Privatisation And Corruption Russia example essay topic

Russia, how corruption impeded privatisation INTRODUCTION In 1992, privatisation in Russia started. The euphoria of the reform to a market economy was fast damped by the proofs of corruption, in particular, corruption by a specific elite, the Oligarchs. This corruption impeded privatisation and up to now economic transformation has been counteracted by the Oligarchs. In this paper I will discuss some causes of corruption and I want to underline the power and the influence of the Oligarchs. In the first section, I will describe the (specific) conditions of privatisation in Russia. Secondly, I will discuss some causes of corruption.

In the next section, I will examine the position of the Oligarchs. Finally, I will pass some solutions. 1. Privatisation, a difficult task After the collapse of the Soviet Union, the expectations Russian people had, were high but at the same time daunting, because what just had ended was one of the most dysfunctional political economies in history. These high expectations were justified because Russia possessed profuse natural resources (oil, gas, aluminium, ... ) and the overall technological level was high in the global context. Nevertheless, privatisation would become a tremendous challenge.

Russia inherited an economic system where the basic legal and institutional components of a market economy were missing. (Members of the Speaker's Advisory Group on Russia 2000) According to Goldmann (2000: 29-30) a successful privatisation process should seek to ensure that the privatisation effort: "is carried out in a theft-free environment. As a minimum, it should not lead to an increase in corruption and theft."does not benefit any group unduly; and that the state and public at large also share in the process, both at the time of privatisation and thereafter."results in an increased efficiency by bringing in new management if necessary and restructuring or even closing down inefficient divisions."ensures that the factory directors in the old regime, if they are capable, stay on and do not become the effective owners once the enterprise is privatised. This often happens, especially if the newly issued stock is too widely dispersed."encourages investors, including foreigners, to invest in these new companies or in competing entities."does nothing to detract from the even higher priority of encouraging start-ups in Greenfield businesses."furthers the development of a market infrastructure."contributes to the strengthening of democracy". Defining these conditions is easy; the difficulty is the effective implementation. Russia chose for a "shock therapy", a massive and irreversible privatisation.

Shock therapy, contrary to the gradual approach, was selected to prevent the resurrection of communism. (Goldmann 2000: 30) Kuznetsov a and Kuznetsov (1999) distinguish three stages of Russian privatisation. In a first stage, the voucher privatisation, mass privatisation started by the distribution of vouchers to the Russian population. In a second stage, the transition to monetary transactions, the objective was becoming an effective structure of ownership as soon as shares began to be traded.

Finally, the current stage, the completion of the privatisation must be regulated by legislation. In the opinion of Varese (1997: 581), "Privatisation per se is not, however, sufficient to produce a well functioning market economy. The cornerstone of a market economy is the presence of property rights... The definition of property rights, the possibility to derive income (or pleasure) from goods owned, and an apparatus for deterring crime are three building-blocks of a market society". 2. Privatisation and corruption Russia is one of the most corrupt countries in the world.

This impedes privatisation, but the imperfect privatisation process causes corruption itself. First of all, property rights over shares are poorly defined. The owner of a share only can demonstrate his right when his name appears in a registrar's book. Beside the fact that this is an inefficient and slow system, the system has difficulties to prevent fraud.

Secondly, Russia has an incompetent tax system, actually there is no tax code. The taxes are excessive and frequently changing. As a result, enterprises have no incentives to increase profits, but are occupied with evading taxes. Finally, latency in the Russian court system reinforces these corrupt operations. The increase in crime, fraud and corruption has not led to more convictions. (Varese 1997: 583-590) The high costs of corruption are both economic and political.

"Unscrupulous privatisation have cost countries such as Russia, India and Mexico billions of dollars in bailouts and other state-absorbed losses, which have contributed to inflation and have slowed, if not halted, on-going economic transformation". Western experts advised Russia a shock therapy. However, they did not take into consideration the absence of an independent, regulatory, legal or judicial framework to effectively stop corruption. "This created a free-for-all atmosphere in countries where state power had virtually collapsed, and law enforcement was largely nonexistent. Nowhere has this problem been more evident than in Russia, where moral chaos and political uncertainty have been the most serious drawbacks to market transformation.

A desperate climate of criminality, in which businessmen are routinely murdered, has hindered the foreign capital and technological investment critical to revitalizing the country's moribund industries". (Cela rier 1997) The West and multilateral organisations such as the IMF and the World Bank also ignored the signals of corruption. "The Clinton administration has often sought to defend its catastrophic policies in Russia by arguing that it had "no alternative". But there were alternatives to administration policy at every step. United States policy could have engaged broadly with Russia at any time in the past eight years. It could have emphasised the development of the necessary building blocks of free enterprise instead of massive, effectively unconditional IMF lending to Russia's central government.

And it could have stopped enabling Russian corruption". (Members of the Speaker's Advisory Group on Russia 2000) Russia borrowed substantial amounts of money from the IMF and became highly indebted. The purpose of these loans, the building up of a market economy, was ignored and because of corrupt practices the money immediately poured out the country. Investment in the West was a more lucrative business. The IMF and the West knew about this corruption. Nevertheless, "small non-strategic countries were denied loans because of corruption, while countries such as Russia, where the corruption was on a far larger scale, were continually lent money".

