Whither Russia? A Review of Andrei Shleifer's A Normal Country
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mar07_Article4 3/9/07 10:11 PM Page 127
Journal of Economic Literature
Vol. XLV (March 2007), pp. 127–146
Whither Russia? A Review of Andrei
Shleifer’s A Normal Country
EKATERINA ZHURAVSKAYA∗
In this review, the author reflects on the heated debates around views about Russia’s
postcommunist transition expressed in essays collected in new Andrei Shleifer’s book,
A Normal Country: Russia after Communism (Harvard University Press, 2005),
which were initially published at different times during transition. She focuses on the
three questions that have been in the center of the debate among academics and pol-
icymakers: What should the sequencing and the speed of reforms be? Should a coun-
try have political centralization for fiscal decentralization to be efficient? Is Russia
normal? The author argues that Russia’s most recent history provides convincing evi-
dence in support of the logic of political and economic transformation as it was under-
stood by Shleifer as early as the beginning of the 1990s.
1. Introduction as the quintessential planning economy. Yet,
from the very start and up to this date,
T ransition from central planning to market
is one of the most important events in
modern economic history. Apart from the fact
Russia’s transition has been full of controver-
sy. Both inside and outside of Russia, the
views on whether Russia’s transition is a suc-
that transition changed the lives of more than
cess or a failure changed virtually every cou-
a billion people in almost thirty countries, it
ple of years. The overwhelming voter
had and continues to have an important effect
support for Boris Yeltsin in 1991–92 was lost
on the economics profession. Transition pro-
already in 1993. The rosy expectations of the
vides academic economists with an unprece-
“coming Russian boom” in 1996–97 were
dented opportunity to put many propositions
followed by the “who lost Russia?” debate of
of economic theory to test. Many important
1998–99. Russia was “rediscovered” in
lessons are being drawn from transition expe-
2000–2003 when the expectations were that
riences of different countries; the most
it joins China, India, and Brazil to become
important of them are about the significance
one of the world’s leading economic powers
and limitations of economic analysis.
and to take the place of Britain, Germany,
Russia’s experience of the last fifteen years
France, and Italy in the G-7 group by 2050.
symbolizes all the challenges and opportuni-
Despite the continued strong growth, the
ties of the transition process. Russia started
mood swung back in 2004: many interpret
the current situation as a reversal of both
∗
Zhuravskaya: CEFIR at the New Economic School economic and democratic transitions.
and CEPR. I am grateful to Sergei Guriev, Roger Gordon,
Ruben Enikolopov, Zarema Kasabieva, Konstantin Sonin, It is often argued that to judge whether
and Natalia Volchkova for useful comments. the transition has been a success, one has to
127mar07_Article4 3/9/07 10:11 PM Page 128
128 Journal of Economic Literature, Vol. XLV (March 2007)
go back to the original goals and expecta- changes in Russia starting from the command
tions in the beginning of 1990s. This certain- planning system to the point where it ended
ly is a useful exercise, but by no means up after a decade and a half of transition. The
sufficient. The first president of Russia, last chapter in the book (by Shleifer and
Boris Yeltsin, believed strongly that his his- Daniel Treisman) presents the authors’ judg-
torical mission was to make sure that Russia ment about where this point might be; the
could never go back to communism and conclusion of this chapter is stated in the
totalitarianism. On the economic front, he book’s title.
aimed at building a prosperous market econ- A Normal Country is a courageous and
omy. By the end of his second term, it was largely successful attempt to take a longer-
virtually a conventional wisdom that he over- term view on the most important issues of
whelmingly succeeded in his first task but transition. It allows having an honest look
failed the second one. Several years down back and assessing the ideas proposed by
the road, it is again almost obvious that the Shleifer and his collaborators at different
opposite is true: Russia is prospering eco- times during Russia’s transition. Since many
nomically but is becoming increasingly of these ideas were at the heart of both aca-
authoritarian. demic and policy debates over the course of
In a retrospect, it is clear that many of the transition, the book gives an exciting oppor-
extreme positions taken along the way are tunity both to confront them with the out-
best explained by representativeness heuris- comes that we observe ten years down the
tic—an anomaly imbedded in the nature of road and also to check them for internal con-
human judgment that entails attributing spe- sistency.
cial features of a mere realization from a sto- The book chapters focus on different
chastic process to the characteristics of the aspects of the institution building during
general population. The swings in under- Russia’s transition; yet, there is a broad over-
standing of Russian transition make it evi- riding theme of the book: depoliticization of
dent that the students of economics, and firms as the major key element of transition.
especially those of political economics, must The book addresses the issues of why
take a longer-term view to understand the depoliticization is important; which reforms
fundamental drivers of reforms. For intellec- are needed to achieve it; what are the major
tual honesty’s sake, we should also try to challenges and the strategy for their imple-
revisit our prior views and confront our the- mentation in the face of political and eco-
ories with recent evidence. Andrei Shleifer’s nomic constraints; and, finally, how far
excellent book, A Normal Country, presents Russia’s transition has gone in securing
a unique opportunity to do so. depoliticization. Shleifer argues that state
intervention into economic life in all of its
2. The Book forms, ranging from the system of command
planning and state ownership of firms to dis-
The book brings together a set of academic cretionary regulation and subsidization of
articles written by Shleifer and his coauthors private firms, is fated to create severe ineffi-
about the most important challenges that ciencies and result in corruption, unofficial
Russia’s reformers faced during the first economy, and suppression of economic
decade of transition. The articles that became growth. The main reason for this is that
book chapters were written and originally politicians systematically pursue objectives
published mostly in the 1990s at the time other than economic efficiency. First, they
when the actual policy choices were faced by reallocate resources toward securing their
policymakers. Step by step, A Normal own political power at expense of economic
Country analyzes the major institutional efficiency. And second, they are dependentmar07_Article4 3/9/07 10:11 PM Page 129
Zhuravskaya: Whither Russia? A Review of Andrei Shleifer’s A Normal Country 129
on concentrated special interests. Since at (see, for instance, Joseph E. Stiglitz 2000,
the start of transition the governments had 2002).
