Реферат: Евгения Альбац

Евгения Альбац , PhD1


Рынок Бюрократических Услуг2


1. Imagine, you decide to start a small business in Moscow.

Imagine that this business is a downtown restaurant in the busy political and business part of the city with lots of people that would love to spend money there, for lunch and dinner. Given that Moscow is roughly the size of New York but has only one-tenth of the number of restaurants (Chernov 2003),3 you might expect your start-up to find a market. Given that Russian consumers tend to spend almost half of what they make on food, you might consider that type of small business to be a smart investment as You might even expect city authorities to be happy about it: greater competition means lower prices, more customers, and thus, more tax revenue in the city coffers, right? 4 Wrong.

In this chapter, I will show the ways and means by which bureaucrats exercise pressure and impose control over small business, pushing them underground into the grey economy. I will argue that there is a logic in how bureaucrats treat small business, which in turn derives out of incentives to stay in the state administration. Bureaucrats are not opposed reforms in general; on the contrary, in the initial stages of reform, the interests of the reformers and bureaucrats closely coincided. However, further in the transition, their interests require getting control over the nation’s economy—even at the expense of sacrificing some rent-extraction opportunities: they do it so to safeguard their partial property rights. I argue that they behave in a very rational manner, in accordance with their interests and motivations, and in accordance with the rules of the game that exists in the current Russian state administration. They do nothing ad hoc, strange or unexpected: they behave in agreement with the experience they obtained in the Soviet era, when they felt safe and comfortable, and at the same time utilizing and accommodating some advantages of the new market environment.

….So, what should you expect to face if you decide to open a start-up business in Moscow?

A two-inch thick bound folder of official documents required to open a restaurant was presented to me by the owner (who will be known hence as Maxim) of a start-up restaurant. This folder consisted of twenty-eight different types of documents—deeds, titles, certificates, licenses, permits, resolutions, you name it—issued by agencies of the four different levels of authority (block, district, municipal, and federal) plus two law enforcement agencies, seven specialized agencies and five different hybrid institutions called GUP (gosudarstvenniye unitarniye predpriyatiya, the name given to semi-state semi–private organizations). Some agencies issue just one permit, some issue as many as six; some require many documents to obtain just one stamp of approval, and some require as many as six signatures from six different agencies of the three levels of authority (Table 7.2).

^ Table 7.2: Agencies involved in granting approvals necessary to open a restaurant in Moscow (2001)


^ Type of Agency

Managerial

Law Enforcement

Specialized

Hybrid

(GUP)

L

E

V

E

L


Of


A

U

T

H

O

R

I

T

Y


Federal

Ministry of Economic Development, Trade Inspection

Ministry of the Interior, State Fire Authority



1. Ministry of Health, State Sanitation Inspection

2. State Statistical Agency

1. GUP, Center for the state sanitation-epidemiological authority

Municipal

1. Moscow City Government (Department of Consumer Services)

2. Moscow City Government Licensing Chamber

Moscow Tax Inspection


1. Moscow Energy Utility

2. Sanitation Inspection

3. Fire Inspection

4. Administrative-technical Inspection

5. Moscow Communal Buildings Project

6. Moscow Committee on Architecture

7. Directorate of Underground Communications

1. Moscow cash register production & control plant

2. Moscow Advertising Center

3. Directorate of Commercial Police

4. GUP “Moscow Committee on Architecture”

5. GUP “Enlakom”

District

Office of the District Authority




District Sanitation Inspection




Block

Office of the block authorities




Department of Communal Services (garbage collection)






The purpose of this multitude of documents is to ensure: (a) compliance by a prospective business with norms and regulations, (b) protection of consumers and (c) control over everyday operations. There is certain logic to the types of agencies involved. Specialized state agencies as well as hybrid agencies (GUP) serve to provide expertise on proper compliance with rules and norms, be it the safety of the electrical wiring or merely the business’s street-side appearance. Managerial offices grant permission to open and conduct business based on expertise provided by the specialized and hybrid agencies. Finally, the law enforcement agencies as well as the control departments of particular agencies (such as the Trade Inspection Agency) oversee the proper conduct of business on an everyday legal basis.

As they say, however, the devil is in the details. First, there is the overlap of functions among the various levels of authority and the various types of agencies. For instance, confirmation of compliance with sanitation rules requires five different deeds and resolutions that are issued by state agencies of two levels of authority and two types of agencies. One might argue that when it comes to protecting consumers from food infected with deadly viruses, no control is too great.5 However, a similar pattern is seen regarding other issues. For instance, concerning zoning laws, the street appearance of a restaurant requires permission from the municipal Committee on Architecture as well as its commercial counterpart, or GUP. “It is all about money: you pay [fees plus bribes] in both places even though both oversee the same issues; and the one [GUP] is just a commercial branch of another [bureaucratic agency],” Maxim explained.

Furthermore, the rules and norms imposed by bureaucrats are so detailed and strict that it is nearly impossible to comply with them. For instance, the Colorist Title of the building (Figure 7.3: document C.14) states the precise tone of the color. In the case of Maxim’s restaurant, it was pink. However, pink has several hundred different tones. Thus, the Colorist Title states the precise tint of pink that Maxim must maintain unless he applies for a new Colorist Title. Also, the details stated in the permits are so precise that they allow for endless and unlimited control by bureaucrats. Any new dish added to the certified menu requires permission from the Doctor-at-Large of the District Office Authority. A deviation in the size and weight of the meal may incur penalties. “The everyday pain is finding hens of the same size and weight. Should the Trade Inspection officer come and find that one portion is 200 grams and another is 230 grams, we must pay penalties. It is even harder with fish; but requirements are such that, for example, each trout must be of the same weight,” the owner complained. One might think that consumers are capable of judging the quality of food and service no worse than the Trade Inspection judges. But apparently they are not trusted for such a responsibility. It is easy to understand why: leaving it to consumers means depriving bureaucrats of the ability to extract rents. As it was noted before, 61% of gains accrued by many various bureaucratic agencies comes from giving expert resolutions of the kind outlined above.6Generally, the “under the table” price of opening a restaurant in Moscow is thirty times higher than the official price. Whereas the complete set of necessary fees and stamps officially amounts to $300–500, the same set of required documents obtained via a middle-man (e.g., a company that works the bureaucracy and finds the right people to accept the right bribes) costs between $15,000–20,000 (the price paid by Maxim). Still, this is not the end of the story. All the documents specified on the list expire after one to three years.“ Access to a high-top nachalnik (official) (sure, it won’t be free), but it will help to get the permits for three years. If you lack such access, you are stuck going through the whole process every year,” said the owner (who has had two other highly successful restaurants). Thus, whether the owner of a restaurant must renew his deeds, certificates, licenses and other permits every one, two or three years, depends on the type of connections he has. Given that bureaucrats possess endless tricks to extort rents—for instance, an office in the local tax agency, where a business is required to be registered, may be open for as little as ten minutes twice a week, as one empirical study revealed (Tambovtsev, 2001b)7—it is obviously easier to pay off a bureaucrat in authority rather than try to fulfill the requirements via legal means.

