The Impact of Democratization: What Makes the Reforms Effective

July 11, 2019   |   Econs
Dialogue Chain. Episode 4. Aleksander Auzan, Professor, Dean, Faculty of Economics, Lomonosov Moscow State University interviews Marek Dabrowski, Professor of the Higher School of Economics, non-resident Scholar at Bruegel

Dialogue Chain. Episode 4. Aleksander Auzan, Professor, Dean, Faculty of Economics, Lomonosov Moscow State University interviews Marek Dabrowski, Professor of the Higher School of Economics, non-resident Scholar at Bruegel.

Auzan: Good afternoon, dear pan Marek. There’s a joke that says that a person who talks to you about themselves is a bore. A person who talks to you about others is a gossip. And a person who talks to you about yourself is good company. So I suggest that we start by talking about us. I mean Russia. You have published what I believe to be an article which forms a roadmap of Russia’s growth problems. Let’s start with that. What does pan Marek, who has closely observed Russia’s economy over the last decades, see as the main problems for Russia’s economic growth?

Dabrowski: Among the current problems (because they do change), I would mention a few. The first is demographic limitations. The working-age population is shrinking, and global experience shows that growing unemployment makes it difficult to think about economic growth… Another factor I should mention is the unfavorable business environment.

Auzan: Business environment, business climate. What can be done here?

Dabrowski: On the one hand, that isn’t a tough question to answer. On the other hand, I understand quite clearly that what I’m going to suggest will not be easy to implement in Russia. Nevertheless, here it is: the state should limit itself, and create an effective system of checks and balances. But the first priority is, certainly, the judiciary system. It plays a key role in protecting property rights. It’s clear that Russia’s judiciary system isn’t independent of the executive, or even the legislative branch.

Auzan: Apart from an independent judiciary, is there something else that could have a strong and positive influence on the business climate?

Dabrowski: Well, that would be the role of law enforcement agencies. Russia isn’t the only country that has this problem. For example, there are former Soviet countries with more open-access order, let’s call it that way. But they still face the same problem. Take a look at neighboring Ukraine. We can’t call its current system authoritarian, but we see that the law-enforcement agencies keep abusing their power when dealing with businesses and ordinary citizens. I think that in Russia, all these authorities obviously have excessive power. But I see this as another problem. For example, to what extent should security services (I mean intelligence services, counterintelligence, and so forth) intervene in business? Apart from in some rare cases.

Auzan: What do you mean by ‘intervene into business’? Do you mean ‘control’?

Dabrowski: Well. I mean the variety of different inspections, steamrollering, etc. These encourage various abuses.

Auzan: Marek, that’s clear, but, on the other hand, when a business belongs to the defence industry, it’s inevitable that the special services (intelligence, counterintelligence, etc.) will be present.

Dabrowski: True. But they should keep themselves within the limits of their mandates. It means that they should counter possible information leakages, protect state secrets but never intervene in general business activities.

Auzan: Pan Marek, I couldn’t agree more, we could issue a statement saying “The state should do this, and shouldn’t do that.” And our visions would be fairly similar. But how can we put them into effect? I mean, it’s true that special services shouldn’t pursue their economic interests when fulfilling the state’s goals. But they do have economic interests, they always do. And we understand that there’s competition for budget allocations, and for influence over certain businesses. This exists outside of Russia, too. It happens all over the world.

Dabrowski: Well, I don’t quite agree with you. Certainly, any state structure is interested in, for example, receiving more budget funding.

Auzan: Of course.

Dabrowski: I think that this is classic. But when law-enforcement agencies of any kind are interested in extorting money from businesses, this, I’m sorry, but I think that this is abuse of power and it goes against the standards.

Auzan: Certainly.

Dabrowski: I think that in many former Soviet countries, including Russia, the key problem is that law enforcers try to achieve their personal material goals, as well as implementing state goals and their legitimate mandates.

Auzan: But we understand that…

Dabrowski: Call it corruption or racketeering.

Auzan: Yeah. We see this rent-seeking behavior in lots of countries.

Dabrowski: True. I Agree.

Auzan: I would even say in the majority of countries. Where there are extractive institutions, there are rent-seeking attempts. That’s why we face a fundamental problem: how can these extractive institutions be transformed into the inclusive ones that will attract human capital and will embrace economic and entrepreneurial activities? How? What reforms are needed in Russia, and, maybe, not only there?

Dabrowski: My answer is political reforms, democratization, and restoration of checks and balances. But law enforcement generally belongs to the executive branch. And as such, they should be strictly controlled by, firstly, the legislative branch, and, secondly, there’s the problem of transparency and public control. It’s also about the role of independent media, and of civil society. Thus, I think that, well, we won’t progress without fundamental political reforms. Democracy certainly doesn’t guarantee that we will resolve the problems of corruption, public racketeering, extortion, rent-seeking, and so on. These problems persist in many democratic countries (for example, in India, Italy, and in many other countries), despite democracy. But still, it gives a chance of progress.

