Jun 08 2009

Russian Bonsai

by at 7:45 pm under Uncategorized

So we had the Genovese and Maghribi traders.  Now I’d like to toss the former-Soviet Russians into the analysis bowl.  As the Cold War ended, the communist Soviet Union was led by the Washington Consensus into a market economy of sorts.  Hurray for liberal democracy, right?  Well, not quite.  For their part, Western leaders had not read enough Greif to make this potentially shocking transition go smoothly – or any semblance of smoothly.

Coming from state-centric, vertically aligned communist system, many Russians had a hard time adjusting to a horizontal, state-free market economic system.  Several issues complicated the situation, including but not limited to the following. 1) The socialist state would generally look after citizens regardless of their work ethic. Under a market system, competition was introduced and citizens were expected to work harder for themselves to get by.  This was often seen as a challenge rather than an opportunity. 2) The culture of corruption was too strong to just naturally dissipate through the course of the transition to a market economy. 3) The country was left with a power vacuum after the strong-armed soviet government fell. These key factors combined to result in the rise of business oligarchs and a lack of central power. Any doing business had to pay their “dues” at every step of every process. Why would anyone work their hardest in a system where you’re bound to lose? The economy disastrously collapsed in the late nineties.

From Greif’s perspective, everyday Russians were severely lacking any coercion constraining mechanisms.  Law enforcement didn’t have the resources or were corrupt themselves. Corruption dramatically increased transaction costs. Social capital probably existed in small amounts at the neighborhood level. But as soon as any value was big enough to be noticed, it was targeted by corrupt actors.  The business oligarchs formed dense clusters of power and wealth while the majority of the middle and working classes were kept stagnant.  The culture of corruption was a well established institution. And for the transition to a market economy to succeed, Russians needed stronger law enforcement to account for this institution.

One person understood this very well. But he wasn’t necessarily interested in making Russia a freer, more promising place for everyday Russians. Enter Putin. After the collapse, Putin took advantage of the corruption institution to organize the oligarchy and realize his vision of a world energy super-power. In assembling his designs, Putin took time to understand the Russian business environment well. He saw that corruption and the markets grew and evolved together. He knew it well enough to achieve his goals.

So how does the role of social capital apply to global governance? This example shows us the need of an intimate understanding of the culture surrounding a developing market by policy makers. In this case, more ground-level attention was needed than money and high-level analysis. Policy makers needed to be on the streets talking to everyone, observing and reporting. In this sense, markets are kind of like Bonsai trees that policy makers need to continually tend. Perhaps corruption was a light source that the Russian tree was growing toward; policy makers could have trimmed some branches or introduced another light source.

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