Nevertheless, let us imagine that you manage to secure enough capital and establish enough connections to open your restaurant—you have a great manager, a good cook and attractive decor to face the competition of the market. All of these good things are still, by no means, a guarantee of success, because success also depends on your relationship with bureaucrats from the various law enforcement and oversight agencies that supervise everyday operations. A report issued in 2003 by the Ministry of Economic Development and Trade outlined sixty-five different oversight bureaus in forty-three federal agencies. These bureaus employ 800,000 inspectors (in addition to police). To illustrate how meddlesome such a force can be, in the year 2000 each small business was inspected on average ninety times by police, twenty times by Sanitation Inspection, and four to ten times by other oversight agencies.8 In the case of restaurants, police, trade, sanitation and tax inspectors are the most frequent extractors of rents—typically more than once per month (Maxim 2001). Police look for the presence of illegal labor and violations of liquor and cigarette codes, and trade inspectors review kitchen cleanliness and food safety, and by doing that they have ample ability to make trouble for the business if their terms are not met. Interviews with small business owners also reveal that pay-outs to criminal gangs, which collect their share of rents in exchange for protection from other gangs, is comparable or just slightly less than the fees extorted by bureaucratic agencies (Table 7.3).


^ Table 7.3: Frequency of control visits to small businesses




Less than once a year

Annually

Each Quarter

Each Month

More than once a month

“Don’t remember”

Fire Authority

19.9

30.4

36.7

6.6

2.8

3.6

Sanitation Inspection

30.4

25.5

19.9

15.7

4.2

4.3

Registration Chamber

63.6

19.9

3.1

0.7

1.0

11.7

Licensing Chamber

55.6

24.5

7.0

2.1

1.7

9.1

Directorate of Architecture

70.6

10.1

3.5

1.4

0.7

13.7

Tax Inspection

15.4

30.4

27.6

8.4

14.0

4.2

Police

35.7

16.4

15.7

11.2

14.0

7.0

Customs

69.6

4.9

2.8

2.4

1.7

18.6

Pension Fund

43.4

28.3

15.4

4.2

1.7

7.0

Criminal Rackets

35.0

1.4

8.7

34.3

2.8

17.8

Source: Russian Independent Institute of Social & National Problems, 1999


Criminal rackets use a clear-cut timetable for rent extraction: 34.3% of such gangs come less than once per month and 35% come less than once per year. For a business owner, such predictability allows time to budget for such expenses. Conversely, however, bureaucrats from the police, sanitation and tax inspection prefer more frequent and chaotic visits. Furthermore, criminal rackets at least provide protection from other similar groups, whereas bureaucratic agencies do not coordinate their visits between each other. Also, rackets extract commissions based on the volume and profitability of the particular business, whereas bureaucratic fees are based on 60,000 different regulatory documents (Tambovtsev 2001a).

Consequently, this abundance of overlapping and contradictory norms and regulations makes dealing with the mafia and other illegal channels less chaotic, more predictable and generally more attractive to small business owners. “I find it cheaper to pay krisha in order to deal with all those controllers [who come to inspect the business]. At least the price of kryshi is well defined,” the owner of a small pub in St.Petersburg told a reporter.9 Recent research suggests that small businesses spend $6 billion annually on bribes to bureaucrats, and the same amount as payments to various krisha, e.g., protection services performed both by mafia and by bureaucrats in epaulets (Shestoperov 2003).10 Another study, conducted in 61 regions of the Russian Federation by an association of small and mid-size businesses called OPORA, supports these claims: less than half (45%) of businesses questioned trust the legal system (i.e., the courts) as a means to defend their rights. Half ask for help from different “authoritative people,” meaning protection services, lobbying groups, human rights groups. etc. (Borisov 2003)11 Even businesses that are eager to work within the legal framework—if only because bribes and protection services make everyday life far too risky—cannot do so: “Right from the beginning, when we opened our [family] business, we decided that we were going to be legal. We tried very hard, but four years later, we gave up, and hired an intermediary company to deal with the authorities. We were told: ‘Whether you want this or not, $300 monthly cash is your fee just to the Office of the District.’ They said that if we didn’t pay, ‘you will not be able to work in our district,’” the owner of a family retail business from St. Petersburg told the researchers.12 It is easy to see why they do not choose legal channels to defend their rights: a price tag is already attached to many decisions dealing with business disputes, be it for an investigation of the case or for a judicial hearing.

