The question raised in Kathryn Hendley's paper is a key issue today. Why has Russian law not got stuck, although plenty of laws have been promulgated and all the legal bodies have undergone substantial reform? So why do not Russians trust and use the judicial system to a greater extent?

The question has to be broadened. Hendley soundly explains that it is not enough to drat or adopt good laws. Nor is it enough to set up an elaborate judicial system. She puts the emphasis on demand by the public, primarily enterprises, for arbitration. It is certainly correct that our inquiry needs to be widened, but the question is how and in what direction. Being an economist, I am primarily inclined to expand our investigation into economic issues, but I also think it is vital to look upon the fundamental functions of the state. The most useful starting point is probably the incentives facing enterprise managers. After having scrutinized them, we should be able to say more about how the development of a judicial system in Russia may proceed. The outstanding feature of the Soviet dictatorship was that the state was run by a small Nomenklatura of less than a percent of the population that controlled everything. As Stalin's terror faded in memory, the Nomenklatura became ever more bold in its nurturing of its own interests and nothing else. They benefited from their old power, while neither the Communist Party nor the KGB were able to stop them any longer.

A second precondition was a characteristic of the perestroika reforms under Mikhail Gorbachev from 1988 to 1991. Not surprisingly, these reforms eliminated all kinds of restrictions on the economic activities of the old elite, while they were maintained for the population at large. In effect, the old economic elite was enabled to transform its power to wealth.  The natural outcome of an all powerful group with privileges was extraordinary rent-seeking. Many in the old elite made fortunes on privileged access to state subsidies or through "markets" shielded from competition by government regulations. Because of low state-controlled prices of commodities and export controls, those with connections could export commodities at tremendous gain. The Central Bank issued huge amounts of subsidized credits to those with the right connections. The key to the fortunes made was the absence of a level playing field.

It is in this perspective we must see the development of laws and legal institutions in Russia. This was the dominant economic interest, and it could not be served by rule of law, as any rule of law would oppose these very activities. Contract on commodity exports, resulting in capital flight, or agreements on the diversion of subsidized credits could not possibly be officially enshrined and contested or defended in an official court, as these transactions were illicit. Therefore, the people who dominated the Russian economy had little or no interest in the strength of the rule of law.

However, these businessmen of the transition had an interest in securing their contracts. Characteristically, in the early years of the transition - 1992-93 - many people involved in commodity trade and banking were murdered, and the biggest deals concerned subsidized credits and commodity exports. The natural reaction was to turn to private protection business to do whatever they could to secure their valuable but incomplete and illicit contracts. In his book The Sicilian Mafia, Diego Gambetta defines the mafia as the business of private protection. He notes that very special economic and social conditions were present in Sicily at the time of the creation of the mafia in the 19th century, and he reflects that the conditions in the former Soviet Union were surprisingly similar.

In Russia, the very contracts were often illicit and could thus not be taken to court. Initially, relevant laws did not exist. The court system was perceived as under-developed, politicized and ineffective, though not all too corrupt, as it was not taken very seriously. With the rise of rent-seeking, a sizable demand for all kinds of protection services arose. In addition, Russia harbored a large number of hardened criminals who had got out of the camps and needed work. Thus, there was both great demand for and supply of private protection services, so it was natural that they flourished.

The question is what do you do when such a situation has arisen. As Hendley points out, the Russian reformers essentially did three things. First, the drafted a great volume of laws, and surprisingly many of these laws have been promulgated. Second, they instituted a large number of new legal and judicial institutions and tried to reform the existing ones. Third, they carried out a very fast privatization. While Russia does have a legal system, it is widely perceived as ineffective. For instance, in the Corruption Perception Index of Transparency International, Russia ranks as the tenth most corrupt country out of 85 countries, though the countries included largely pertain to the least corrupt countries in the world.

