law is based on the principle of commodity exchange and laws are like prices.

Laws may be assimilated to prices.

The means of production will need to be wrested from the owners (if necessary by a minority and by force).

Economic reform must be introduced (by a minority if necessary) whatever the cost.

Criminality is due to exploitation, and will cease when exploitation ceases.

Creation of wealth will produce institutional reform.

Once property is nationalised, exploitation will cease and the new social order will be created.

Once property is privatised a market will be created and a market democracy will emerge.

Man is motivated by the notion of service and social benefit will accrue spontaneously.

Man is motivated by maximising his utility and social benefit will accrue spontaneously.

Once the initial conditions have been created, reform toward the new order is an inexorable and linear process.

Once the initial conditions have been created, reform towards the new order is an inexorable and linear process.

COMPARISONCOMPARISON

CONCLUSIONCONCLUSION

Authoritarianism?Authoritarianism?