^ Table 7.4: Price of judicial favors (selected cases)


Suspension of investigation

$1,000

Release from custody

$10,000—20,000

Dismissal of case

$ 25,000-50,000

Arrest of the competitor accompanied by planting false evidence (usually heroin)

$ 10,000—30,000

Victory in a case that is otherwise doomed

$ 100,000

^ Source: Coudert Brothers Law Firm, Yevgenia Albats, Global Access Project, 2003


True, in 2001 the government of newly elected President Vladimir Putin passed several laws aimed at reducing bureaucratic pressure over business. Among the most acclaimed measures was the 13% flat tax on profits, a licensing law that reduces the number of permits that businesses must obtain from bureaucratic agencies. There was also a law creating a “one-window” process for registering businesses—instead of the usual 20-30 windows—as well as some initiatives of lesser consequence. Two years later, however, observers have reached some poor conclusions. The number of required permits is again on the rise, and it is harder than ever to get licenses and certificates. The “one-window” registration rule does not work; a prospective business owner must deal with at least six or seven different agencies, and spend at least one month waiting in queues. Thus, the demand for middlemen has not suffered. Though the government fired a couple thousand inspectors and controllers, the reduction amounted to less than 0.25% of the total. Regardless, a law that sought to constrain different types of inspectors and controllers did not include law enforcement agencies—such as police, tax inspection and FSB—that disturb small businesses the most. Furthermore, the new Administrative Code increased the number of agencies that are allowed to exercise control functions over businesses from forty-three to sixty.13

To cut the long story short, in a study of small business conducted in the summer of 2003, 50% of owners confessed that “the situation has not improved,” and 46% claim that “it has become worse” (Borisov 2003).

Consider again the list of documents that must be obtained in order to start a restaurant business in Moscow. It is evident that bureaucrats may exercise their power over business through three types of activities: (1) selling various permits to enter the market and then to operate in it (licenses and certificates), (2) providing expertise on compliance with rules and regulations (GUPs), and (3) by conducting regular check-ups of everyday business operations (law-enforcement and other control agencies). Each of these practices was born and tested in the Soviet bureaucratic system, and each one was reinstituted by the new laws (e.g., they are not leftovers from the USSR-type “rule of law,” but have undergone adjustment to the new economic environment). Each activity in itself provides an opportunity for extracting bribes. But when taken together, the three practices—interdependent upon each other—provide for something much more promising than a petty, one-time bribe: they establish control over the market field, which in turn ensures the constant flow of rents and de facto property rights over businesses.

Following is discussion of controlling institutions, presented in ascending order, from those least harmful to business to those capable of imposing the greatest burdens and/or exercising the greatest control over the wider range of entrepreneurial activity: GUPs, certification, licensing.


GUPs

State property enterprises (gosudarstvenniye unitarniye predpriatia) are the kind of creatures in which the property belongs to the state but the managers enjoy the profits. They originated in the last two decades of the Soviet Union, the outcome of the then-quasi market reforms known as xozrachet (self-supporting or self-financing enterprises) which were meant to bring efficiency to state enterprises by creating additional incentives for the state-appointed managers (Yasin et al. 2002).14 In the reality of the Russian transition, GUPs (identified by various labels such as “privately-traded company, Ltd.,” “openly-held company,” etc.)15 have become a form of gratitude bestowed upon federal and local bureaucrats by the federal executive as a reward for loyalty. In the chaotic and politically uncertain autumn of 1992, Boris Yeltsin, in a special presidential decree, spelled out the right of bureaucrats to create semi-private organizations: the property would belong to the state, but the profits would be private.16 This has resulted in a convenient way of selling state services in commercial packaging, or, in other words, a way to legitimize bribery. This became much more necessary for bureaucrats after the 1995 federal law on state service prohibited bureaucrats from conducting commercial activities out of their offices: GUPs have been organizations which stood apart from the state administration. (Of course, any law in Russia allows for exceptions. Thus, for example, the Kremlin’s Business Administration Directorate (which provides benefits to executive–level bureaucrats) enjoys special presidential decrees—be they from Boris Yeltsin or Vladimir Putin—that allow the directorate to engage in commercial activity despite being an office of the state administration.17

The heads of the respective agencies— federal or local— appoint managers of GUPs thus creating incentives for managers to share the profits and for agencies to protect their existence.18 There are over 22,000 such enterprises in existence across the nation, of which almost 10,000 (9,810, to be exact) belong to the federal administration (Yasin et al. 2002).19 GUPs, as is often acknowledged in the government documents,20 are a burden on federal and local budgets: according to official statistics, 40% of those enterprises are operating at a loss, and an additional 20% have a profitability close to zero.21 In December 2001, President Vladimir Putin signed a federal law requesting a drastic reduction in the number of GUPs.22 However, two years later, in 2003, ninety-two new federal–level GUPs were created,23 and an additional seventy or more have been created under the auspices of local administrations.24

That study also reveal that in more than half of Russia’s regions, local authorities have increased their presence in private firms. Thus, the size and volume of state presence in the economy via GUPs and other bureaucratic businesses is on the rise.25 Why? As learned from interviews, as well as documents and publications in the press, there are two major reasons for this. For one, because the operating expenses of bureaucratic businesses are paid from the state budget, they are quite profitable for their managers and the officials who establish and supervise them. Unlike businesses in the private sector, GUPs do not pay tax on income, they enjoy special discount utility rates, and they do not expend funds on their primary sources of production, which are provided by the state. Nor do they incur costs on property rental, guards, etc. We may assume that they are also excused from the bribes extorted by control agencies: the state itself serves as their krysha. Thus, the estimated net profit (which almost never reaches the owner of the property—i.e., the state) of some GUPs is $5 million.26

The second reason for the rise in the number of GUPs despite their burden to state and local budgets is that these bureaucratic businesses are an essential element in the state’s control over business. In fact, an open-ended questionnaire administered by analysts from Standard and Poor, the international credit-rating agency, revealed that 80%of bureaucrats considered state presence in private firms as a necessary means to control the economy.27


Certification

Certification of products and services is yet another remnant of the Soviet bureaucratic state. In the USSR, there existed gosudarstenniye standarti (state standards), or GOST, which prescribed standards for the majority of products and services that existed in the country. In the new Russia, a system of certification was re-introduced in 1993 by the federal law “On Certification.” The reasoning for this was nothing new: public interest, and the necessity of protecting consumers from dangerous products and services. Since then, certification has apparently expanded into a profitable industry: there are approximately 4,000 firms (special agencies and test laboratories) that conduct certification of goods in the name of the state. Without this certification, no business may conduct their activities, be it a grocery, restaurant or electronics retailer (Tambovtsev 2001a). As of 2003, 80% of all consumer goods are obliged to obtain a certificate of compliance with state-imposed standards (Kruchkova 2001:7). For the sake of comparison, in the countries of the European Union, only 4% of consumer goods are subject to obligatory certification;28 moreover, the EU has just ten agencies (compared to the 4,000 that exist in Russia) involved in certification.29 Critics denounce the public interest justification of the certification system as nonsense. They argue, for instance, that 60% of the state standards in existence are leftover from the Soviet-era’s Gosstandart (the Ministry for Standardization in the USSR). Given the notoriously ill quality of goods and services that existed in the USSR, it is hardly possible to apply those standards to the current merchandise, much of which is produced in the European Union and the US (Tambovtsev 2001b). Furthermore, statistics suggest that state-assigned certification agencies and firms reject only about 2% of goods, whereas 30% of already-certified goods are rejected as bad by traders: apparently, the market is much more cautious than the bureaucrats and their colleagues in the certification business (Kruchkova, 2001:7).