The narrow approach is to focus on the legal system, but it was not the original cause of the legal problems that were political and economic. While legal improvements are needed, they are probably not possible before the political and economic conditions have been created. Let us scrutinize the current problems in broader economic and political terms. The fundamental economic problem in Russia today is that the relationship between state and enterprise is a free-wheeling negotiation. The prime reason is that Russia has a complex and totally arbitrary tax system. That means that no tax-payer can know or prove how much tax he or she is supposed to pay. The obvious solution would be to adopt a tax reform that would lead to a simple, broad-based tax system with only a few taxes with low rates. However, the Russian government has tried to do so for years, and little has come out of it. The apparent reason is that the current tax system suits the big and politically powerful enterprises, which can negotiate a good deal for themselves thanks to their political strength. To them, it is only an advantage that the tax authorities strangle small enterprises that could offer them competition. The issue is how it will be politically possible to introduce a well-designed tax system.

A second related problem is that the authorities generally do whatever they want to enterprises through a host of control organs and inspections. A Russian enterprise is frequently subject to inspections virtually every day. Enterprises and citizens must gain legal strength in relation to the government, so that they can defend themselves through the legal process. However, the government is not very interested in this. A case in point is the militant attempts to extract more taxes through arbitrary raids by the tax police, taking all the money and documentation they find. yet, this problem is much broader, and it is more of a political than a legal problem. The long repressed former Soviet citizens must learn that it makes sense to stand up against the authorities, which has not been true to date.

The problem is not only the relationship between state and enterprises but also between big enterprises with political clout and most other enterprises. The big enterprises exploits the state to suppress small enterprises. The tax police and herds of inspectors can be sent out to impede competing upstarts. Barter should also be seen in this perspective. The Russian Economic Barometer, a regular poll among Russian enterprise managers, show that no less than 40 percent of barter is involuntary. That is, big enterprises force small enterprises to accept their commodities as payment, which makes it cheaper for them. Barter helps the big enterprises avoiding a level playing field.

The essence of this analysis is that the fundamental problem behind the weak legal system in Russia is that the state extracts too large resources, redistributes too large resources, intervenes too much in enterprises, and is too strong in relation to both enterprises and people. At the same time, the state does not represent much of a public interest but rather than private interests of a few large and politically-favored enterprises. The state is weak in terms of representing the interests of the public, because it is too large, given the capacity of society to control the state through legal and political means. Rather than discussing details in the legal system, we must turn to an overall economic and political analysis. On the one hand, we have questions about what preferably should be done, on the other, what is politically possible.

The easiest thing to accomplish should be to reduce the tax burden, as the government has to struggle so hard all the time to keep it up. This will have many positive effects. First, the tax extraction will be less harmful to economic life which will stimulated economic growth. Second, if the average tax rate falls, the value of tax exemptions will decrease. As a consequence, the resistance against a sensible tax reform should fade away. Third, if total tax revenues fall, the government will not be able to undertake so large harmful expenditures any longer. This includes both enterprise subsidies and excessive bureaucracy. Fourth, with smaller public revenues, the public expenditures will automatically become more transparent and thus more easily become subject to public pressures, rendering crude rent seeking more difficult. Fifth, as an effect, enterprises will find that they have ever less to get from the state, and they will be increasingly tempted to make money on the market instead. Sixth, if enterprises make less money on the state, they will not be prepared to spend as much money as before to corrupt the government either. Hence, a simple reduction in tax revenues should have very positive effects, as the incentive structure will greatly improve.

Strangely, many people argue that Russia's public revenues and expenditures are not high, as they are less than those of West European countries. However, Wagner's law suggests that the public expenditures of a country are correlated to its level of GDP per capita. One interpretation of Wagner's law would be that poor countries have weak states. If these weak states are overloaded, the result is corruption and a dysfunctional state, which harms economic growth, which is exactly what we are seeing in countries such as Russia and Ukraine. Then, it is not relevant that West European countries have higher levels of public expenditure. Another argument is that the formerly socialist countries are used to much higher social expenditures. However, their social expenditures are not very social, but highly regressive, so this is a very poor argument. The poor would be better off with a more liberal state allowing substantial economic growth.

