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Saturday, August 25, 2007

Streetwise Professor on the Putin Economy

Streetwise Professor on the prospects of the Putin economy (spoiler alert -- they are bleak):

I got a chuckle reading this quote from a Moscow Times article on the growth of the Russian bureaucracy:

From inside the Kremlin’s walls to everyday lives with endless paperwork, bureaucracy rules. Like the nation’s economy, bureaucracy seems to be booming. Determining its exact size is difficult, much like navigating the mire of it. But by all accounts, the number of public servants today likely exceeds Soviet levels. And they are making substantially more money than their average compatriots. Sociologists have detected a growing inclination among young people toward jobs like customs officers or tax inspectors, despite widespread allegations of corruption and inefficiency. [Emphasis mine.]

Er, despite isn’t the right word. Because is more apt. Resources flow to their most highly remunerated use (not necessarily their most efficient one.) In societies where rent seeking is highly rewarded, resources will flow to activities conducive to rent seeking. Just as Willie Sutton said he robbed banks because that’s where the money is, young Russians are evidently seeking glorious careers in the customs or tax services for exactly the same reason.

This does not bode well for the future of the Russian economy. As Tullock, Anne Kreuger, Vishny & Shleifer, and others have noted, the flow of real resources into rent seeking activities creates a drag on growth. Vishny & Shleifer note that there are sources of increasing returns in rent seeking. Their basic mechanism is that rent seeking depresses the returns to private economic activity, which makes it more attractive to go into rent seeking governmental positions, which results in further depression of the returns to productive work, etc. There are other mechanisms at work too. North, Wallis, & Weingast note that “natural states” built on rent seeking need to suppress private economic activity in order to prevent the rise of political interests that would challenge the rent seekers. Mancur Olson argued that rent seekers come to dominate politics, and introduce rules and regulations that increase their opportunities to extract rents while throttling private economic activity.

Vishny & Shleifer also derived a model in which high rewards to rent seeking activity impede growth by inducing the most talented to go into non-productive activities. In this model, in the productive sector the rate of productivity growth depends on the skill of the most talented individual in that sector (because of spillovers/learning by doing–the less talented learn from the most talented.) High rewards to rent seeking induce the most talented to go into unproductive redistributive activities, thereby reducing growth in the productive sector. (The V-S model presumes free entry into rent seeking activities. Presumably the rent seekers will attempt to protect their turf and erect entry barriers that will mitigate this problem of dynamic inefficiency, but which will create other static deadweight losses as people expend real resources to attempt to get into the cartellized rent seeking sector.)

If the sociologists’ observations are accurate, this is an indication that rent seeking in Russia is not limited to expropriating foreign energy companies, but is instead a more pervasive phenomenon. This would represent a throwback to Tsarist times, and to traditional Russian patramonialism. Sigh.

One other thought comes to mind in this regard. The increasing centralization of power in the Putin years–the re-establishment of the “vertical power”–could actually make things less bad–not good, just less bad. Centralized, “cartellized”, coordinated rent seeking is typically less inefficient than the de-centralized, uncoordinated rent seeking that apparently characterized the Yeltsin years. Vishny-Shleifer analogized the cost of uncoordinated rent seeking to the losses that arise from multiple marginalization that occurs when complementary goods are sold by separate monopolists; integration into a single monopoly can improve efficiency in this case. With corruption, numerous independent bureaucrats each extracting a bribe will collectively charge a bribe that exceeds the monopoly bribe, creates more deadweight loss than the monopoly bribe, and actually results in lower bribery collections. Coordinating the activities of corrupt officials makes everybody better off–though not as well off as they would be if corruption were stamped out. Think of the “anti-corruption” campaigns in Russia as being aimed at making corruption more efficient, not as an attempt to stamp it out altogether. Where’s the fun (and profit) in that?

Similarly, Olson argued that a “stationary bandit” with monopoly control over a territory has an “encompassing interest” in encouraging some economic growth to permit him to extract greater revenues. In contrast, “roving bandits” view the populace as a commons, and have an incentive to steal as much as they can as soon as they can lest somebody else steal first. They have no incentive to encourage any economic growth as unlike the stationary bandit, they can’t get their hands on the fruits of this growth.

This is not to say that I advocate strong power verticals that coordinate theft. It is just to say that as bad as this is, things can be worse. This can also help explain Putin’s popularity. Compared to a normal civil society in which rent seeking and corruption are highly circumscribed, Putin’s Russia appears dreadful. But that’s not a comparison that most Russians can make, never having lived in such a normal civil society. Compared to the era of roving bandits and uncoordinated corruption that preceded Putin, ordered corruption by the vertical power looks pretty good. The tragedy is that many Russian minds identify chaotic corruption with freedom, economic liberty, and democracy, as that is how the transition was described to them. And Putin is not about to disabuse them of that notion. Indeed, he is doing everything to reinforce it, as AEI’s Leon Aron discusses in this article.

One last thing on the Russian economy. I am reviewing some data on recent Russian economic performance, and will soon post an extended entry analyzing that performance, and making some observations on what the future is likely to hold.

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