Researchers from the Moscow-based magazine Spors—a publication of the national Confederation of Consumers—conducted a test of twelve of the most popular kettle-boilers on the market. It was discovered that eight brands and models did not comply with fire protection rules. However, each brand and model received an approval certification stamp prior to the research. When the Ministry for Standardization was given the results of the test, they reacted in a remarkable fashion: they denied any responsibility for the appearance of the dangerous products on the market. Instead, the retailers who sold kettle-boilers (and who, again, had obtained the state’s permission to sell those products) were fined.30

Another highly acclaimed example concerns the production of illegal vodka. In the early 1990s, the market was overwhelmed by the intrusion of dangerous substitutes, which subsequently led to a sharp rise in the death rate from alcohol poisoning. The government issued literally hundreds of documents regulating the industry, to no avail: illegal vodka kept arriving on the market, mostly from the provinces in the Northern Caucuses. “[The] State found itself totally powerless, until the Association of Alcohol Producers [an umbrella lobbying organization for producers of alcohol] put their guards on each and every train coming from the Caucuses. Whatever means they employed—and I am sure there were some violent ones as well—the reduction in the volume of illegal vodka was stunning: it virtually disappeared,” a top-ranking official told the author (Pavlenko 2001).31

Unlike with the mafia, businesses find themselves helpless when it comes to bureaucratic control: either they must pay their way through or attempt comply with the impossible rules. “There is no way to fight [with imposed regulations] including via the judiciary,” Vitali Tambovtsev, a professor in the Economics Department at Moscow State University, and a long-time scholar of the problem, told the author. “There exist some 60,000 documents that describe the state’s demands for the quality and safety of goods produced or imported. Thus, [should business sue bureaucrats] there always will be a document that will find bureaucrats right and business wrong.” As was the case with a start-up restaurant, it tuned out that the size of the kitchen table, on which meat is cut, was specified in the certificate as well. As for the meat itself, there is a certificate that the seller of the meat must obtain, and there is a certificate for turning that meat into a dish (Maxim 2001). Overall, the estimated volume of the business of certification is around $120-150 million, of which only a fraction is paid to federal and local budgets (Kruchkova 2001:8).

Licensing

This is the most effective—and most harmful—tool possessed by bureaucrats for control over entrepreneurial activities. Licenses are special permits that start-up businesses must obtain from the bureaucratic agencies in order to begin operations. By denying a permit, or by demanding a prohibitively high price for the permit, bureaucrats resolve the problem of efficiency of control: they reduce the number of businesses that may operate in the legal realm. Those businesses that dare to start activity without an entry permit are doomed to operate in the gray zone of the unofficial economy: by doing so, they deprive themselves of both legal protection (and thus are forced to pay bribes to law enforcement agencies and krysha) and political opportunities to lobby their interests. As Simeon Djankov et al showed in their comparative study of regulation of business start-ups in eighty-five countries, high official costs of entry correlate closely to “higher corruption and higher unofficial economies, but not better quality of public or private goods,” (Djankov, La Porta, de Silanes and Shleifer, 2001).32 Russia is described in the study as one of the worst cases.

The myriad of licenses promotes bureaucratic businesses such as GUPs (which are not required to obtain a license or are granted one at creation), gives a boost to certification (a license stipulates compliance with standards and regulations outlined by the state) and creates fertile ground for the extraction of rents by all kinds of controllers who, among other things, are obliged with the task of checking the permits. In previous chapters, I have referred several times to the problem of licensing as a signature example of the reformers’ failure to overcome the bureaucratic stranglehold on the nation’s economy and on small business, the most hopeful and promising component of the prospective civil society, in particular. This failure has led in turn to: the development of non-market competition; the creation of a market dominated by monopolies; high prices on everyday goods; the practice of rent extraction by bureaucrats of the executive and managerial levels who have incentives to protect the system of regulation of entry despite its known harm to the nation’s economy and general economic transition, acknowledged even by the nation’s leading politicians including the chief executive.

The existence of a somewhat coherent and consistent set of data on licenses (unlike it is the case with other types of regulations)—spanning the decade-long period of Russia’s economic transition—allows for more than just the recitation of anecdotes acknowledging the effect. It allows us to see how and why the whole system of bureaucratic control, once destroyed with the collapse of the USSR, managed to revive, evolve and thrive in the new political and economic environment.