unconstrained influence on all aspects of Gérard Roland (1994) introduced a useful
economic life, the main goal of reforms dur- framework to analyze alternative reform
ing transition had to be to establish institu- strategies from the political economy per-
tions that put effective constraints on spective. He distinguished between ex ante
government’s intervention in firms and mar- political constraints (reflecting the strength
kets.1 A Normal Country applies this gener- of political resistance to reforms) and ex post
al theme to the specifics of Russia’s reforms. political constraints (reflecting the danger of
It analyzes which reforms were needed to policy reversals after implementation of
secure constraints on Russia’s state and why. reforms and realization of their outcome). It
In this review, I want to reflect on the is useful to revisit this debate using Roland’s
heated debates around many of the views framework.
about Russia’s postcommunist transition
3.1 Ex Ante Political Constraints
expressed in this book. In particular, I focus
on the three issues discussed in the book Russia went through many of the key insti-
that have been in the center of the debate tutional reforms in the first five to seven
both among the academic economists study- years of transition. In particular, big bang
ing Russia and the policymakers working in liberalization and privatization of firms were
and with Russia. In what follows, I will argue largely completed by 1995. Yet, Russia’s
that Russia’s most recent history (that took record in such areas as establishing the rule
place after the majority of the essays in the of law and deregulation was extremely poor.
book were written) provides convincing evi- Throughout most of 1990s, Russia’s GDP
dence in support of the political and eco- was shrinking, living standards deteriorating,
nomic logic of institutional transformation as and unofficial economy rising. Motivated by
it was understood by Shleifer in the early the rising criminalization and by poor
1990s. In addition, the book proves to be a macroeconomic performance during the
very useful tool for understanding Russia’s first stages of Russia’s transition, many schol-
prospects as of today. ars heavily criticized Russia’s reformers and
their advisors, including Shleifer, for “market
3. The First Debate: The Logic of fundamentalism,” i.e., disregard of market-
Institutional Transformation supporting institutions and “naked faith” in
the invisible hand of the market.2
One of the major debates of the transition
To be fair, it is worth noting that accusa-
literature throughout the 1990s was on
tions of “market fundamentalism” seem to
sequencing and the speed of reforms. In
ignore many policies actually implemented
particular, one of the central questions in
during the first years of Russia’s transition.
this debate was whether priority should be
Most of what reformers were doing was cre-
given to rapid privatization as Shleifer and
ating institutional foundations of market
his coauthors advocated or, in contrast, to
economy from scratch in contrast to the
establishing competition, rule of law, social
claims of their critics. A few examples from a
and organizational capital, and other market-
much longer list are the establishment of an
supporting institutions prior to privatizing
independent central bank, securities and
1
The general theoretical arguments behind this theme
2
are featured in another book by Shleifer written jointly See, for instance, Stiglitz (2002) and Grigory
with Robert W. Vishny, The Grabbing Hand: Government Yavlinsky and Serguey Braguinsky (1994). Chapter 5 of A
Pathologies and Their Cures, published by Harvard Normal Country includes Shleifer’s response to the work
University Press in 1998. of Yavlinsky and Braguinsky.mar07_Article4 3/9/07 10:11 PM Page 130
130 Journal of Economic Literature, Vol. XLV (March 2007)
exchange commission, tax system, customs, capital markets, privatization can not
constitutional court, consumer rights law achieve its main goal—depoliticization.
and consumer rights organizations, and So why, despite so much attention devot-
bankruptcy law.3 The problem with many of ed specifically to institutional reforms, did
these institutions was not that they were many of them not materialize during the
missing but that they failed to function prop- 1990s and why did many materialize only
erly; for example, many market-supporting on paper? Shleifer’s answer is that the logic
laws were not enforced (Katharina Pistor, of institutional transformation dictates that
Martin Raiser, and Stanislaw Gelfer 2000 functioning market-supporting institutions
and Pistor and Chenggang Xu 2004). It is could not be established before the emer-
true, however, that several key reforms, gence of a demand for them, namely, the
including those from the “Washington con- emergence of a class of economic agents
sensus” list (John Williamson 1990), have not who are supposed to play by the rules set
even been attempted at that time, e.g., up by these institutions. The “Privatizing
deregulation and privatization of land. Russia” chapter of A Normal Country
Irrespective of whether the architects of argues that a precondition for creating this
Russia’s reforms—Egor Gaidar and Anatoly demand was formation of markets and pri-
Chubais—were “market fundamentalists” vate property (see also Maxim Boycko,
and of whether they pursued “Bolshevik Shleifer, and Vishny 1995). One of the
strategies” as Stiglitz (2002) puts it, A main goals of privatizing fast was political:
Normal Country vividly demonstrates that rapid privatization according to Shleifer
the criticism of ignoring the importance of and his coauthors was needed to create a
market-supporting institutions surely did political constituency that supports further
not apply to Shleifer who, at that time, reforms. The flip side of this argument is
served as an advisor to Russia’s government. that ex ante political constraints were too
Almost every single chapter in the book strong: special interests against reforms
focuses on the challenges of creating market (e.g., bureaucrats in industrial ministries,
supporting institutions and, particularly, managers of large state-owned enterprises
rule of law. Seven out of eight chapters in (SOEs) often called “red directors,”
the book that are devoted to specific regional governors, and SOE workers)
reforms—all but one published before were politically too powerful at that time
1998—speak of the importance of such and reformers were unable to co-opt or
institutional reforms for the success of tran- crush these interests.4 For example, resist-
sition as legal and judicial reform, establish- ance to a new Land Code from the
ing sound competition policy, deregulation Communist wing of Russia’s parliament—a
of small business, tax reform, reform of fis- faction with broad political base at the
cal federalism, etc. Even the chapters that beginning of transition—was simply insu-
were written on the very eve of Russia’s pri- perable. Whether this political equilibrium
vatization, e.g., chapter 3 of the book was sustained or it had changed over the
“Privatizing Russia” originally published in course of transition is an important test of
1993, go far beyond the “Washington Shleifer’s thesis.