Auzan: True, Marek, but there’s also the chance of economic loss: over the last ten years, Tabellini, Parsons, and Popov have published their papers arguing that democratization can have negative economic effects. We saw what happened in Russia in the 1990s, we see what’s happening in Ukraine. Sometimes, democratization has positive economic effects, and sometimes, it has negative ones. What can we do about that, Marek, my dear economist?

Dabrowski: No, I totally disagree that democracy can harm economic development and economic reforms or thwart the active functioning of the economic system.

Auzan: Excuse me…

Dabrowski: I don’t think the examples you mentioned are relevant. Russia’s economic downturn of the 1990s had two main reasons, which would have been the same even if the political system back then had been democratic instead of authoritarian. The first and the most important one is Russia’s heritage - the structural and macroeconomic imbalances of the Soviet system. The other one is inconsistent and slow reforms, despite all the talk about shock-therapy. As far as Ukraine is concerned, it’s still too early to analyze the results.

Auzan: As regards what you just said, it’s worth remembering that Polterovich and Popov in their works argue that democratization has positive economic effects only when two conditions are met. You have already mentioned the first one, which is an independent judiciary, and the second one is a high-quality bureaucracy. When these prerequisites are met, democratization is good for the economy. Otherwise, it’s bad. I would agree with this opinion because there’s an algorithm here. But I suggest that we talk about you and your country. You were one of those people that launched Balcerowicz’s reforms, which were important not only for Poland, but also for us, too, and the 1990s saw a very impressive growth rate. At that time, we also saw significant growth in Ireland, and in Southern Germany, so people even started talking about a Catholic economic miracle. Do you remember that? So. How can you explain this phenomenon of growth in Poland and some other Catholic regions of Europe? Is it related to culture?

Dabrowski: I’ll be honest. I don’t see any connection between economic growth and the dominant religion. Speaking about the 1990s, Poland was not the only country that underwent a successful transformation; it was the case with Czechoslovakia as well. Back then, it started in Czechoslovakia and continued in the Czech Republic, and in Slovakia. It was also the case in the Baltic countries, although, certainly, the downturn there was a bit longer because the imbalances were much worse than in the Central European economies. Looking at the wider world, for example, South Korea and Chile showed high growth rates, too. So, the countries I have mentioned have different religions. Actually, if we take the world economy, it saw relatively good times in the second half of the 1990s. So, if we turn to Robert Gordon’s works, for example, he says that from 1994/1995 till 2004 the ICT revolution had a positive impact on soaring labor productivity. Now this effect is much smaller.

Auzan: You mean that back then, Poland managed to ride the wave and benefit from those effects through some institutional measures, right?

Dabrowski: Well, these effects – I mean the ICT revolution – were yet to materialize. I think we should keep in mind that Poland’s starting conditions were relatively more favorable for the transformation than, certainly, those of the former Soviet republics. The reason is that, for example… Well, I will give you one example. The defence industry accounted for an extremely low share of GDP. If I’m not mistaken, it was about 1-2% of GDP. In the USSR, it was almost 20%, according to different estimates. Secondly, Poland still had private agriculture. And here, if we analyze the structure of the downturn, we see that in many countries and certainly in all the former Soviet republics, the key part was the slump in agriculture. It wasn’t like that in Poland because…

Auzan: Why?

Dabrowski: Private property still existed in agriculture. This sector was fragmented and quite ineffective, but it still operated according to market rules. There were other, similar factors, too.

Auzan: So, the factors are historical?

Dabrowski: Yes, they are historical. Moreover, the reforms were enacted in a swift and coordinated way. Certainly, looking back, I would say that some things could have been done better, but that’s natural. Again, Poland is not the only example. The same is true for Estonia, for instance. However, in the beginning, its economy was Soviet, but its results are totally different from those of Russia, Ukraine, and Moldova.

Auzan: So, this isn’t a historical factor, is it?

Dabrowski: I think that this is a combination of two factors. The first one is what we call the starting points, which, of course, played their role. And the second one is the quality of transformation programme.

Auzan: True, I can confirm that. We have studied the Estonian experience. This country’s institutions were mainly of the Germanic type, even though it had Finland as its flourishing neighbor, and the Finnish institutions could have been copied easily thanks to the similarity of their languages. But no. Estonia found its own solutions, such as e-government, and these solutions are very effective. So, there’re still some rather successful cases…

Dabrowski: And it’s not a Catholic country!

Auzan: True, true. But in this case, I think that they managed to benefit from their cultural traits by incorporating them into the institutional reforms.

Dabrowski: Well, culture…It’s interesting to recall that Estonia is not a mono-ethnic country.

Auzan: Exactly.

Dabrowski: For instance, it has a big Russian minority, which has successfully joined the process.

Auzan: At least, they participate in local governance, which is quite important. We shall end here, Marek. Natalia Zubarevich gave me the relay baton of this conversation. Now I give it to you. Whom will you talk to next?

Dabrowski: Well, I suggest Evsey Gurvich. In this case, we can continue the conversation about growth factors and growth prospects. I think it’s one of Russia’s key problems, so…

Auzan: He’s also one of Russia’s best macroeconomists.

Dabrowski: Certainly.

Auzan: So, send my greetings to Evsey. You made a great choice. Thank you, Marek.

Dabrowski: Thank you.