There are two sets of data that can be used for this analysis. One set describes the type and number of business activities that have been affected by entry regulations throughout the years of transition, and the impact that those laws have had on the transition process (Table 7.6). Unfortunately, this data is not really operational: it is based on approximations, compiled from the work of numerous (though reliable) experts, and it does not show the impact of politics on the development of the system of control. Still, it shows three important trends. First, it shows that the mere existence of laws does not provide for the rule of law: the return of licenses eliminated by the laws in the same (or slightly different) wording was as high as 75%. Second, except for the very first period of transition (1991-1993), the pace of the bureaucratic encroachment on business has been quite stable.33 Third, there is a tendency for secrecy: if we consider that, under the 1998 law, 57% of licenses were outside federal law and were rather in the form of secret presidential and governmental decrees, and then three years later, in 2001, the number of secretive rules went up by almost 20%, thereby accounting for 78.5% of licenses. In the same period, the total number of business activities that require licenses decreased by just 3.2%, compared to the 1998 law. Given the increasing secrecy, that has been a landmark of the presidency of Vladimir Putin, I doubt that any accurate data will be available in the future, and Russian specialists will have to rely on the techniques of data estimation used by their predecessors, the Sovietologists.34

Another value of this data set is that it allows one to see a complete cycle from beginning to end, and then the transition to the next cycle. For instance, by the time the first coherent law was passed to constrain bureaucratic activities in the field of licensing, in 1994, there were 2,500 types of business activities that required a permit on entry. The law specified just 495 such activities, assuming that bureaucrats were going to follow the new rule. However, by 1998, when yet another law was passed aimed at exactly the same purpose—to bring order to bureaucratic regulations—there were already 2,000 business activities that required a permit on entry (e.g., 1,505 new regulations had appeared since the previous law). The 1998 federal law passed by the government of Yevgenii Primakov marked the beginning of yet another cycle: it reduced the amount of licensing activities by the agencies in the following two years, but the volume of regulations remained the same despite the wording of the new law. Finally, another much more detailed and supposedly efficient federal law was passed in 2001, in accordance with the program of further economic liberalization proclaimed by the newly elected President Vladimir Putin. Thus, 2001 was the beginning of the new cycle. No data is yet available to evaluate the difference between the language of the new law and its effectiveness: reports in the media and in some databases show that still new regulations have been passed since 2001. In fact, the day after the new law was passed by the State Duma, a new permit was born: the federal government decided to impose control over businesses engaged in auditing activities.35


^ Table 7.6: Number of business activities under licensing with respect to laws on licensing

Year when law was passed

1994

1998

2001

Type of legal document

Executive Decree of the Federal Government #1418

Federal Law #158

Federal Law #128




Prior to the law

Stipulated by the law

Total (including agencies not in the law)




Prior to the law

Stipulated by the law

Total (including agencies not in the law)

Prior to

the law

Stipulated by the law

Total (including agencies not in the law)




Number of business activities under licensing


2500


495


No data


2000


215


500


2000


104


484

^ Source: Working Center of Economic Reforms under the Government of the RF; Olga Makarova(2000), Yevgenii Yasin(1999), Viktor Pleskachevskii (2002)

The second set of data, which I compiled from databases of official documents, deals with regulations produced in different formats (laws, presidential decrees, and executive orders) that were issued over the course of eleven years by various institutions of the federal authority: the president, the federal government, the legislature and the federal agencies. These documents established new licensing requirements (adding to the pile developed over previous years), made additions to existing ones, or reconfirmed and/or redirected old ones.36 Unexpectedly, the total number of documents that comprised the data set (2278) referred to the estimated number of business activities (2000-2500)37 which had been under licensing until 2001 (Table 7.7).

^ Table 7.7: Licensing by year and institution





President

Federal Government

Legislature

Agencies
Total
1988-

Nov. 199138



0



9



6



25



40

Nov. 1991-1992


15


34


12


72


133

1993

17

49

8

121

195

1994

9

57

3

174

243

1995

8

55

34

132

229

1996

10

63

23

155

251

1997

9

39

15

199

262

1998

7

59

28

214

308

1999

7

44

21

164

236

2000

4

51

7

155

217

2001

2

69

5

88

164

TOTAL

88

529

162

1499

2278

Source: Labas database, Consultant data base, Yevgenia Albats


Two things arrest our attention right away. One is that elected institutions such as the executive and the legislature39 (e.g., institutions that depend upon constituency, and hence should be especially concerned about protecting the constituency from market failure) are the least involved in issuing rulings aimed at controlling businesses. Taken together, these two institutions are responsible for slightly less than 10% of all existing regulations. Furthermore, the federal government—which is somewhat accountable to the constituency by the fact that the prime minister is appointed through the dual action of the president who nominates the candidate and the legislature which approves that choice—accounts for only 23%. Instead, the entities responsible for 66% of established regulations are the federal agencies: using the loopholes in laws and executive orders, the non-transparency of their agencies and the weak and corrupted legal system, bureaucrats who have no constituency whatsoever issue in-house regulations that inhibit the development of small business.

^ Figure 7.2:Licensing 1988 -2001



We may conclude from this data that anything but public interest has served as a reason for imposing controls over the market field.40

Interestingly, this data somewhat contradicts the common sense perception that the Russian legislature, which was dominated by nationalists and communists all the way from the onset of reform in November 1991 through December 1999, was at large responsible for the failure to liberalize the nation’s economy. At least in one instance—namely, the right of bureaucrats to control entry to the market—the legislature is much less guilty than the federal government and the agencies. These findings also dismiss ideological bias on the part of Russian bureaucrats (e.g., that by virtue of having been indoctrinated by communist ideals, they are prone to greater state involvement in the economy to ensure a more egalitarian distribution of the national wealth) as a plausible explanation for bureaucratic behavior. Should it be otherwise, their fellow communists in the legislature would have been expected to behave accordingly, whereas they did not.

The data set also suggests that the development of the system of bureaucratic control went through three distinct periods, which correspond somewhat to the three phases of transition outlined in my theoretical model. Consider for that Figure 7.3:

Figure 7.3: Dynamics of Licensing Activities.




The first period lasted from the onset of entrepreneurial activity in 1988 through 1992. This phase was characterized by rather low licensing activity on the part of bureaucrats, as if they were in sleep mode. The second period, from 1993/1994, saw a torrent of regulations, which resulted in a peak of licensing activity in 1998, the year of the financial collapse.41 During this period, approximately 250 regulatory documents were passed each year (not including 1998, when such documents reached a historic high of 308). The third period, which began in 1999, has been marked so far by a decrease in licensing activity. Given that the ratio of open regulations compared to those outside public oversight in 2001 was 1 to 4.7, that decreasing trend should be reversed pretty soon by increase in secretive regulations.

