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CHAPTER 6 What Governs? Organizational Competition and the Weak Russian State We typically view the state as the organization best suited to govern markets. States have economies of scope and scale that are not available to other organizations (Baumol 1952; Stiglitz 1989). They can often make stronger claims to legitimacy than other organizations seeking to provide public goods and can often rely on the international community for support (Jackson and Rosberg 1982; Reno 1997). Yet preceding chapters demonstrate that other organizations, such as SGOs and private protection organizations, can also become significant governing organizations on some markets. Why did different organizations come to govern these relatively similar markets? This chapter presents a very simple theoretical framework for understanding the variation in institutional outcomes across markets. It begins from the premise that in many instances economic agents can choose to "hire" the state, an SGO, or a private protection organization to insure contract compliance. Businesspeople calculate the costs and benefits of using these different organizations and hire the organization that insures the highest probability of contract compliance at the lowest cost (Hay and Schleifer 1998). In response, these organizations compete for the residual profits that accrue from providing contract enforcement. This framework suggests that where state tax and delegation policies impose high costs, brokers will be reluctant to hire an SGO or the state to enforce contracts because doing so requires them to reveal inforlnation about their trading practices. Revealing this information, in turn, leaves them vulnerable to high rates of taxation. To avoid paying these high costs they will have strong incentives to enter the informal economy and "hire" private protection , rather than the state or an SGO. By hiring a private protection organization brokers are not required to share information about their business with the larger community and the state. In contrast, where state tax and delegation policies are more favorable and do not punish brokers for revealing information, they will have strong incentives to share information, stay in the formal economy, and "hire" the state or an SGO. They will choose between the state and an SGO depending on which organization can insure a higher rate of contract compliance at a lower cost. 143 144 Brokers and Bureaucrats This rudimentary theoretical framework has three attractive features. First, it has the potential to offer a relatively general account of the rise of private protection organizations across markets in postcommunist Russia. Rather than linking the rise of private protection to the legacy of communism or Russian culture, it examines how regulation shapes the incentives of brokers across markets to choose among competing organizations to enforce their contracts. While it does not purport to explain all instances of private protection in Russia, this framework is portable across economic sectors. Second, it generates insights into the surprising weakness of the postcommunist state. Rather than attributing the weakness ofthe Russian state to neoliberal reforms or interest group capture, the approach developed here suggests an alternative explanation. It argues that the Russian state has also become weak due to state policies that encourage economic agents to leave the formal economy and pay "taxes" to a private protection organization, rather than to the state or an SGO. Third, it provides a theoretical lens for viewing the postcommunist transformation that focuses our attention on state-building. By analyzing the post-communist transformation as an organizational competition among the state, SGOs, and private protection organizations, it places the construction and destruction of the state at the center of the analysis. The literatures on transitions from authoritarian rule and economic reform tend to focus on who governs or how they govern. Will the regime be democratic or authoritarian ? Will rent seekers or market-oriented reformers run the government? In these literatures reformers and communists, or hard-liners and moderates, battle over control ofthe state, and it is assumed that the state as an organization governs. In contrast, this approach suggests that an equally important question is what organization governs. It views the postcommunist transformation as a competition among organizations for the residual profits that accrue from providing more secure property rights to economic agents in a given sector. Borrowing from diverse strands of literature on state building and organizational competition, it operates from the premise that economic agents can hire anyone of these organizations to perform the costly tasks of enforcing contracts and securing property rights (Tilly 1990; Olson 1993; Spruyt 1995; Thomson 1995). This framework provides a first step toward understanding the organizational competition that is shaping...

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