Consensus” and argue that, without corpo- For the first eight years of Russia’s transition,
rate governance, antitrust, and functioning not much political pressure for institutional
4
Another brilliant book by Shleifer written jointly with
3
Egor Gaidar—the Acting Prime Minister of Russia Treisman, Without a Map: Political Tactics and Economic
(1991–92)—made this point in his address to the GDN’s Reform in Russia (2000), shows that reformers’ policy
Seventh Annual Global Development Conference in St. choice set, indeed, was substantially constrained by the
Petersburg in January 2006. political equilibrium in the Yeltsin’s era.mar07_Article4 3/9/07 10:11 PM Page 131
Zhuravskaya: Whither Russia? A Review of Andrei Shleifer’s A Normal Country 131
reform was observed. At that stage, transition medium-size firms in Russia (Guriev, Olga
scholars realized that resulting from privatiza- Lazareva, Andrei Rachinsky, and Sergei
tion (relatively) high wealth concentration Tsoukhlo 2003 and Peter Boone and Denis
may lead to subversion of government poli- Rodionov 2002).
cies and institutions by the rich.5 For exam- These recent developments, in my view,
ple, Konstantin Sonin (2003) and Glaeser, provide convincing evidence in favor of
Scheinkman, and Shleifer (2003) built Shleifer’s original view of the logic of institu-
insightful models showing that the rich (e.g., tional transformation even if the change has
Russia’s oligarchs) may block institutional taken a lot longer than reformers expected.
reforms, such as establishing rule of law, Completion of the first wave of liberalization
because low property rights protection allows in 1992–96 and subsequent (partly lawless)
the rich and politically powerful to expropriate consolidation of ownership in the second
less powerful agents. half of the 1990s led to the formation of a
Nonetheless, many of the market-sup- class of large private majority owners as an
porting reforms and other institutional important political force that pushed for fur-
changes that Shleifer argued for back in the ther reforms. These individuals acquired a
1990s did materialize later on. This hap- stake in continuation of institutional reforms
pened between 2000 and 2003—long after since they became interested in attracting
the relevant chapters of A Normal Country outside finance and protecting their proper-
were written. During the first Putin’s term ty rights. One can illustrate this logic by the
in power, Russia’s government accom- mechanism behind recent changes in corpo-
plished deregulation of small business, a rate governance. Before ownership consoli-
drastic tax reform, a more transparent rev- dation in the 1990s, asset stripping was the
enue sharing rule between the federal cen- main activity of a majority of top corporate
ter and the regions, and adoption of the new executives, so-called “red directors.” At the
Land Code that instituted private property turn of the century, the initial process of con-
for land. Importantly, most of these reforms solidation was completed and the majority
have been lobbied for by private-sector owners gained control over their enterprises.
organizations, and most of all by the “oli- Criminal gangs who previously provided
garchs’ trade union” RSPP (Russian Union protection to asset stripping out of state-
of Industrialists and Entrepreneurs). owned and employee-owned firms in the
Substantial microeconomic adjustments fol- early stages of transition were forced out of
lowed shortly after these measures have the market. It is now quite clear that decrim-
taken effect. For example, a regular survey inalization of large business occurred only
of a representative sample of two thousand because racketeers faced controlling owners
small businesses conducted by the Center who were credibly committed to legalize
for Economic and Financial Research in their business and to fight for protection of
Moscow (CEFIR 2004 and 2005) shows their own property. This sharply contrasts
both the substantial improvement in regula- with incentives of red directors who were
tory burden for small firms and its positive interested in tunneling assets out of firms in
effects on business growth. In addition, which they de facto had full control but no
since 2000, scholars have observed very cash-flow rights. The winning fight of large
substantial improvements in corporate gov- outside corporate owners over the criminal
ernance and transparency in large and gangs jointly with deregulation and tax
reform turned the growth of the unofficial
5
See, for instance, Joel S. Hellman 1998; Sonin 2003; economy around as many activities were
Edward Glaeser, Jose Scheinkman, and Shleifer 2003;
Karla Hoff and Stiglitz 2004; and Irina Slinko, Evgeny brought to the official sector (Nina
Yakovlev, and Ekaterina V. Zhuravskaya 2005. Glavatskaya and Svetlana Serianova 2003).mar07_Article4 3/9/07 10:11 PM Page 132
132 Journal of Economic Literature, Vol. XLV (March 2007)
These events very closely follow Shleifer’s This scenario is perfectly consistent with
predictions made in the outset of privatiza- the latest developments in Russia. Russian
tion. It is quite evident that the institutional voters believe that individuals who now have
changes of 1999–2003 were impossible with- control over formerly state-owned firms
out the demand for market-supporting insti- appropriated their assets dishonestly. For
tutions coming from the newly emerged example, a poll conducted in the summer of
private owners. Interestingly, even the largest 2003 by ROMIR Monitoring (an independ-
politically powerful oligarchs (featured in ent polling firm in Russia), showed that 88
Sonin 2003 and Glaeser, Scheinkman, and percent of the Russian population think that
Shleifer 2003) started to open up and all large fortunes were amassed in an illegal
improve corporate governance and trans- way, 77 percent said that privatization results
parency of their firms as the well-known should be partially or fully reconsidered, and
story of Yukos before 2003 demonstrates 57 percent agreed that the government
(Guriev and Rachinsky 2005). should launch criminal investigations against
the wealthy (Vedomosti 2003). The public
3.2 Ex Post Political Constraints holds particularly strong adverse feelings
toward those businessmen who organized
The growing demand for secured private and (not surprisingly) won “loans-for-shares”
property that is finally coming from Russia’s auctions of 1996.
