Russia's Natural State of Corruption

Vladimir Putin holds his country back.

In Russia this weekend, Prime Minister Vladimir Putin and President Dimitry Medvedev made public an agreement to switch jobs this spring when national "elections" will be held, reversing their titles do-si-do. No real mention was made of actually consulting the electorate, of course. 

As it happens, I was in Russia on a lecture tour when the duo announced their plans to continue occupying the top two slots in the Russian government. And a lecture I gave at the Higher School of Economics in Moscow on "The Intangible Wealth of Nations" included insights that bear on the current situation in Russia. My lecture drew on the brilliant Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, by economics Nobelist Douglass North, University of Maryland economist John Joseph Wallis, and Stanford University political scientist Barry Weingast. The book begins by noting that a central problem confronted by societies encompassing more than a few hundred people is how to deal with the problem of violence. The authors persuasively argue that what they call the "natural state" emerged in the first social revolution that occurred with the development of settled agriculture. "Personal relationships, who one is and who one knows, form the basis for social organization and constitute the arena for individual interaction, particularly personal relationship among powerful individuals," they write. "Natural states limit the ability of individuals to form organizations." 

Until the 19th century, all societies were natural states run by elites that controlled access to political power and economic resources. In natural states the politics that matter takes place among members of this elite as they jockey for position among themselves. Access to all organizations is limited to members of the elite and no significant organizations—religious, economic, or political—exist outside of the state. Natural states are characterized by patron-client networks in which people (traders, producers, priests, educators, etc.) personally ally themselves with specific militarily potent individuals. The patrons offer protection and channel resources to clients in exchange for their loyalty and support should intra-elite violence break out. While the authors assert that natural states are a fundamental way of organizing society, they also acknowledge that not all natural states are exactly alike. "Mesopotamia in the third millennium B.C.E., Britain under the Tudors, and modern Russia under Putin were all natural states, but very different societies," they note. We'll be coming back to Putin below.

Natural states operate by limiting access to valuable resources, e.g., by creating and sharing the rewards of monopolies. Members of the dominant coalition agree to respect each other's special privileges. The would-be violence specialists that make up the dominant elite achieve a standoff that enables each one to earn and enjoy the monopoly rents from the land, labor, and resources that he controls. Social peace makes the returns to the assets that each controls higher than what they might gain from fighting. However, if some members of the elite come to believe that they would win access to more resources (and power) by fighting, then they will defect and fighting will break out. The Roman civil wars in the first century B.C., and the English Wars of the Roses in the 15th century are archetypes of outbreaks of coalitional violence among members of dominant elites and their patronage networks. Thus coalitional politics and violence is in a sense recorded human history, just with differing details and personalities.

Then in the 19th century, a small group of societies hit upon what the authors call "open access orders." In such societies, a large number of individuals have the right to form organizations that can engage in wide variety of economic, political, and social activities. Unlike in natural states, the existence of organizations in open access societies does not depend on the personal individual identities and elite privileges of its members; they are, in that sense, "impersonal." The authors argue that this kind of "impersonality" is key to open access orders. People can create perpetually lived organizations with impersonal legal identities and rights that have an existence that is independent of the lives of their members. Think here corporations and formal political parties and advocacy groups that can be formed without the consent of the state (although they benefit from relatively impartial third party enforcement of agreements and relationships by the state).

Individuals and organizations still seek monopoly profits (economic rents), but economic and political competition ameliorates this in the long run. Economic competition also produces rapidly shifting interests making it difficult for political actors to solidify their control over resources. In political competition groups monitor one another and publicize attempts to subvert open access. The proliferation of independent organizations forms the basis of civil society where groups become politically active when their interests are threatened. "Countries exhibit a marked correlation between the number of organizations and the extent of economic and political development," note the authors. They offer data showing that countries with incomes over $20,000 per capita average about 65 organizations per million residents, whereas countries with incomes between $5,000 and $10,000 average about 17 per million residents.

But how to get from natural states to the open access orders? The transition has to be consistent with the interests of the dominant elite. If the members of the elite do not think they will be better off by economic and social changes that lead to open access, the transition will not occur. The authors identify three "doorstep conditions" that enable the development of open access orders: (1) Rule of law for elites; (2) Perpetually lived forms of public and private elite organizations, including the state itself; and (3) Consolidated political control of the military. 

