Whither Russia? A Review of Andrei Shleifer's A Normal Country

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          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

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          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 dependent
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            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.
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          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.
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          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).
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          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).
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            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).
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          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 of
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            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.
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          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.
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            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 systematically
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          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.
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            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.
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          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 doubts
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