business elite is not the whole story, howev- This perceived illegitimacy of property
er. There is also an emerging demand from rights gave the foundation for a turn in
bureaucrats to regain control over privatized Putin’s economic policy starting 2004. The
assets in the last couple of years. This two distinguishing features of this new poli-
demand is based on the popular sentiment cy seem to be (1) a creeping renationaliza-
that private owners gained their property tion and (2) an increase in harassment by tax
illegally. collection agencies. Renationalization start-
An important implication of privatization ed with a showcase when the Yukos control-
under the initial conditions of high corrup- ling owner, Michail Khodorkovsky, was
tion and generally poor institutional envi- expropriated and sentenced for eight years
ronment is that property rights of the newly in prison on tax evasion charges with a full
emerged owners may be deemed illegiti- support from the median voter. Yukos’s main
mate by the general population (Roland asset was passed on to state-owned oil hold-
1994; Guriev and William L. Megginson ing Rosneft. Since then, the largest state-
2006). In this case, voters would happily controlled corporations acquired a number
endorse expropriation of the newly of important assets from Russia’s oligarchs.6
emerged private owners. This creates a seri- Since oligarchic ownership has been shown
ous danger of a reversal of transition. to be more efficient than state ownership
Politicians may use public sentiment to gain
political control over firms either through 6
The largest deals included the following: Gazprom got
renationalization of assets or through control over Abramovitch’s Sibneft and Bendukidze’s
OMZ; Rosneft acquired Potanin’s Verkhnechon-
increasing state’s bargaining power vis-à-vis skneftegaz; RAO United Energy Systems bought Potanin’s
privately owned firms by using the political- Siloviye Mashini; Vneshtorgbank got hold of
ly credible threat of their expropriation. In PromStroyBank; and Rosoboronexport jointly with
Vneshtorgbank took over AvtoVAZ. All analysts expect the
both cases, the resulting fragility of proper- trend to continue. For example, Potanin’s main asset—
ty rights severely undermines incentives of Norilsk Nickel—is expected to be sold to the state-owned
the newly emerged private owners; and the diamond monopoly Alrosa (see, for instance, an interview
with Al Breach, a co-head of research at Brunswick UBS
main goal of transition—depoliticization—is http://www.aton.ru/en/news/publication.asp?id=108269
jeopardized. &page=1&order=pubdate&type=publication).mar07_Article4 3/9/07 10:11 PM Page 133
Zhuravskaya: Whither Russia? A Review of Andrei Shleifer’s A Normal Country 133
(Guriev and Rachinsky 2005), these deals with tax collection agencies. In 2004, the tax
substantially diminish economic efficiency. ministry increased its tax claim on Russia’s
There is little doubt that all assets that private companies (excluding the Yukos
were privatized in the notoriously corrupt group) by eight billion dollars, which is
“loans-for-shares” deals in 1996 will be rena- eleven times the sum of 2003. According to
tionalized in one way or another. The reason the data from the first half of 2005, the addi-
for it is that, given the attitude of the gener- tional tax claim will be even higher in 2005
al population, Putin cannot commit not to (Vedomosti 2005).
expropriate even those oligarchs who fully Looking back, we see that this political
support him. Thus, oligarchs loyal to the equilibrium fifteen years down the road has
Kremlin are forced to sell their assets to been recognized as a possible outcome by
state-owned companies at below market the early transition literature. Scholars on
prices.7 Whether the policy reversal will go both sides of the debate—those who advo-
beyond “loans-for-shares” depends on the cated a gradual approach and those who
strength of the public sentiment about ille- argued for a big bang strategy—have written
gitimacy of mass privatization and of the ini- about it. For example, Roland (1994) writes
tial process of ownership consolidation. that, if a privatization program is advertised
Particularly, the worry is that renationaliza- as egalitarian but produces high concentra-
tion reaches firms in such industries as fer- tion of wealth in the hands of a small number
rous metallurgy and telecommunications, of people, there is a danger of a backlash due
which would be a true sign of turning back. to the political demand for redistribution.
These firms were not subject to “loans-for- Shleifer and his coauthors also warned
shares” privatization. But, if public dislike of against ex post political costs of “spontaneous
privatization process extends beyond “loans- privatization.” They showed that reformers
for-shares,” it will not be easy for Putin’s rejected a few privatization options precisely
cronies to resist temptation to get control because “turning thousands of managers into
over these assets as well. multi-millionaires overnight would incite
In addition to creeping renationalization, popular outrage” (Boycko, Shleifer, and
in 2004 and 2005, tax inspectors substantially Vishny 1995, pp. 60–61). Yet, it is evident
tightened screws. According to Anatoly that neither the designers of Russia’s reforms
Chubais, the father of Russia’s privatization nor their opponents seriously considered the
and the CEO of RAO UES, about 90 percent possibility of a reversal ten years after priva-
of businesspeople suddenly got problems tization (rather than right after it), particular-
ly at a time when real incomes of the poor are
7
Even when the reported sale is at the market price, growing. A careful reading of the privatiza-
rumors are that a substantial share of the overall price tion manifesto Privatizing Russia (Boycko,
actually is used as a kickback. (These rumors, for instance, Shleifer, and Vishny 1995) shows that the
have appeared on the radio “Echo Moscow,” see the tran-
script of a program by a prominent Russian journalist Yulia primary concern of reformers was the con-
Latynina on March 11, 2006, http://www.echo.msk.ru/pro- temporary political equilibrium. Pushing
grams/code/42280/). If these rumors are true, billions of reforms forward, indeed, required a lot of
dollars end up in the pockets of the top bureaucrats as a
result of these deals. It is important to mention that apart effort in overcoming politically strong anti-
from rumors, there is no evidence of this what so ever. I reform interests. Advocates of a gradualist
could not find a citation about this in the Russian press as approach were thinking of ex post costs, but
well. This, of course, could mean two things: one is that I
am wrong and it actually is not true; but the other, more they mainly were concerned with political
plausible to me, is that the media is controlled. The basic costs of potential massive layoffs from priva-
economics argument is straightforward: since the threat tized enterprises rather than legitimacy of
point is the Yukos-like complete expropriation, the equi-
librium outcome cannot provide the oligarchs with a full private property (Mathias Dewatripont and
market value of their assets. Roland 1992; Roland 1994).mar07_Article4 3/9/07 10:11 PM Page 134
134 Journal of Economic Literature, Vol. XLV (March 2007)
Shleifer’s opponents are quite correct It is absolutely clear that, in a corrupt
when they point to absence of rule of law as environment as Russia was in the 1990s
the reason for the emergence of this bad (and, by the way, remains such), continued
political equilibrium. The non-cash insider state ownership would have lead to full-
privatization de facto transformed itself into fledged spontaneous privatization. The rea-
“spontaneous privatization.” For example, son for this is the weakness of Russian state’s
managers used transfer pricing to divert enforcement power and inherent inefficien-
assets to private companies; they also inten- cy of bureaucracy. The power of Russia’s
tionally accumulated high wage arrears to central government and its ability for law
employees and, then, forced employees to enforcement had deteriorated even before
sell their shares at low prices to the manage- the collapse of the Soviet Union. (The sec-
ment. In addition, the outright corruption of ond chapter of A Normal Country demon-
“loans-for-shares” disproportionately shaped strates this using the example of partial
the public perceptions of the whole privati- reforms attempted by Gorbachev in the late
zation process. Thus, it is important to revis- 1980s). The reform strategy that worked so
it the debate about the logic of institutional well in China because of efficient bureaucra-
transformation and to understand whether cy and effective enforcement would have
various other feasible options in the outset of definitely failed in Russia. Therefore, even
Russia’s privatization would have changed abstracting from all the efficiency considera-
the ex post illegitimacy of property rights. tions of leaving companies in state hands, it
My view is that, among all the feasible would not have resulted in a better attitude
options, none could have solved the legiti- of the median voter toward economic
macy problem Russia is facing now. In fact, reforms in general and legitimacy of proper-
most alternative solutions proposed by ty rights, in particular.
