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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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the district and the global market.1179 However, as firms and suppliers are connected mostly over informal connections, continuity is also essential to ensure quality and reinforce the level of trust. Network connections are polycentric in the sense that enterprises can be working as producer, terzista or supplier at the same time and multiplex in the sense that competitors are related on an economic but also social level. However, corporations still stay in the same broadly defined sector and do not switch to different product groups.1180 The Italian case is thus on the one hand a typical example for Western-style networks, on the other hand it is due to the strong informal and familial connections similar to the Chinese case. However, the Italian industrial districts are merely ―small islands of prosperity in a sea of misery‖1181 and as those are more fragile and under pressure to be ‗drowned‘.1182 6.4.3. The blat of Russia

–  –  –

Similar to the Chinese experience, also Russia had to open up to market reforms at the end of the 20th century. However, it was considerably less successful in implementing the institutions needed; its GDP shrank 59 percent between 1992 and 1998 (whereas China‘s increased 107 percent), so economic reforms ultimately caused the Soviet economy to collapse, whereas they accelerated economic success in China. In the process of economic liberalization, Russia had to face hyperinflation, industrial collapse and rapid privatization, which together produced a more or less chaotic environment.1184 Two factors were found influential for this development: on the one hand the missing foreign direct investment in Russia ($9.2 billion in Russia compared to $220.2 billion in China between 1992 and

1998) and on the other hand the role of entrepreneurship, which also only thrived in China (only 1.4 percent self-employed labor and 850.000 small businesses (with fifty or less employees in trade or other industries, with approximately ten to twenty percent unregistered) Walter, 2004, p. 188ff.

Walter, 2004, p. 197ff., 250f.

Piore and Sabel, 1984, p. 6.

Orrú, 1997, see also chapter 6.4.4.

Putnam; Leonardi and Nanetti, 1993, p. 183.

Galbraith, 2004, p. 87. Similar numbers can be found in Nolan, 1995.

in Russia by 1997 compared to China‘s 5.6 percent self-employment by 1994, even with the state-sector still largely intact).1185 The reason for that is often attributed to the differently chosen path of development which is often referred to as shock therapy versus gradual change (see also chapters 5.1.2.

and 5.1.5.). Whereas Russia changed its economic and political system in a ‗big bang‘, in a sort of ―social engineering‖1186, and privatized large areas of the economy in very short time, China opted for a more gradual, ―crossing the river by feeling the stones‖ 1187 approach carried out with the political system remaining in place. This resulted in different abilities of the governments of both countries to control resources and personnel.1188 Although Russia very quickly installed a complete new legal system, it remained weak in its ability to enforce contracts and thus to defend the rights of investors and property owners as well as regulate economic transactions. Thus, Russia experienced an ―institutional bank run‖ during the ―spontaneous‖ or ―insider‖ privatization even of banks under lawless conditions, with a lot of ―public property plundered by political elites‖ who took advantage of the privatization process by buying property for only a fraction of its value.1189 This ―new aristocracy‖ experienced a rapid increase of consumption possibilities whereas the poorer strata became even poorer. At the same time the society as a whole experienced an extreme change of social values away from collectivism towards extensive individualism.1190 As a result, it was rational for people ―to grab what they could in the face of a very uncertain and uncontrollable future‖ as privatization often took away the ‗de facto‘-property rights and -institutions established during socialist times, such as use rights or other informal norms, instead of merely formalizing or legalizing them. As a consequence, the ―market reform created social dislocation on a massive scale‖.1191 The gap within the institutional structure was ―filled by a ruthless illegitimate force, the mafia‖ which took over large parts of the economy, controlling as much as 40 percent of the turnover in goods and services and half of the privatized capital in 1993 and later 70 to 80 percent of the private sector and became thus the leading sector outside the state (see also below). It acts not as complementation parallel to the state but rather overtook the On the issue of the private sector and the development of private businesses, please refer to chapter 7.

Data taken from Hsu, 2005, p. 310.

Ellerman, 2010, p. 3.

A catchphrase coined by Deng Xiaoping, please see also chapter 5.1.5.