Obviously, there should be reasons why the three periods are different. The simple (and valid) answer is that the development of the market simultaneously drove bureaucratic activity: more business actions (even if not agents) implies more possibilities to impose new regulations. It sounds perfectly reasonable, except for at least two obvious factors. First, in the initial years of reform, there were plenty of subjects to regulate. However, bureaucrats seemed to be concerned with something else. Second, it is not clear why there was a decrease in licensing activity in 1999, which continued through the following years. Even if my suspicions are right, and much of this information has become classified, still there should be an explanation of why fewer new executive orders were issued during the election cycle of 1999-2000, whereas during the 1995-1996 parliamentary elections the trend was just the opposite. Is it because bureaucrats became rational, and realized that they were killing the golden goose? Or they were unable to digest any more regulatory activity? Both possibilities imply a degree of unity on the part of bureaucrats, which as was described in the previous chapter, does not exist. So, what explains the difference between the three periods?


^ 1988-1992: Grabbing the State

Though the first law that allowed for private entrepreneurship in the USSR was established in 198642, the real start of private economic activity in the Soviet Union came with the May 26, 1988 law “On Cooperation in the USSR” (Radygin, 1994). In less than two years, there were officially registered 245,000 cooperatives, plus almost the same number operating unofficially; in addition, there were 672,000 private entrepreneurs.43 By 1990, private enterprise accounted for 6.1%of the Gross National Product (Radygin, 1994:25)44. Therefore, the base for extracting rents already existed between 1988-1991. Yet, licensing activity on the part of bureaucrats barely existed. Only some forty documents were issued back then. Of course, state bureaucracy was perfectly aware of the possibility of controlling businesses via permits on entry and operation: the language of the laws always spelled out the rights of bureaucrats to intervene in business activity. Still, one of the first regulations that listed the kind of business activities that required a permit from the state appears to be extremely modest, and even reasonable, compared to what came later in the course of economic reform. The fields of regulation were clearly defined and were concerned with weapons production—from simple explosives to chemical and biological weapons. Next came regulations concerning energy supply—in a country as cold as Russia it seemed like a reasonable concern on the part of the administration. Further came regulations concerning access to natural resources (such as oil and gas), operations involving precious stones and radioactive materials, and issues dealing with transportation, communications, cryptology, and finally drugs.45 Apparently, Soviet (and later, Russian) bureaucrats did not see the business of licensing as worth their time and effort.

There were several reasons for this.

First, in the final years of the USSR there was no need to officially define state control over private business. The majority of new private enterprises (which were cooperatives and amounted to 80% of all private business) were created under the patronage of managerial bureaucrats—the directors of state-owned enterprises (Radygin 1994: 26). Thus, bureaucrats did not yet see these new private businesses as competitors. Second, bureaucrats from the state administration—industrial agencies, first and foremost—were busy converting state property into semi-government/semi-state organizations (Chubais 2001 and Radygin 199446). Thus, they were not interested in imposing regulations that might also apply to their own future businesses.47 However, the most important reason was that back in the dying years of the USSR, bureaucrats were busy with spontaneous privatization of state property and resources, of which the financial resources of the nation were the most desirable commodity. As Mark Kramer wrote, it was a time “of a massive de facto privatization of cash flows that previously had been under the control of the Soviet government.”48

^ 1993-1998: Getting Back Control

As described by one Russian liberal economist, 1993 was the year of yet another great bureaucratic revolution in Russia (Illarionov 1997). Looking at the plethora and dynamics of licensing activity on the part of the bureaucracy, it is hard to disagree. It is obvious that bureaucrats exercised a free hand in acquiring control over the market field. By 1998, there were few business activities left that did not require a permit for start-up and/or additional ones to operate in the market. Consider the following example, which would seem like a joke if we did not know it to be true: at some point, businesses that operated resorts were required to obtain a license for measuring the temperature of the water in the sea, because, as the resort owners were told, “all oceanographic measurements are subject to regulation and require a license” (Tambovtsev 2001b).

The course of Russian transition definitely reached a turning point in 1993. And so did the story of its bureaucrats. For one, 1993 signified the end of the government of reform: in December of the previous year, Yegor Gaidar was replaced as prime minister by Viktor Chernomyrdin, a career Soviet apparatchik, whose appointment satisfied the aspirations of different groups from the former Soviet nomenklatura—i.e. managerial bureaucrats (who became known as “red directors”), state officeholders and the powerful energy lobby (Baturin et al. 2001).

Chernomyrdin’s appointment inspired old career Soviet bureaucrats to seek office again. Galloping inflation, which was the key feature of the first years of reform (Aslund 2002), ate much of the cash that they had grabbed earlier. Besides, experience of many acquired in the private sector was rather tough: many didn’t survive the competition. However, since no law precluded soviet bureaucrats from reacquiring their positions in top Soviet institutions, such as the Central Committee of the CPSU and the KGB, they became eager to get back into the safety net of state service. My analysis of the spravochniki (lists of employees by year) of the apparatus of the central administration shows that by 1995 the number of former elite apparatchiki of the Central Committee of the Communist Party quadrupled in the ranks of Chernomyrdin’s government compared to that of Yegor Gaidar’s government. Subsequently, the total number of bureaucrats in the apparatus doubled from 591 in the second half of 1992 to 1,189 in August 1995. We can safely infer that the trend was mimicked throughout the federal agencies. These new/old Soviet bureaucrats brought back the experience and methods they had acquired from their years in the Soviet regime, reintroducing regulation and control of the economy and of the public sphere in general. In the new market environment, that experience manifested itself in the issuance of hundreds of documents establishing control in the form of start-up and operating permits, certificates and the creation of bureaucratic businesses such as GUPs. Rents naturally came along.

In fairness to bureaucrats—although they may and do have their personal interests—they merely do what they are allowed to do by politicians.

Thus, the system of rents and permits did not arise simply because bureaucrats themselves were eager to expand their rent-extraction opportunities. Of course, they were. However, at least as importantly, it was because the political leadership of the country had made a choice in favor of the bureaucrats as their primary support base instead of the civil society that was then represented by small and mid-sized businesses. The following graph illustrates this conclusion.