Daniel Kaufmann has observed that the post-Soviet courts were not very corrupt initially in comparison with Latin American courts. Anecdotal evidence suggests that Russian courts have become more corrupt, notably the courts dealing with important commercial issues such as bank bankruptcies are perceived as totally corrupt. This appears a natural consequence of the rising commercial importance of Russian courts coupled with lacking supervision. The autonomy of the courts is hardly of help against corruption on its own but might even facilitate corruption. A different solution is needed. Andrei Shleifer and Robert Vishny have suggested that corruption is best combat through competition. For long, the idea has been that "one-shop stops" should be introduced for investors, but it is striking that they hardly ever work, while competitive agencies doing the same thing seem to function much better. I noticed in Kyrgyzstan's capital Bishkek that three agencies competed in registering land titles, which swiftly led to the registration of urban land, and the process seemed not to involved much bribery, as people could turn to another agency that could do the same job. Similarly, different state agencies should be allowed to issue the same licenses, for instance, federal, regional and municipal agencies. If an entrepreneur was dissatisfied with the work of one agency, he should be able to turn to another agency.

One way of improving the fledgling Russian court system would be to encourage competition between different courts. In their book Mercantilism As a Rent-Seeking Society, Robert Ekelund and Robert Tollison argue that free markets in Britain arose as an effect of the competition between the Royal Court and Parliament, not least over jurisdiction. Competition over jurisdiction already exists in Russia. Many contracts concluded between Russian and foreign companies agree that any dispute should be settled at the arbitration court at the Stockholm Chamber of Commerce, which is highly active. Russian Chambers of commerce or similar enterprise associations could be allowed to set up their own arbitration courts, financed by fees, which would solve the problem with underpaid and corrupt judges, as courts with such reputation would never be asked to serve in an initial contract.

Even if Russia has adopted a lot of decent legislation and undertaken substantial reforms of the judicial system, neither is satisfactory. Russia is still lacking elementary laws, such as the private ownership of agricultural land. The constitutional and legislative system has developed considerably. One consequence is a realization that a presidential decree is not good enough. It does not stick. The parliamentary legislative process is necessary to render a legal act legitimate. The remaining problem, however, is that the substance of the legislation is not good enough for a normal market economy. The experiences of post-communist countries in general suggest that a reformist majority in parliament is a prerequisite for a successful economic transition. So far, Russia has not enjoyed that, and it is not likely to do so any time soon.

An obvious weak element is Russia's civil society. People do not protest even when they have very good reasons to do so. In East-Central Europe, even in Bulgaria and Romania, wage arrears were never accepted, while they are standard in much of the former Soviet Union. The long communist suppression of all forms of civil society is of course the dominant explanation, but an additional reason is that the role of the state has remained so omnipresent that protest has appeared foolhardy. A reduction in public expenditure should reduce this unhealthy state of affairs. Another peculiarity of post-communist Russia has been that until recently there were plenty of possibilities to make a fortune through individual action, making collective action look rather unattractive. Now, collective action might appear the only way out in many unpleasant circumstances.

Let us look back and consider what this teaches us about what was right and wrong in the initial reforms. The problems we see today are very much those of excessive continuity. The disruption with the old system were not sufficient. Therefore, the new system lacked credibility, and people refused to take the risk of believing that the system had changed. The very source of the evil, the Communist Party of the Soviet Union, was admittedly prohibited in August 1991 for its coup, but only for a very short time, and unfortunately Russia had no lustration that excluded senior communists from holding top positions in the new society. To a great extent, the second rank of the old ruling class survived and hung on to positions of power. The domestic arm of the KGB should naturally have been abolished, but it was not and it persists as a cancer of lawlessness in Russia. Estonia that has had the most radical transformation of its whole government apparatus is not surprisingly ranked as the least corrupt of all post-communist countries by Transparency International.

After the destruction of the old system, it was vital to create a new system as soon as possible, so that the old elite would not fill out the vacuum. The only legitimate source of legislation is a popularly elected parliament. Russia's problem was that a populist, semi-democratic parliament lingered on for the first two years of the attempted reforms, and it did not really represent anything. To a considerable extent the old Supreme Soviet appears to have been bought by the rent seekers. At least it served their interests meticulously, and people usually do that when they are paid to do so. The old parliament lacked legitimacy, and it did not reflect democratic interests. The big opportunity missed was that President Yeltsin, who was democratically-elected and legitimate President, did not dissolve the old Supreme Soviet and promulgate a new constitution early on. Then, Russia would probably have got a parliament with a democratic and reformist majority, which prevailed in the opinion polls all along during the first one and a half years of reform attempts, as reflected in the April 1993 referendum.
With regard to economic policy, the consequences of the gradual reforms in Russia and Ukraine make evident that a swift macroeconomic stabilization and a far-reaching deregulation were of vital importance. The pattern becomes ever more clear: the more radical reforms a country has carried out, the less rent-seeking it has experienced, and the sooner it has returned to substantial growth, and the higher the resulting economic level has become. Radical reform has simply led to a much higher growth path than gradual reforms, which have caused continuous decline in several post-Soviet countries (Russia, Ukraine and Moldova, in particular). Part of the explanation is that slow reform has bred more corruption. Behind this lingers the explanation that radical rupture generates credibility for the reforms, while slow reform does not entice credibility.

