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![25 Years of Transition
Formerly socialist economies become market economies
different paths with similar outcomes
There is a whole range of political regimes in formerly
communist dictatorships
from stable democracies to sultanistic dictatorships, covering whole
spectrum without holes
[Putting the same idea differently:] political institutions are
way more dissimilar than economic ones
even controlling for history, oil, proximity to the West
The Economic Transition and Alternative Institutions | December 2016 | 4](https://image.slidesharecdn.com/konstantinsonin-161209120514/75/Economic-Transition-and-the-Rise-of-Alternative-Institutions-4-2048.jpg)
![20 Years Ago
Shleifer (1995): “.. there is simply no political interest in governance
mechanism before privatization. This interest emerges during privatization,
as large outside shareholders are created and come to realize their needs
... Pressure from these new owners can then convince the government to
adopt regulations that foster corporate governance. Under pressure, the
government begins to protect property rights. ... The transfer of control
rights from politicians to private parties gives the process of establishing
property rights a jump-start by creating the political demand for the
protection of property rights.”
Aslund (1995): ''... [once] the fundamental issues [of] the mutual
independence of enterprises from one another (as well as from the state)
and their profit orientation [have been addressed], under such conditions
owners will forcefully try to ascertain their property rights''.
The Economic Transition and Alternative Institutions | December 2016 | 6](https://image.slidesharecdn.com/konstantinsonin-161209120514/75/Economic-Transition-and-the-Rise-of-Alternative-Institutions-6-2048.jpg)
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Economic Transition and the Rise of Alternative Institutions
This document summarizes a presentation on the economic transition of formerly socialist economies and the development of alternative institutions. It discusses how 25 years after transition, political institutions diverged more than economic institutions. It also presents analysis showing the density of connections between Russian business and political elites increased over time, and early connections were linked to greater business success, especially in oil industries. The analysis suggests alternative institutions like personal connections filled the gap when appropriate market institutions did not develop fully.
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Economic Transition and the Rise of Alternative Institutions
- 1. The Economic Transitionand Alternative Institutions Natalia Lamberova, UCLA Konstantin Sonin, University of Chicago and Higher School of Economics 25 Years of Transition SITE, Stockholm, December 5-6, 2016
- 2. Road map Some generalobservations on 25 years of transition Some puzzles that I derive from these general observations A very simple exercise on political connections in Russia Some very general conclusions The Economic Transition and Alternative Institutions | December 2016 | 2
- 3. 25 Years ofTransition Transition is a giant natural experiment Does transition experience confirm our hypotheses? The Economic Transition and Alternative Institutions | December 2016 | 3
- 4. 25 Years ofTransition Formerly socialist economies become market economies different paths with similar outcomes There is a whole range of political regimes in formerly communist dictatorships from stable democracies to sultanistic dictatorships, covering whole spectrum without holes [Putting the same idea differently:] political institutions are way more dissimilar than economic ones even controlling for history, oil, proximity to the West The Economic Transition and Alternative Institutions | December 2016 | 4
- 5. Politics of Institutions Politicalregimes produces institutions Efficiency requires good institutions normatively - for an economy to grow, it needs good institutions positively - people want to get rich The Economic Transition and Alternative Institutions | December 2016 | 5
- 6. 20 Years Ago Shleifer(1995): “.. there is simply no political interest in governance mechanism before privatization. This interest emerges during privatization, as large outside shareholders are created and come to realize their needs ... Pressure from these new owners can then convince the government to adopt regulations that foster corporate governance. Under pressure, the government begins to protect property rights. ... The transfer of control rights from politicians to private parties gives the process of establishing property rights a jump-start by creating the political demand for the protection of property rights.” Aslund (1995): ''... [once] the fundamental issues [of] the mutual independence of enterprises from one another (as well as from the state) and their profit orientation [have been addressed], under such conditions owners will forcefully try to ascertain their property rights''. The Economic Transition and Alternative Institutions | December 2016 | 6
- 7. Alternative Institutions Taking astep back, demand for good economic institutions needs to result in a demand for good political institutions which is obviously not there So, demand for economic institutions should result in alternative institutions as there are certainly some institutions The Economic Transition and Alternative Institutions | December 2016 | 7
- 8. A Small Exercise “Cronycapitalism” as an example Institution: leaders appoint cronies instead of building up impersonal institutions The Economic Transition and Alternative Institutions | December 2016 | 8
- 9. Why Appoint a“Crony”? An easy question to a lay person (or a journalist ), but a difficult one for an economist Naïve: a crony will give your more benefits, than a non-crony economics: that’s naïve Coasian logic total surplus is higher under non-crony you could get more from having a higher total surplus The Economic Transition and Alternative Institutions | December 2016 | 9
- 10. “Dictators and theirViziers” Egorov and Sonin (2011) loyalty as equilibrium behavior dictator appoints vizier to guard his door against enemy competence is ability to distinguish strong enemy from weak one incompetent vizier cannot be bribed into betrayal Does “dictators and viziers” logic help when appointing oil or railroad monopolist head? yes, as “betrayal” might be money to support opposition no, as competence in running business is not same as political acumen The Economic Transition and Alternative Institutions | December 2016 | 10
- 11. The Exercise Russia, Putin listof “inner circle” members business elite (top-200 Forbes list) stack two lists for each pair of people scrap joint mentions in news section of top Russian search engine for 2004-2005 controlling for positive coverage check whether or not early connections matter The Economic Transition and Alternative Institutions | December 2016 | 11
- 12. Connections 2004-05 The EconomicTransition and Alternative Institutions | December 2016 | 12
- 13. What is “aConnection”? The Economic Transition and Alternative Institutions | December 2016 | 13 Connections 1 and 2 are inner circle members A,B,C, and E are businessmen 3 is member of both groups Proximity A has 3-step connection B has 2-step connection C and E are directly connected D is unconnected
- 14. Connections 2014-15 The EconomicTransition and Alternative Institutions | December 2016 | 14
- 15. Density of NetworkIncreases The Economic Transition and Alternative Institutions | December 2016 | 15
- 16. Summary Statistics The EconomicTransition and Alternative Institutions | December 2016 | 16
- 17. At a Glance TheEconomic Transition and Alternative Institutions | December 2016 | 17
- 18. First Results, OLS TheEconomic Transition and Alternative Institutions | December 2016 | 18
- 19. Effect of Oil TheEconomic Transition and Alternative Institutions | December 2016 | 19
- 20. KLRS Misspecification? OLS assumesthat marginal effect remains the same at all levels. logistic regression assumes that log-odds remain constant across different levels of other variables Kernel Regularized Least Squares (Hainmuller, 2013) to use leverages similarity between observations, so that the closer are two observations, the more weight it has with infinitely many higher-order terms and interactions in the model, should be penalty on complexity to avoid overfitting KRLS helps to address the misspecification bias, yet does not protect from he omitted variable bias; also does not allow clustering of standard error The Economic Transition and Alternative Institutions | December 2016 | 20
- 21. KLRS Results The EconomicTransition and Alternative Institutions | December 2016 | 21
- 22. Direct Connections andOil The Economic Transition and Alternative Institutions | December 2016 | 22
- 23. Connection to FoesAlways Bad The Economic Transition and Alternative Institutions | December 2016 | 23
- 24. Conclusion Alternative institutions suchas personal connections work when appropriate institutions would not develop Their existence reconciles similarity of economics and dissimilarity of politics in transition The Economic Transition and Alternative Institutions | December 2016 | 24