Shleifer’s opponents would have only exacer- As far as the case-by-case privatization is
bated it. I would like to look at the proposed concerned, Shleifer and Treisman (2000)
alternatives for Russia’s privatization from correctly point out that Russia did experi-
only one angle—the extent to which they are ment with this method of privatization.
likely to have resulted in lower fragility of “Loans-for-shares” program “is nothing but
property rights.8 One can identify three dis- case-by-case privatization as it actually hap-
tinct views on what Russia’s privatization pened” (p. 35). Loans-for-shares deals are
strategy should have been: (1) Russia should rightfully perceived by the public as by far
have delayed privatization following the the most corrupt part of Russia’s privatiza-
Chinese example (i.e., Peter Murrell 1992 tion. Judging by the loans-for-shares experi-
and Stiglitz 2002); (2) Russia should have ence, case-by-case privatization in the
chosen other methods of privatizing but environment of widespread corruption
voucher privatization, e.g., case-by-case cash would have resulted in even lower legitimacy
sales preferably to foreigners (i.e., John of private property rights compared to non-
Nellis 1999); and (3) non-cash voucher pri- cash mass privatization. Indeed, open, fair,
vatization was the best among all politically and transparent auctions were just not a fea-
feasible options (the view of Shleifer and his sible option for Russia at that time. Two very
coauthors). recent examples of auctions—one of privati-
8 zation, the other of renationalization —show
In the third chapter of A Normal Country, as well as
in Privatizing Russia (1995), Boycko, Shlefer, and Vishny that things have not changed for the better
carefully assess political feasibility of various privatization on this front: corruption and collusion in the
options for Russia. In the second chapter of Without a case-by-case auctions is as standard in
Map (2000), Shleifer and Treisman analyze possible con-
sequences of these different options for continuation of Putin’s Russia as it was in Yeltsin’s. One
reforms and for restructuring of Russia’s industry. example is Yuganskneftegas auction ofmar07_Article4 3/9/07 10:11 PM Page 135
Zhuravskaya: Whither Russia? A Review of Andrei Shleifer’s A Normal Country 135
2004—the climax of the Yukos affair—in abstracted from its main economic
which the state used a dummy “Baikal goal—restructuring of Russia’s industry. Yet,
Finance Group” to transfer the asset to there is no agreement among scholars on the
Rosneft in an extremely shady way (New assessment of the effect of Russia’s privatiza-
York Times 2004 and 2005). Another exam- tion on firm performance either.
ple is Slavneft privatization auction. In 2002, Privatization has been characterized as the
this large state-owned oil asset was sold at a “reformer’s greatest success” and as “the
price slightly above the reserve price while biggest disaster.” Throughout transition,
competing bids (including a very competi- Shleifer has been consistently arguing for
tive bid from a Chinese company) were the former.9 Shleifer’s opponents usually use
excluded on technical grounds (Financial the output fall of the first eight years of tran-
Times 2002). sition as the proof of the failure of privatiza-
Evidence shows that privatization to for- tion policy to bring in restructuring and
eigners is by far the best option both for eco- growth (see, for instance, Stiglitz 1999). This
nomic efficiency and political stability argument, however, is hardly sustained once
(Megginson and Jeffrey M. Netter 2001). we consider the last instead of the first seven
Auctions to foreigners reduce the probabili- years of Russia’s transition. Since the finan-
ty of corruption and collusion of bidders and, cial crisis of 1998, Russia has been experi-
therefore, increase privatization legitimacy. encing sustained and rather strong economic
Yet, this option was simply politically infeasi- growth: for eight years in a row, official GDP
ble (Boycko, Shleifer, and Vishny 1995). The has been growing on average at a rate of
main reason for this is the (post)empire syn- almost 7 percent per annum in constant
drome: sales to foreigners prove to be politi- prices.10 An alternative way to look at the
cally very sensitive in all big countries. productivity and profitability of Russia’s pri-
Moreover, the combination of corrupt auc- vate sector is to look at the dynamics of the
tioneers with vested interests of home bid- stock market: since September 1995, the
ders makes sales to foreigners technically stock market index is up fifteen fold.
infeasible since foreign bidders de facto get Generally speaking, using macroeconomic
banned from the auctions as was the case performance of a country as evidence of the
with Slavneft (Financial Times 2002) and the success or failure of a specific reform in a
Yukos’s “loans-for-shares” scheme (Chrystia package of many essential reforms and with
Freeland 2000).