Figure 7.4: Dynamics of Licensing Activities and Political Events


As Figure 7.4 shows, the beginning of the licensing activities coincided with the unleash of entrepreneurial activities: apparently, some regulations were needed as it was stated in the previous pagers. Reform government of Yegor Gaidar tried to play both the good and the bad cop: the ratio between promised benefits and those delivered was 1:4, e.g., approximately 20% of promises made to agencies came into being (Pavlenko 1993b).49 However, with Viktor Chernomyrdin, the career Soviet bureaucrat instituted as a prime minister, any constrains existed before disappeared and business of bureaucratic regulations flourished.

^ Finally, 1999–2001. The decline in licensing activity—, which, oddly, occurred in conjunction with another election cycle, that of December 1999 to March 2000—has several explanations. (To be sure—none of those explanations is in the realm of ideology. In that respect, government of Viktor Chernomyrdin was no more liberal than the government of Yevgenii Primakov who came into being after the August 1998 financial collapse, and which assumed leftist rhetoric and had some members of the Communist party of Russia at the key positions in the cabinet).

First, the election cycle in question was a short period between two new laws on licensing—one passed in 1998 and the other in 2001—which were aimed at constraining bureaucrats and reducing administrative corruption. It was the time when the new elite, which arrived with the newly elected President Vladimir Putin, had begun a battle with the old elite, which remained from the presidency of Boris Yeltsin. (In a country dominated by bureaucracy, a fight between elite clans within it is always helpful to outsiders: they are finally left alone, even if for a short while.) As a result of this “healthy” battle inside and among bureaucratic agencies, some who were closely associated with the Yeltsin regime lost their privileges. For instance, Gosatomnadzor, the oversight arm of the Ministry of Atomic Energy, held the rights to issue as many as 400 permits before 2001. However after its head was dismissed by the new president, that number was halved (Auzan 2001). By comparison, agencies associated with issues of national security, defense and political police, by virtue of having a KGB colonel as President, managed to preserve and in certain cases even increase their rights of control. However, I believe there is also another reason for the decline: oil prices. By 1999, oil prices began to rise, which was something that Russia had last experienced in the 1970s and early 1980s. Thus, bureaucrats from the new elite were more preoccupied with acquiring control over oil and gas, rather than dealing with small and mid-sized businesses that, in any case, were half dead.


3. Small Business: Dead Men Walking

Given the scale of bureaucratic control, it is no surprise that 1994 was the last year that statistics acknowledged a growth in the number of small businesses. Thereafter, there was never so high a number of registered small businesses operating in the legal—as opposed to gray, unofficial—economy.

I decided to conduct a statistical test to check the relationship between the licensing activity of bureaucrats and the decline in the number of small businesses. The simple correlation between the number of small businesses over the period of ten years (1991—2001) and the number of licensees issued over the same period appeared to be strong and significant (R=.849, p<0.01 level), but the conclusion that follows out of the result was that licensing greatly promotes creation of small businesses. That contradicts both the common sense and the qualitative analysis, and suggests that outburst of business activity went along with licensing activities. To put it in plain English, the initial spur of small businesses in early 1990s was due to the “opening of the gates” effect, e.g., that many of these businesses had been operating in the unofficial economy during the final years of the USSR, and so were “newly legal” rather than “newly established;” besides that permission to conduct entrepreneurial activities gave an exit option to many those young and energetic Soviet people who were unable anymore to tolerate the boredom of the Soviet enterprises and institutions: regardless of restrictions they were eager to start a new. Thus, it makes sense to disregard these first years of “ business and social optimism,” and to look at the correlation between the number of licenses at time t and the number of small businesses at time t+1. The correlation between the one year lag of the number of licenses and the number of small businesses is lower, but nonetheless positive and significant (Pearson R =.778, p< 0.01). After the initial spur in small business development (1991-1993), licenses, as it was predicted by the qualitative analysis, indeed seem to harm small businesses. The negative correlation (R= -.205, p< 596) suggests that the increase in the number of licenses is associated with a decrease in the number of small businesses. However, the correlation is not significant, so we cannot be too certain about it. In order to overcome the problem, we decided to create a new variable (LICECHNG) which records whether the license burden increases or decreases from year to year.50 This regression shows that a decrease in the number of licenses leads to an increase in the number of small businesses (see Table 7.8). The relationship is not too strong, but we could be at least 86% confident that this relationship does exist. The results suggest that each additional license may lead to the disappearance of 941 small businesses nationwide (in the regression small businesses are counted in thousands, therefore, the number in the table is .941). We can be also 80% confident that anywhere from 97 to 1,780 small businesses are affected by issuing just one additional license. Our uncertainty is obviously the result of the small number of observations (just over ten years), but we can state that at least the fifth of the variation in the number of small businesses nationwide can be explained by licensing activities


^ Table 7.8: OLS Model of the Relationship between Licensing and the Number of Small Businesses


Independent Variables

OLS coefficients and 80% confidence intervals

Constant

855.465 (812.597; 898.333)

Change in number of licenses from previous year (LICENCHNG)

-.941(-1.784; -.097)

R2 =.23, N=10, p<.16





Thus, in one way or another, bureaucrats not just ensured their control over business, but by reducing the number of small businesses, have made that control more efficient. For whatever it is ultimately worth, it was a smart move on their part. After all, small business as a basis for civil society poses a potential danger to bureaucrats. Should such businesses happen to be successful—as they are in the countries of Central and Southern Europe—they would become the driving force of civil society and, by extension, a political force capable of demanding accountability and transparency of the government. Absence of that force further unties the hands of bureaucrats.

Conclusion Bureaucrats are not devils. On the contrary, their behavior in post-communist Russia is very rational. Democratic politics, with its demands for accountability, is a threat to their survival and well-being. Thus, even at the expense of losing some rents (and with the hope of filling the void with big business and oil profits), through the decade of economic transition, they have consistently exercised increasing pressure over small business—which, as I argue in my model, is the biggest consumer of democratic politics in post-communist states, as well as the biggest resource of the potential social capital in countries in transition


1 Евгения Альбац, профессор кафедры общей политологии ГУ- Высшая школа экономики. Замечания и пожелания : albats@post.harvard.edu


2 © Albats Yevgenia Mark , United States Copyright Service, # TX 5-937-349. Оригинальное название главы : ^ The Shakedown State. Данный текст является сокращенным вариантом главы монографии, которая в настоящее время готовится к публикации : Bureaucrats and the Russian Transition: The Politics of accommodation, 1991-2003 (Бюрократия и российская трансформация. Политика приспособления, 1991-2003) защищенной в качестве докторской диссертации в Гарвардском Университете в 2004г. Использование данных возможно только по согласованию с автором. Все права копирайта защищены.