(Stiglitz 2002) Remarkable, corruption has been generally adopted in Russia and some Russian academics think corruption is necessary for the development of private entrepreneurship. After reaching a market economy "civilised norms of behaviour would triumph."Irrespective of how one regard such theories in moral terms, they contain methodological flaws. Corruption is turned into a structural phenomenon. It reproduces itself through the existing systems of relationships, established ties and habitual norms". (Kagarlitsky 2002) 3. Power by corruption, the Oligarchs Russia chose the strategy of a shock therapy.

Mass privatisation had to prevent a return to communism. "A small group of businessmen enriched themselves and then corrupted many of Russia's politicians and officials". They have impeded further reform. Small enterprises without political connections had to pay more taxes. The influential businessmen have blocked the continuation of tax reforms.

Moreover, "these big businessmen also benefit from Russia's arduous regulations and pitiless inspectors, which limit competition but do not impede the powerful". Russia's elites started making their fortunes in the Soviet Union's last years, mostly from three sources: commodity exports, subsidised credits, and food imports". In the transition period they managed to maintain the price of the commodities. In this way they could sell their commodities with substantial profits in the West. Secondly, they kept their cheap credits from the central bank, because reformers failed to bring the central bank in their control. Finally, reformers feared famine and couldn't stop the food-import subsidies.

The elite could buy cut-price food and sell it freely on the market. (Aslund 1999) "The old bureaucrats dominate much of the privatisation process often deciding who gets what and at what price". (Klebnikov 1993) The business elite entwined more and more with the politicians. With the guarantee on successful elections, politicians directed the legislation in favour of the powerful businessmen.

"Political capitalism" dominated. (Kagarlitsky 2002) Consequently, competition has been low, small business haven't got a chance, foreign entrepreneurs have been deterred by the organised crime and foreign investors haven't invest. (Members of the Speaker's Advisory Group on Russia 2000) In these oligarchic economy the "Oligarchs" have kept the power. Endeavours to decrease the influence of the Oligarchs, have failed. Chub a " is experienced this when he wanted to reform the "oligarchic capitalism" into a "people's capitalism" where "the market rules are the same for everybody and the state is independent of business". (Klebnikov 1998) There's a remarkable comparison between Russia and early feudalism where "property and power were closely intertwined and it was often impossible to separate them from each other".

(Shlapentoch 1996: 393) 4. Solving the corruption Straight after the dramatic collapse of Russian economy in 1998, there were some opportunities to take measures in favour of a market-oriented economy. The government could install equitable laws and guarantee the enforcement of these laws. They could diminish the power of the Oligarchs by multiplying the number of businesses and service providers combined with the support of new businesses. (Goldmann 2000) There followed some improvements but it became soon clear that Russians would have to work hard to eliminate the damage caused by the imperfect and corrupt privatisation. The opinion of western experts also changed, they had to stop to lend Russia "easy" money.

This could end in more entrepreneurship by the Russian population. (Aslund 1999) After the crisis in 1998, oil prices showed an upward trend and the economy became more competitive, but this was only a short-term effect. When Putin became president, he proposed some measures. One of the proposed projects included measures to punish people who went "beyond the bounds" but the project did not tackle the causes of corruption. He also wanted tax cuts to decrease corruption at the lower level and an redistribution of property to reduce the power of the Oligarchs. (Kagarlitsky 2002) To what extent these proposals are sincere, is difficult to say, because Putin became president with the support of some businessmen.

(BBC News 2000) According to Ledeneva (2003), there is much rhetoric about stopping corruption, but there is a shortage of effective programmes. Actions still are far too much controlled by political heads. By creating a corporate code of conduct, Putin wants good governance in the private sector and he hopes to get in this way foreign direct investment. Nevertheless the costs of corruption are still too high to attract foreign investors. There are also initiatives in legislation against corruption, but the effective implementation is lacking. Law enforcement agencies have to become more effective, but Putin gives the key positions in these agencies to his friends.

So far, the problem of partiality is not solved. The new generation still believes in democracy, nevertheless, "political capitalism can be resolved only in a revolutionary matter". (Kagarlitsky 2002) CONCLUSION The conditions for privatisation in Russia were not good. The basic legal and institutional components of a market economy were missing. In these circumstances you could decide to apply a gradual approach for your privatisation process. Russia chose for a shock therapy because they feared a return of communism.

Even when you adopt this strategy, you have to take measures to prevent corruption by way of legislation and to reduce occurring corruption by the institution of law enforcement agencies. In addition, the Oligarchs have determined the failure of economic transformation. They succeeded in enriching themselves because of the imperfect privatisation process. They entwined more and more with the politicians.

With these connections, they have defined the political agenda and have benefited from the arduous regulations. In this way, new start-up businesses have not got the chance to develop their enterprises. Solutions are possible but they have to deal with the causes of corruption and in the current situation, this is not likely to happen. The new generation still believes in democracy, maybe they can eradicate corruption.

Nevertheless, even when they can stop or diminish corruption, the population has to wait decades before the damage of the failed privatisation will be disappeared. The future of Russia is daunting.