Thus, the analysis of Russia’s initial condi- 9
See Boycko, Shleifer, and Vishny 1993; Boycko,
tions, i.e., widespread corruption and Shleifer, and Vishny 1995; Shleifer and Treisman 2000;
and Shleifer 2005.
absence of rule of law, leads to the conclu- 10
While there is not yet enough data for a quantitative
sion that measures that prolong the period decomposition of this growth, there seems to be a con-
of state ownership would have resulted in sensus on the most important explanations (Anders
Aslund and Nazgul Jenish 2006; Erik Berglof and Ksenia
more looting and, as a consequence, even Yudaeva 2005; IMF 2005; and Augusto Lopez-Claros
higher criminalization; while measures that 2005). The two most straightforward sources of growth
involve cash auctions would have resulted in are not related to Russia’s reform. These are high com-
modity prices and devaluation of ruble in the 1998 finan-
even higher corruption. Thus, neither of cial crisis. Both provided Russia with extremely fortunate
these alternatives to what actually had been terms of trade. Experts agree, however, that growth could
done would have helped legitimization of not have picked up without either of the following two
factors. First, Yeltsin’s radical reforms of 1991–96 and, in
the private property institution. particular, completion of privatization created necessary
preconditions for the subsequent growth and, second, the
3.3 Economic Efficiency of Privatization effects of favorable external conditions were strongly sup-
ported by continuation of liberal reforms and responsible
Up to this point, I have only consid- macroeconomic policy during Putin’s first term in power
ered political aspects of privatization and in 2000–2004.mar07_Article4 3/9/07 10:11 PM Page 136
136 Journal of Economic Literature, Vol. XLV (March 2007)
a large number of confounding events in a restructuring in the short run and a strong
background is not a grateful task. Thus, positive effect in the longer run. Stories sug-
abstracting from possible externalities, one gest that, before consolidation of ownership
would like to look at the microeconomic evi- was completed, both the managers of state
dence of the effects of privatization. The vast and of privatized firms had tremendous
majority of existing firm-level evidence shows incentives to engage in looting. Since firms
a positive effect of privatization on restructur- that were privatized to employees and firms
ing (see, for instance, Joseph R. Blasi, Maya that have not yet been privatized had similar-
Kroumova, and Douglas Kruse 1996; John S. ly few constraints on management, the actual
Earle and Richard Rose 1996; Earle 1998; productivity of state and privatized firms did
Earle and Saul Estrin 1998; Nicholas not differ much in the early stages of transi-
Barberis, Boycko, Shleifer, and Natalia tion. The picture had changed drastically
Tsukanova 1996). None of these papers, how- after 1998 crisis. There is a consensus among
ever, are without methodological problems.11 all observers—including the proponents of
There is one paper—Brown, Earle, and renationalization—that since 1999 most of
Telegdy (2006)—with superior methodology; the growth has been concentrated in priva-
it explores longitudinal data. Brown, Earle, tized and de novo firms (controlling for indus-
and Telegdy find a negative effect of privati- try differences). There is lots of anecdotal
zation on productivity of Russian firms on evidence that, after macroeconomic growth
average over the whole transition period con- picked up, privatized firms restructured while
trolling for firm-specific fixed effects and state firms did not (see, for instance, Evgeny
firm-specific time trends. The posivitive Yasin 2005). It is important to note that, so
effects of privatization start to realize in far, there is no sound theory that would pre-
Russia only seven years into the privatization dict that state firms are more productive than
program—much later than in Hungary, privatized firms unless one is willing to
Romania, or Ukraine.12 Therefore, (1) we assume a benevolent government—clearly a
would need more research to reconcile all wrong assumption both generally and in the
pieces of empirical evidence and (2) at this case of Russia (Shleifer 1998). At most, theo-
point we have to turn to anecdotal evidence ry predicts that privatization benefits should
for answers. A large body of accumulated be delayed until ownership gets consolidated
anecdotes collected from conversations with in the hands of large outside owners (Adolf
investment bankers and industry insiders Berle and Gardiner Means 1932). Therefore,
(who observe transformation in Russia’s positive effects of privatization are expected
industry from within) points to a mildly to be delayed much longer in Russia and
positive or zero effect of privatization on other CIS countries compared to most coun-
tries in Central and Eastern Europe due to
11
The vast majority of the empirical evidence is based differences in the methods of privatization
on cross-sectional analysis and, therefore, is subject to
selection biases. Thorough surveys of the vast empirical lit- programs and initial conditions in these coun-
erature on the effects of privatization in Russia and other tries. Evidence is consistent with this predic-
countries were done by Megginson and Netter 2001, tion. Did privatization help restructuring of
Simeon Djankov and Murrell 2002, and Megginson 2005.
12
Brown, Earle, and Telegdy’s (2006) finding may be Russian firms? While empirical literature gives
explained by the different treatment of state and priva- a mixed picture, anecdotes overwhelmingly
tized firms by the state throughout the transition in suggest the positive answer.
Russia, i.e., state firms have been granted tax breaks and
received other preferential treatment substantially more Overall, the longer term political economy
frequently than privatized firms (Slinko, Yakovlev, and perspective on the debate about privatiza-
Zhuravsknya 2005). Moreover, different tax incentives tion and the speed and sequencing of
may have led to systematic differences in underreporting
of output between state and privatized firms, which could reforms seems to support the views of
account for a part of the productivity gap between them. Shleifer rather than of his opponents.mar07_Article4 3/9/07 10:11 PM Page 137
Zhuravskaya: Whither Russia? A Review of Andrei Shleifer’s A Normal Country 137
4. The Second Debate: Federalism and regulations, corruption, low public goods
Political Centralization provision, and regionalist policies.
There have been a few attempts to recon-
Probably the biggest puzzle in the transi-
cile the outcomes of Russian and Chinese
tion literature is the Chinese economic mira-
federalism. Most of them focus on formulat-
cle. Many papers try to provide explanations
ing conditions for the system of intergovern-
for this puzzle by singling out various peculi-
mental fiscal relations that need to be
arities of institutional and cultural environ-
satisfied for federalism to function well. For
ment, stage of development, as well as of the
example, such features as the clarity of the
speed, sequencing, and direction of transi-
division of expenditure responsibilities and
tion in China. None of these explanations so
revenue sources between levels of govern-
far provided a satisfactory answer that would
ment and the size and predictability of mar-
allow treating China not as a miracle but as a
ginal remittance rates affect incentives of
normal and comprehensible phenomenon.
subnational governments to foster business
Nonetheless, many of these theories helped
growth and to provide public goods effi-
our general understanding of how the world
ciently (for a survey, see Roland 2000).
works outside China or, at least, helped to
Indeed, there is some evidence of important
pose the right questions.
differences in the fiscal intergovernmental
One example is the grand debate about
relations between China and Russia
workings of federalism in developing and
(Zhuravskaya 2000; Hehui Jin, Qian, and
transition countries. In this debate, one
Weingast 2005). Yet, these differences may
strand of the literature argues that decen-
not be enough to explain the vast disparity in
tralization helps to create efficient incentives
the behavior of local governments.