3 Sergei Chernov, ^ Restorannii Rating.Putevoditel’ po Restoranam (Moscow: 2003)


4 According to observers of the restaurant business, this market has had a tendency for steady growth at a pace of roughly 15% per quarter over the last couple of years. Its potential is estimated at $150-200 million.


5 Obviously, I allude here to the public interest theory of regulation, which argues that a government protects public against self-interested markets by imposing such a system of screening, which precludes market failures and ensures consumers’ rights to buy high quality products and services. Simeon Djankov et al, in Regulation on Entry (2001) convincingly argue against such an approach.


6Anastasia Onegina and Boris Grozovski, “Nastuplenniye na Kontrolerov,” (Attack on Controllers), Vedomosti, 3 February 2003.


7 Vitali Tambovtsev (2001b) “Podchody k sovershenstvovaniu sistemy regulirovaniya predprinimatelskoi deyatelnosti,” (Ways for Perfecting the System of Regulation of Entrepreneurial Activities); Analytical report prepared for a meeting of the government of RF. Copied from the original. Part of that research can be found in: Vitali Tambovtsev, ed., Economicheskii Analiz Normativnich aktov,( Moscow: TEIS, 2001).


8 Onegina and Grozovski, 2003


9 Onegina and Grozovski


10 Oleg Shestoperov, Head of the Institute of Systemic Research of Entrepreneurial Problems. Transcripts of a round-table discussion “Russian Small Business: Questions and Answers,” Liberal Mission Fund, September 30, 2003. Available at: http://www.liberal.ru/sitan.asp?Num=396


11 Sergei Borisov, President of the All-Russian Organization of Small and Mid-size businesses “OPORA Rossii.” Transcripts of a round-table discussion “Russian Small Busines: Questions and Answers,” 2003.

Ibid.


12 Ella Poneych, “Pravila Igri: Sam Dolzhen Ponimat’s,” (Rules of the Game: One Should Understand Them), Vedomosti, 18 November 2003.


13 Irina Xachamada, “Maliy Bisnes: Chto v Davose Chorosho, to v Rossii,” (Small Business: What is Good for Davos, for Russia [is Bad]), Vedomosti, 10 February 2003; Elena Vichucholeva and Elena Zagorodnaya “Poterya Lica,” (Loosing the Face), Izvestia, 13 December 2003.


14 Yevgenii Yasin, et al, “Bremya Gosudarstava I Ekonomicheskaya Politika”(Burden of the State and Economic Policy), Liberal Mission Fund, October 22, 2002; Available from: http://www.liberal.ru/sitan.asp?Num=276


15 Ibid.


16 Presidential Order #1230, October 14, 1992; Sobraniye Aktov Presidenta and Pravitelstva RF (Collection of Acts of the President and the Government of the RF), 1992, #16, p. 1237.

17


See, for example: Presidential Decree #1444, “Voprosi Upravleniya Delami Presidenta RF,” (Questions of the Business Administration Directorate), August 7, 2000.


18 Igor Nikolaev, Ivan Shulga, “Firma po imeni GUP,” (Firm under the name GUP), Moscovskiye Novosti, 23 September 2003, #37.

19


Yevgenii Yasin et al., 2002

20


On May 23, 1994, then-President Boris Yeltsin signed a presidential order “On reform of the State Enterprises,” which acknowledged the necessity of concealing the practice of the establishment of new GUPs, and to proceed with the privatization of the existing ones. It had little if any effect. In 2002 alone, twenty-seven different governmental orders were issued, including two federal laws regarding privatization of GUPs. See: official website of the Ministry for State Property (http://www.mgi.ru/base/privat).

21


Alexander Braverman, Deputy Minister for State Property, as quoted in: Gosudarstenniye Unitraniye Predpriyatia Zhdet Mashtabnaya Reforms, (GUPs are to be Reformed at Large), strana.ru, 2 June 2002. Available from: http://www.strana.ru/stories/02/02/06/2463/170857.html

22


Federal Law #178-FZ, “O Privatizatzii Gosudarstvennogo I Munitsipalnogo Imushestava,” (On Privatization of Municipal and State Property), December 21, 2001.


23 “Pomogiti Putinu,” (Help Putin), Vedomosti, 6 February 2003.

24


Research was conducted by the Standard and Poor international credit agency. Results of the growth of bureaucratic businesses are for 27 out of 89 regions of the Russian Federation. Cited in: Tatyana Kordukova, Pavel Kochanov, Neprozrachnoye Vmeshatel’stvo (Non-Transparent [State] Intervention), Vedomosti, 9 April 2002.


25 Ibid.


26 Estimation of the Treasury Chamber as cited in: Igor Nikolaev, Ivan Shulga, 2003.

27 Tatyana Kordukova & Pavel Kochanov, 2002.


28 Ibid.

29


Boris Alyshin, Deputy Prime Minister of the Russian government (2003-present) as cited in: Ekaterina Katz, “Vzyatki Budut, no Ich Stanet Menshe,” (Bribes will Keep Existing, but there will be a Little Bit Less [of bribes]),” Gazeta, 3 February 2003.


30Spros, #10, 1999; # 2, 2001.


31 Sergei Pavlenko, Head of the Department, Administration of the President, 1997-1998, chief of secretariat of the First Deputy to Prime Minister Aleksei Kudrin, 2000-present. Interview with Yevgenia Albats, May 2001.


32 Simeon Djankov et al., “The Regulation of Entry,” Quarterly Journal of Economics, no. (February 2002).


33 The beginning of the system of licensing is usually attributed to the Soviet law, “O Kooperatcii v SSSR” (^ On Cooperatives in the USSR),