The Rule Of Law And Economic Reform In Russia

Jeffery Sachs

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429975509
• Edition: 1
• Topic: History
• Subtopic: World History
• Index: History

What impact has Russia's chosen path of reform had on the development of law after the collapse of the communist regime? This collection of essays examines how Russia's distinctive traditions of law-and lawlessness-are shaping the current struggle for economic reform in the country. Nine renowned scholars, chosen from specialties in history, politi

---

---

CHAPTER 1

Introduction: Progress, Pitfalls, Scenarios, and Lost Opportunities

Jeffrey D. Sachs and Katharina Pistor

The fundamental questions in this collection of essays are twofold: first, how Russia’s distinctive traditions of law—and lawlessness—will shape, and perhaps cripple, Russia’s struggle for economic reform; and second, what impact Russia’s chosen path of reform had on the development of rule of law after the collapse of the communist regime. In 1992, at the initiation of radical market reforms, Russia differed in many ways from the reforming countries of Eastern Europe, and the lack of historical tradition of the rule of law was among the most important of these differences. Nonetheless, few observers guessed how large the lack of sound legal norms and principles, which governed the public and private actions as well as the issues of criminality and state corruption, would loom in the struggle over economic reform. At the outset of the transition process, all countries were confronted with the twin tasks of economic reform and reform of the political, constitutional, and legal order. Most of the Central and Eastern European countries managed to introduce political, legal, and economic reforms almost concurrently. In Russia, by contrast, constitutional and legal reforms were stalled or often simply ignored, while economic reforms were pushed forward.

Initial conditions may have been an important factor in determining Russia’s distinctive reform path. Russia differed considerably from many countries of Central-Eastern Europe and the Baltic states with regard to political and constitutional conditions. While much of Central-Eastern Europe and the Baltic states had a pre-socialist constitutional and private legal tradition to return to or to build on, this was not the case in Russia. Also, communism had been forcibly imposed and maintained in the latter countries by an outside force (i.e., the Soviet Union), while Russian communism was essentially homegrown. As a result, the change of political leadership in Central Europe and the Baltic States was more thoroughgoing than it was in Russia. The generational change of leadership was also consequently greater.

Finally, given the ongoing struggles for power in Russia that followed the coup attempt in August 1991 and the dissolution of the Soviet Union itself in December 1991, it apparently seemed necessary to President Yeltsin and his newly chosen team to press ahead with radical economic reforms despite the fact that constitutional and legal problems were unresolved, and indeed heavily contested. Both political reforms and economic reforms became matters of improvisation, given the ongoing power struggle in Moscow and the provinces. Without question, though, the unresolved constitutional and political problems haunted the economic reform process, and continue to do so. The tension between the need for economic reform on the one hand and the weakness of legal and political institutions to implement reform in a transparent and equitable manner on the other hand has perhaps been the central problem of Russia’s post-socialist development.

The present collection of essays, which were first presented in the 1994–95 Olin Seminar Series of the Davis Center for Russian Studies at Harvard University, explore different aspects of Russia’s legal tradition and post-socialist legal development and their relation to the economic reform process.

The contributions by Thomas Owen and Michael Newcity give an account of Russia’s pre-socialist legacy. Owen analyzes in detail the struggle for legal reform in the area of private law during the last decades of the Tsarist regime. He emphasizes the ambivalence of the autocratic state, including reform-minded politicians, to trade the wide discretionary powers of the bureaucracy for a legal framework that would be more conducive to market development, but would also impose constraints on the state. Newcity relates the roots of Russia’s autocratic past to the orthodox church and the absence of competition among secular and religious legal systems.

The role of constitutionalism and the relationship between economic reform and criminality in the post-socialist environment are explored in the subsequent two chapters. Joel Hellman offers a comparative, empirical analysis of the relation between constitutional order and economic reform programs in transition economies. He concludes that the establishment of a constitutional order early in the reform process can be beneficial for, but the concentration of power in the hands of a president is detrimental to, the adoption of comprehensive and far-reaching economic reform programs. Anders Åslund analyzes the economic causes of crime and corruption. Using comparative data from several transition economies, he suggests that the extent of lawlessness in present-day Russia is exaggerated. In his view, successful economic reforms will lead to a stabilization, if not reduction, in crime rates and create the necessary constituencies for law and order.

This sets the stage for an investigation of legal institutions and substantive economic law in post-socialist Russia. Michael Waller analyzes the history and current role of securities forces, including the police. He argues that the chekist tradition and culture created serious obstacles for establishing effective and credible civil authority in post-socialist Russia. In the absence of structural reforms of the security forces and the police and the political will to control their actions, members of the security forces have infiltrated other parts of the state administration and have dampened the prospects for establishing credible civil authorities. Timothy Frye investigates the emergence and subsequent decline of non-state dispute settlement institutions at commodity exchanges. He relates their demise to the role of the state and argues that among the main causes for the weakness of private arbitration is state control and surveillance as well as arbitrary state interference and excessive taxation.