Hendley rightly argues that existing practices should have been considered in legislation, but the question is how. The Russian reformers did so and for good reasons disliked them so strongly that they wanted to accomplish a maximal disruption to render the new system credible. In many cases, the new interests had not been formed, notably in financial markets. Then, it appeared sensible to adopt legislation providing one distinct system before the interests had taken shape. Later on, it would only be more difficult. That is typically what is done with new grand constitutions. Candidates for joining the European Union adopt thousands of pages of often exotic technical law labeled "Acquis communautaire", and that gets adopted swiftly without much public debate, setting a new framework. Clearly, there was a window of opportunity for a great deal of legislation, and it is good that it was reasonably well used. The poor functioning of financial markets in the Czech Republic is usually explained by the creation of financial interests before their regulation, and they were so strong that they refused to be regulated. In this regard, Russia certainly did better, as the Russian problem has rather been that the culprits have been so strong that they could overrule decent existing legislation. The failure of the state to implement good legislation is not a reason to wish for worse legislation.

Property legislation is another matter. Robert Cooter of Berkeley has made the argument that property legislation has to rise from below more or less as common law. I think that is true, and it is in line with the ideas of stakeholder privatization of Maxim Boycko, Andrei Shleifer and Robert Vishny, which guided the Russian voucher privatization. My conviction remains that the Russian privatization scheme was the best that could be accomplished under the existing circumstances, and the relative failure of Russia's privatization is rather a result of the lack of other reforms, notably of deregulation and of getting the ubiquitous state apparatus under control. Privatization did lead to a certain demand for law, but it was much less than expected, as the state remained preeminent.

Initially the reformers failed to make their mark on economic policies. The consequences of the gradual reforms in Russia and Ukraine make evident that a swift macroeconomic stabilization and an early far-reaching deregulation were of vital importance. The pattern becomes ever more clear: the more radical reforms a country has carried out, the less rent-seeking it has experienced, and the sooner it has returned to substantial growth, and the higher the resulting economic level has become. Radical reform has simply led to a much higher growth path than gradual reforms, which have caused continuous decline in several post-Soviet countries (Russia, Ukraine and Moldova, in particular). Part of the explanation is that slow reform has bred more corruption. Behind this lingers the explanation that radical rupture generates credibility for the reforms, while slow reform does not entice credibility.

A school of evolutionary thought is hiding behind Friedrich Hayek, who would turn in his grave, arguing that only gradual changes are possible. They are using this as an argument for minimal changes. A number of distinctions need to be made. First, the main problem in the transition is the debauchery of the old elite. The main means of stopping them politically is through democratization, which is usually a rapid change. Many proponents of gradual change are implicitly anti-democratic, seemingly not realizing that they advocate the continued rule of the Communist Party and the KGB, which they of course never mention. The best economic weapon is a swift deregulation and reduction of public expenditures, which they inevitably appropriate for themselves, given the weakness of the post-communist state.

Second, a considerable confusion prevails about what social capital in Robert Putnam's sense actually implies. Some seem to confuse social capital with state administration and old communist cadres, while the social capital that should be utilized is rather all the well-educated people whose skills were underutilized for political reasons under communism. Therefore, the logic of utilizing social capital is rather demanding lustration and a radical turnover both in organization and personnel, as notably Estonia has achieved. This would be in line with Mancur Olson's advocacy of radical change of government structures in Germany and Japan after World War II as a reason for their strong economic performance after the war. We should not wish the post-communist countries the perseverance of old communist structures, but that is what many proponents of gradual reform do.

East European Constitutional Review, 8, 4: 96-101.