for local public officials through interjuris-
Moreover, a more fundamental question of
dictional competition and fiscal incentives.
why one of the two countries was able to
The Chinese system of fiscal intergovern-
institute and enforce efficient rules while the
mental relations is commonly used by this
other was not is not addressed in those
strand of literature as the main example of
papers.
the beneficial effect of decentralization on
In chapter 9 of A Normal Country,
growth. The other strand of the literature
Blanchard and Shleifer shed some new light
argues that decentralization leads to ineffi-
on this debate by focusing on another major
cient local policies because of local capture
difference between Russia and China. They
and incentives to pursue regionalist policies.
use the China–Russia comparison to argue
Russian transition is often used to demon-
that, for federalism to function, it needs to
strate the pitfalls of decentralization.13
come with political centralization. This argu-
Overall, it has been shown that, in China,
ment was first developed by William Riker
local governments fostered growth of small
(1964) who reasoned that only those local
business by maintaining benign regulatory
politicians, who have strong career concerns
environment and providing growth-enhanc-
about promotion to national politics, can
ing public goods; while in Russia, local gov-
resist local special interests and internalize
ernments impeded growth by excessive
effects of own local policies on other juris-
dictions in the country. Blanchard and
13
The first side of the debate is represented by Shleifer highlight differences in career con-
Charles M. Tiebout 1956; Yingyi Qian and Roland 1998;
Eric Maskin, Qian, and Xu 2000; Gabriella Montinola, cerns of local politicians in the two countries:
Qian, and Barry R. Weingast 1995; Qian and Weingast On the one hand, the Chinese Communist
1996; while the second side by Richard A. Musgrave 1969; party plays a crucial role in creating “national”
Wallace E. Oates 1972; Remy Prud’homme 1995; Vito
Tanzi 1996; Pranab Bardhan 2002; Hongbin Cai and career concerns for (fiscally autonomous) local
Treisman 2004. public officials. In particular, it systematicallymar07_Article4 3/9/07 10:11 PM Page 138
138 Journal of Economic Literature, Vol. XLV (March 2007)
promotes governors whose regions per- The China–Russia case study taken togeth-
formed well to the central government and er with evidence of country-level regressions
dismisses governors whose regions per- suggests the following two points. First, just
formed poorly. In contrast, in the 1990s in as Blanchard and Shleifer argue, political
Russia, fiscal decentralization occurred centralization does matter for how well fed-
along with massive political decentralization eralism functions both in general and in
so that the central government was left with- Russia and China in particular. Second, the
out political or administrative means to dis- necessary condition for administrative cen-
cipline governors. tralization without local democracy to disci-
Generally, there are two distinct ways to pline local governments (and, therefore, to
achieve political centralization: first, to have help federalism function well) seems to be
strong national political parties present in efficient growth objectives of central officials.
local elections; and second, to have adminis- Judging by Enikolopov and Zhuravskaya’s
trative subordination, i.e., to appoint rather (2006) results, this is not true in general.
than elect local officials. There is an impor- Thus, the great Chinese puzzle remains
tant difference in the positions of Blanchard unresolved: it is still not clear why Chinese
and Shleifer, on the one hand, and Riker, on central government is well-behaved and how
the other, about the effect of these two meth- the Party manages to provide its officials in
ods. Blanchard and Shleifer stress the impor- Beijing with incentives to act in the country’s
tance of administrative centralization in best interest. Understanding the fundamen-
China, although they highlight the possible tal reasons behind this is especially challeng-
costs in the form of toppled democracy. ing given the 1980s experience of the Soviet
Riker’s view was that, in most cases, adminis- Communist Party.
trative subordination is ineffective in disci- This last conclusion has an important
plining local politicians—unlike strong implication for Russia’s recent political cen-
national parties—because it may undermine tralization.
potential benefits of federalism (such as bet- While this was never officially acknowl-
ter information about preferences of popula- edged, Putin seemed to have followed the
tion at the local level) in the first place. The Chinese model of political centralization. On
reason for this is that appointed officials may September 13, 2004, Putin announced a
stop caring for preferences of local popula- drastic political reform. First, elections of
tion even though they may know them better regional governors were replaced by their
than central politicians. In contrast, when appointment by the president. Second,
national parties are strong and local elections direct majoritarian elections, which—prior
present, local politicians care both about the to the reform—were held for one half of the
preferences of the local population and about seats in the lower chamber of the Russia’s
the preferences of the national party. Using parliament, were replaced by proportional
cross-section and panel data for up to seven- representation. At the same time, the
ty-five developing and transition countries threshold share of votes needed for a party
for twenty-five years, Enikolopov and to get into the Duma was raised. The official
Zhuravskaya (2006) confirm Riker’s view. aim of the latter change was to strengthen
They show that strong national parties are the national political parties. In line with
necessary for fiscal decentralization to result Riker and Blanchard and Shleifer, Putin jus-
in higher economic growth and public good tified this reform by the need for “securing
provision and in better quality of govern- the unity of state power and the logical
ment; while appointing rather than electing development of federalism.”14
local governments does not have a significant
14
effect on the results of fiscal decentralization. http://www.cdi.org/russia/johnson/9173-10.cfm.mar07_Article4 3/9/07 10:11 PM Page 139
Zhuravskaya: Whither Russia? A Review of Andrei Shleifer’s A Normal Country 139
Did this reform make local governance Ilymzhinov stood for reelection in 2002.
any better in Russia? The answer should Despite all of this, Kirsan Ilymzhinov was
depend on Putin’s objectives. There are no reappointed by Putin for his fourth term as
empirical studies of the effects of these Kalmyk governor, which allows him to rule
changes just yet. It will be very interesting to the region for nineteen years in a row
see the results when sufficient data are accu- because the length of each gubernatorial
mulated. It is not easy, however, to reconcile term in the republic is now seven years.