The final two contributions treat Russia’s slow progress in economic law reform and discuss its implications for the success of economic reform. Cheryl Gray and Kathryn Hendley set out three basic conditions for law based private transacting, which are good laws, sound supportive institutions, and market based incentives that create a demand for law and legal institutions. Drawing from comparison with commercial law development in Hungary, they suggest that the development of effective judicial and administrative support institutions is the most difficult task to accomplish, not only in Russia but also in other transition economies. However, Russia still falls short of providing the first conditions for law based transactions: good laws that reduce transaction costs and enable private actors to mobilize their own rights. Katharina Pistor discusses the implications of the lack of a comprehensive corporate law at the outset of privatization for the development of property rights and corporate governance post-privatization. She traces the nature and quality of legal rules issued in post-socialist Russia, not only to Russia’s legal tradition, but also to policy choices made by reformers during the course of economic reform. She argues that comprehensive legal reform was delayed in favor of speedy economic reforms based on ad hoc decisions and decrees with detrimental consequences for the development of property rights and governance structures.

As this overview suggests, this volume offers a host of different perspectives and views about the relationship between rule of law and economic reform in post-communist Russia. We have made no attempt to harmonize these views as this would have eliminated much of the richness of the debate. It would also do injustice to the complexity of the issues at hand, which are explored by a group of scholars who represent different disciplines, including law, economics, political science, and history. Nor does this volume aspire to offer a comprehensive account of all aspects related to rule of law and economic reform in Russia. Rather, it should be regarded as a first attempt to engage scholars from different disciplines in exploring a subject of great theoretical fascination and practical importance.

In this introductory chapter, we assess the state of the rule of law and of the economy at the outset of reforms in 1991/92 and in late 1996, five years into the reform process. We relate the outcome to Russia’s pre-reform history as well as to the reform process, and propose some implications for the future of Russia’s economic and legal development.

Initial Conditions

Russia faced enormous obstacles for creating a market economy and embarking on political and legal reforms aimed at establishing a democratic regime based on the rule of law. The roots of Russian exceptionalism in the rule of law and in the lack of economic freedom—in comparison with the rest of Europe—are deep. The exceptionalism far predates the 1917 Bolshevik Revolution, and indeed was already dramatic in the mid-nineteenth century, when Alexander II launched his attempts at the Great Reforms (described in detail by Owen). The exceptionalism can be traced back several centuries, plausibly to the start of the Muscovite state.

Following the emergence of Moscovy from more than two centuries of Mongol domination (1240–1480), law has played a conspicuously less important role than in Western Europe. The great formative stages of Western European law—the application of Roman Law throughout the dominions of the Roman Empire; the reception of Roman Law by medieval Europe; the struggle of the Emperor and the Papacy over political authority and legitimacy; the Renaissance; and the Enlightenment—touched Russia only indirectly. Perhaps equally important, after the sixteenth century, the Russian Orthodox Church was subsumed in state power. The Tsar was both the head of state and the head of the Russian Orthodox Church. This dual role eliminated one of Western Europe’s key bulwarks against the concentration of power in the hands of a single ruler. Medieval Europe’s prolonged struggle between Church and State over sovereign authority, natural law, and political legitimacy played a fundamental role in fostering law-bound state power and bolstering standards of political morality; in Russia, by contrast, the struggle ended in a dominant state and a politically subservient Church.

The Renaissance in Western Europe had profound and complex effects in furthering the Rule of Law in Western Europe. On the ideological level, mankind and the meaning of life itself were put at the center of renewed philosophic speculation. On the economic level, the rise of competing city states of Renaissance Italy spurred the role of international trade, with the attendant market institutions of banking, contract law, shipping law, and secured transactions. Political speculations, crowned by Machiavelli’s The Prince, explored ways for the Prince to strengthen the state in competition with other states, including the role of the state in fostering economic prosperity.

At that time, Russia was still under Mongol rule. Moreover, Russia’s international trade was greatly hampered by geography. With its vast overland distances, its paucity of roads (Russia has no roads, only directions, said Gogol), and its rivers running North-South rather than East-West towards Europe, Russia participated in international trade mainly through the export of few highly valued commodities, such as furs, which could be profitable despite the enormous transport costs. (While Russia’s river systems allowed access to the Black Sea, Russia trade with Europe via the Black Sea was hampered for centuries by Ottoman domination.) Otherwise, Russia was not drawn deeply into the emerging European market economic system.