They authors go into great detail over how rule of law for elites evolved from elite personal privileges, especially with regard to the right to buy and sell land. Once established, the rule of law for elites creates a common interest in defending those rights. The extension of the rule of law to non-elite members of society occurs when elites recognize that such arrangements make them better off economically, too. Win/win economic transactions become possible.

Perpetually lived corporate organizations break the link between specific personalities, such as the king, and the operation of elite organizations. The authors point out the king was originally the embodiment of the state, but in some western societies the kingship evolved (was demoted) into the "agent" of the corporate state. One significant milestone occurred when the king had to get permission of other formal independent bodies to raise taxes.

The third condition is that the link between the organizations that decide how to fight and those that decide when and how much to spend on fighting is severed. This is the most difficult step to achieve. As an example of how this transition occurred, the authors explain how debt financing of the British navy in the 18th century made it more efficient and powerful than any the world had ever seen, but simultaneously more vulnerable to the impersonal and perpetually lived organizations in financial markets.

Economic and political competition sparked by open access orders produces innovation that creates wealth. Innovation essentially becomes the way to create economic rents, i.e., profits above the normal rate of return. The authors note that before 1840, long run economic growth was essentially zero. Since open access orders evolved, economic growth has been steady at around 1.5 percent per year.

So what has all this high-falutin' economic theorizing to do with the situation in Russia? Russia is still a mature natural state run by an elite coalition that disposes of money and power through a network of personal relationships. Access to resources is organized through various monopolies that are awarded to loyal members of the coalition. As The New York Times notes, "A common complaint is that Mr. Putin's rule hollowed out the country's institutions, so that even major deals hinge on personal relationships with the country's leaders."

As one would expect from the foregoing analysis, the state is an instrument used to punish those who challenge Putin's coalition. Mikhail Khodorkovsky, the former head of the Yukos Oil Company, found this out when his company's assets were seized and he was tossed in jail. Khodorkovsky's chief crime was that he was bankrolling opposition political parties. Indeed, as the murder of journalist Anna Politkovskaya indicates, actual violence will be used against critics of the ruling elite from time to time. 

Some observers had hoped that Medvedev was organizing a rival patron/client network that might help push Russia in the direction of the rule of law and less corruption. Given Medvedev's acquiescence to Putin's re-ascendancy, he was either outmaneuvered in coalitional politics or, more likely, was always a witting placeholder for the person with the real power in the coalition. As the authors of Violence and Social Orders point out, what looks like corruption to those of us lucky enough to be living in open access orders is really just the more or less normal operations of distributing largess through patron/client networks.

In my talk at the Higher School of Economics, I pointed to recent research [PDF] by the World Bank on intangible wealth that shows just how bad Russian governance is when it comes to efficiently utilizing resources. The World Bank calculates that the average Russian has access to about $345,000 in human capital, e.g., mostly education and skill levels. In comparison, the average American has access to $465,000 of human capital. However, bad governance (corruption, lack of rule of law and property rights, crony capitalism) in Russia has completely offset the value of its peoples' human capital. Whereas relatively good governance in the United States adds $100,000 per capita to the value of American human capital.

The bottom line is that when all the natural capital (forests, oil wells), produced capital (factories and roads), and intangible capital (human capital and good governance) are added up, the average Russian has access to a total of $73,000 in capital producing an average per capita GDP of $5,000 per year. If Russian governance could somehow be transformed, average per capita capital would rise to nearly $500,000 potentially yielding an average GDP return (at 6 percent) of $30,000 per year. By contrast, the average American has access to $735,000 in total capital yielding a GDP per capita at an average of $43,000 per year.

While natural states do limit social violence, they are terrible at encouraging economic growth and creating wealth. The monopolies that supply resources to coalition members have little or no competition and therefore no motive for innovation and development. The result is economic stagnation. An oil and gas bonanza has fueled Russia's economy in the last decade—the shops in Moscow are filled with luxury goods and the streets clotted with luxury cars. But the country has no other significant endogenous sources of economic growth. The latest Kremlin maneuverings indicate that Putin and his coalition have no intention of transforming Russia into an open access society. Consequently, it is sadly hard to resist the conclusion reached by Russia analyst Ralph Peters in today's Washington Post: "Demographically, economically, developmentally, militarily, even educationally, Russia appears doomed to fierce decline."

Disclosure: I want to gratefully acknowledge the Friedrich Naumann Foundation for Freedom for making it possible for me to travel to Russia.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.