the record of reappointments up to this Apart from redistribution of rents toward
point with a theory of using administrative bureaucrats in the center, there could also be
centralization as a disciplining device for the political benefits of negotiating with even the
governors. A more plausible story to me is most notorious governors (instead of dismiss-
that the ability to dismiss governors is used ing them). Politically unpopular misbehaving
by the central administration to receive a governors are more dependent on Putin and
(larger) share of governor’s rents. Thirty- cannot appeal to the public against Putin. If
nine out of forty-eight governors were reap- Putin dismisses the most corrupt governors
pointed up to now. Among those thirty-nine, and the new appointees do a good job, they
a few governors are well known for pursuing may become politically strong and independ-
policies that were in massive violations of the ent (and, potentially, they may organize
Russia’s federal legislation; several are widely opposition to the president in the future).15
recognized as local mafia bosses. Thus, the assumption of a benevolent or
The most striking example is reappoint- growth-maximizing national government
ment of the governor of Kalmyk republic, does not seem to be consistent with Russia’s
Kirsan Ilymzhinov (reappointed on the 24th political centralization model. If this is true,
of October 2005). Before being reappointed, we should not expect Putin’s political cen-
Governor Ilymzhinov had truly abysmal per- tralization to affect local governance,
formance throughout his twelve-year gover- instead, it may just redistribute rents toward
norship. During this time, Kalmyk republic the center.
was the first (and so far the only) region in Another possible (related) outcome of
Russian history to officially declare bankrupt- political centralization is that a strong cen-
cy because the past-due debt of the republic tral bureaucracy may face a commitment
exceeded the annual budget of the region. problem in maintaining local governments’
Over the last twelve years, the region was one fiscal autonomy. The desire of central politi-
of the slowest growing in the country. Russia’s cians to appropriate control may lead to fis-
Accounting Chamber investigated the region cal centralization following political
and concluded that Mr. Ilymzhinov systemat- centralization. This is essentially what hap-
ically diverted federal transfers from the pened in Mexico in 1980s. It is important to
Kalmyk budget. Mr. Ilymzhinov has the note, however, that this happened only after
biggest Rolls-Royces collection in Russia, yet a few decades of a remarkable growth of a
his region is among the seven poorest regions federalist system under PRI’s political dom-
in the country. In 1998, the most prominent ination which was perfectly consistent with
critic of Ilymzhinov, journalist Larisa Yudina, the Riker–Blanchard–Shleifer model.
was abducted and murdered. President Putin
awarded Ms. Yudina with a posthumous 15
Overall, mediocrity seems to be a very important
award for courage. Human rights organiza- feature of many key figures around Putin. For example,
tions make accusations that she was killed on Aslund (2005a) characterized Russia’s Prime Minister
the orders of Mr. Ilymzhinov. It is widely Mikhail Fradkov as “a man famous for never making any
decisions” (p. 4). Georgy Egorov and Sonin (2005) show
known that there were grotesque manipula- that autocratic leaders have incentives to avoid choosing
tions of election results when Kirsan able and smart people as advisors and closest allies.mar07_Article4 3/9/07 10:11 PM Page 140
140 Journal of Economic Literature, Vol. XLV (March 2007)
5. The Third Debate: Russia’s Normalcy problems are either overstated, i.e., are
lower in reality than it is customary to think,
A very heated debate erupted around the or overstressed, i.e., are common to other
views that Shleifer and Treisman expressed in countries with similar income. For example,
an article that gave the title to A Normal overstatement relates to country’s economic
Country and became its closing chapter. decline in the first seven years of transition
Shleifer and Treisman argue that Western and overstress relates to Russia’s corruption
scholars and policymakers who view the and inequality.
Russian transition as a disastrous failure mis- Many criticisms of this article appeared in
perceive its effects. The reason for this is various media sources and academic press
their failure to understand what the appro- (see, for example, Steven Rosefielde 2005;
priate comparison group is. While many Vlad Ivanenko 2005a, 2005b; and Vladimir
observers would expect Russia to be at par Shlapentokh 2004). Some critics agree with
with OECD countries, Shleifer and Treisman the main ideas but disagree with the
argue that Russia should be compared to a methodology; the others argue that the rel-
group of middle-income countries. Having a evant comparison groups for Russia is G-7
comparison group for Russia consist of coun- (since, for instance, Russia was the G-8
tries with GDP per capita at purchasing chair in 2006) and that by G-7 standards
power parity around $7,000 to $11,000 leads Russia is extremely abnormal; yet other crit-
to the following conclusion. The challenges ics argue that Russia has not made much
that Russia is facing in terms of both eco- progress from its central-planning and com-
nomics and politics (e.g., corruption, inequal- munist past and still should be characterized
ity, state capture, macroeconomic instability, as an authoritarian martial police state with
immaturity of democracy, and political con- imperial ambitions and feudal economic
trol over media) are typical for this level of system much different from Mexico’s or
income and it is unreasonable to expect from Argentina’s.
Russia to have a level of social, political, and As far as the first two types of criticisms
institutional development much above that of (above) are concerned, they are simply irrel-
other middle-income countries. Considering evant for Shleifer and Treisman’s article. The
that, only a quarter of a century ago, Russia first overlooks the simple differences
was an “evil empire” that oppressed many between genres: A Normal Country is not
neighboring nations, presented a terrible supposed to have rigorous econometric
threat to the outside world, and had trouble analysis because it is not an academic paper
feeding its own people, Russia’s transition but rather a popular summary of views held
should be considered an extraordinary by academics backed up by a colorful collec-
achievement. The two main characteristic tion of anecdotes (thus, criticizing empirical
features of the former empire are gone for methodology in what is not an empirical
good: on the political front, Russia freed itself paper is somewhat deceiving). The second
of the Communist ideology; on the econom- simply misses the meaning of the article as
ics front, the system of central planning was well as of the word “normal.” The third view
replaced by markets and private property. is certainly relevant and, effectively, repre-
Overall, Shleifer and Treisman characterize sents the set of arguments which Shleifer
Russia as of November 2003 (when the arti- and Treisman are debating with.
cle first appeared as a NBER working paper) Let me state my view on the subject of
to be a “typical middle-income capitalist the debate. The reason why I feel that I
democracy.” could possibly suggest myself for the role of
To make their point, the authors provide an arbiter in this debate is that Shleifer and
various pieces of evidence that Russia’s Treisman’s critics expressed serious doubtsYou can also read