We can put the point more generally. Throughout European history, innovations in economic and political life have started in one region and then spread to others on the basis of their perceived or demonstrated advantages, or through conquest, colonization, or imperial rule. It was considerably more difficult for new European ideas and institutions to spread into Russia’s vast continental expanse, especially in view of Russia’s autocratic rule. Institutional innovations carry less well into continental, largely self-contained societies—China, India, Russia—than they do into small, open societies that are dependent for their very survival on international trade, international alliances, and the timely adoption of “best practices” from abroad. Perhaps “small is beautiful” in economic reform, if the small entity isn’t simply gobbled up by a larger power. In any event, it is probably no accident that Russia, China, and India have had the most difficult time of all of the traditional societies in the world in adapting the new political and economic institutions from abroad, even when those institutions have an overwhelming track record of effectiveness.

By the mid-nineteenth century, the divergence in the rule of law between Western Europe and Russia was profound. In contrast with the emergence of parliamentary and constitutional limits on sovereign authority in Western Europe, the Russian Tsar was never constrained by constitutional limits, and the state administration before the mid-nineteenth century lacked minimal standards of rational bureaucracy, citizenship, and the application of law through a judicial system. Russia was the very last country in Europe to create a parliament as a check on the absolute power of the sovereign, and even lagged behind the Ottoman empire in this institutional change. And the new Russian Duma, granted reluctantly by the Tsar in 1906—following the debacles of a lost war to Japan, a failed revolution, and a deep fiscal crisis—had few powers to limit the sovereign. Extreme limits on suffrage, and on the Duma’s institutional role vis-à-vis the Tsar’s powers, left the Tsar and state bureaucracy with almost all of its traditional autocratic powers.

The Russian state administration failed the basic tests of a “rational” state, according to the classic definition of Max Weber. Until the emancipation of the serfs in 1861, the vast majority of Russians had no civil rights, were subjected to the violent and arbitrary rule of their lords, and had no recourse to the state for basic legal protections. The rural aristocracy, rather than a state bureaucracy, effectively governed Russia in its vast rural areas where the overwhelming majority of the Russian population lived. To the extent that the state bureaucracy functioned, it was notoriously free of rules, rational procedures, and effective administration, as captured in Gogol’s devastating depictions in the 1830s.

The state’s failure to establish basic principles of the rule of law is also reflected in the development of private law. Throughout Western Europe, basic notions of private property rights, and their exchange via voluntary contract, had deep roots in traditional practice and Roman law. By contrast, the vast majority of Russian households living as serfs had no notions or rights of private property. The most basic personal freedoms were denied them; even the right to decide on their own marriages depended upon the permission of the lord.

In continental Europe, it was not until the nineteenth century that many of the key economic laws underpinning a modern market economy were developed or adopted, such as laws governing limited liability joint-stock companies, commercial banks, and bankruptcy. In principle, Russia could have closed the gap of commercial law development with Western Europe by adopting some of the key economic legislation spreading rapidly throughout the Continent. Japan, for example, leap-frogged to modern capitalism in the dramatic twenty years of radical reforms that followed the Meiji Restoration of 1868. In Russia, debates raged on just such a course of action, particularly during and after the reign of Alexander II, but with few results. Russia continued to mark a kind of geographical barrier to the Eastward diffusion of modern economic laws in the nineteenth century, as was the case in earlier centuries.¹ In every area of reform of economic law that was debated in Russia after the mid-nineteenth century, Russian reforms stopped half-way between its feudal heritage and modern capitalist practices.

This tendency towards stunted reforms was most critical and socially devastating in the question of land ownership. As is well known, the emancipation of the serfs in 1861 was not followed by individual land titling and household farms as in most of Western Europe, but rather by new communal structures (the obshchina), which once again deprived millions of rural families economic freedom on the basis of household decision making. The emancipated serfs had to rely on collective decisions of these communal organizations to obtain private land plots or to withdraw from the village itself. The idea of a modern citizenry—individuals exercising rights established in national laws and enjoying the ability to defend those rights in an independent judiciary—eluded mid-nineteenth Russia at the apogee of its Great Reforms. As Blum notes: “The former serfs and state peasants were placed in a peculiar legal category in which they were recognized as free persons, yet were deprived of many of the civil rights that adhered to per...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• 1 Introduction: Progress, Pitfalls, Scenarios, and Lost Opportunities,
• 2 Autocracy and the Rule of Law in Russian Economic History,
• 3 Russian Legal Tradition and the Rule of Law,
• 4 Constitutions and Economic Reform in the Post-Communist Transitions,
• 5 Economic Causes of Crime in Russia,
• 6 Police, Secret Police, and Civil Authority,
• 7 Contracting in the Shadow of the State: Private Arbitration Commissions in Russia,
• 8 Developing Commercial Law in Transition Economies: Examples from Hungary and Russia,
• 9 Company Law and Corporate Governance in Russia,
• Bibliography
• About the Contributors
• About the Book and Editors
• Index