Sun, 1999, p. 2. The Russian way of privatization has been called the ―one of the most spectacular failures in the history of economic reform‖. Braguinsky and Yavlinsky, 2000, p. 123.

Sun, 1999, p. 5, 8.

Nolan, 1995, p. 20f.

Ellerman, 2010, p. 9f.

whole economy as a consequence of weak state structures that could not prevent insider trading and other profiteering by bankers, managers, bureaucrats and of course mafia bosses.1192 Instead of accepting the newly designed formal institutions, people turned to semi-legal or even illegal means to secure income – or rather, the formally de facto institutions turned now into illegal ones which still guided behavior.1193 Also, the dismantling of the existing political system led to the weakening of authority structures that opened the opportunity for illegal behavior. This goes as far as preferring the mafia to settle disputes than relying on the court system.1194 This situation is conceived as being influential on the level of both foreign direct investment and entrepreneurship.1195 As much as this is true, it is only a part of the story as investors and entrepreneurs experienced and still experience similar obstacles when dealing with bureaucracy and official institutions or when trying to enforce contracts within China. Still, China‘s bureaucrats are conceived as much more reliable because Guanxi and the fear of losing face hold them to their word.1196 However, even when ignoring the different government structure, Chinese people seem to be much more entrepreneurial than their counterpart in Russia because they could rely on Guanxi mechanisms that complemented missing or insufficient formal institutions in the post-socialist era. The Russian equivalent of blat seems to provide less security. Although it served the purpose to overcome the problems of a socialist bureaucracy, it appears to have not developed into a ―flexible tool which allowed people to create trustworthy, expansive business networks in the absence of adequate legal guarantees‖ in postsoviet Russia, like Guanxi did in China. It turned into a form of corruption only for ―elite players‖ and ceased to be of importance for the Russian post-soviet society.





Blat is the Russian term for the use of networks and informal contacts to overcome the shortage of supply and the obstacles of bureaucracy within a communist state, similar to Guanxi before 1978. It has no direct translation in English but ―the term blat is one of those many flavored words which are so intimate a part of a particular culture that they can be only awkwardly rendered in the language of another‖.1197 For reasons elaborated below, it was not a sustainable form of interacting with strangers for ordinary people and thus RusSun, 1999, p. 3f., 8.

Ellerman, 2010, p. 12.

Sun, 1999, p. 3, 8.

Hsu, 2005, p. 310, 320.

For the role of corruption in China please refer to chapter 6.2.

Berliner, 1957, p. 182.

sian entrepreneurs come mostly from the upper class which more exploited public resources rather than invested in their firms.1198 However, examined only superficially, blat and Guanxi seem to have a lot in common and they indeed have. But when analyzed in detail, blat evolved in a different way than Guanxi in the reform era. The term is rooted in pre-communist criminal jargon of the 1930s, but actual is an invention of Soviet times although its usage was avoided in official communication. It also differs in how it is constructed. Blat transactions engage in two different kinds of relations, with a very narrowly defined group of friends (in Russian ―people of the circle‖) and ―useful people‖. Relations with the latter are more complicated to set up and thus the extension of blat networks is more challenging and demanding as it is only possible via the introduction of a common friend. Consequently, they mostly remained considerably smaller than their Chinese counterpart as people tend to mistrust each other.1199 Blat is a more closed concept than Guanxi and only a subset of friendship, although it is also possible to use blat with friends of friends. It is still considered as antisocial.1200 The Russian society seems to be characterized by an ―excess of community‖ caused by a concept named ―amoral familism‖ that is build on strong and particularistic loyalty to the family and is characterized by ―the presence of social integration but the absence of linkage‖ and limited group-morality.1201 Under amoral familism, wealth is accumulated by ―trafficking, racketeering, plundering, looting, or favoritism‖ within ―various factions, cliques, or groups fighting for power‖.1202 Blat transactions were also more difficult to enforce as the monitoring of the practices by the members of the network often did not happen due to mislabeling the action as mere ‗helping out‘, which meant that favors did not have to be returned.1203 Blat has a less thorough moral background than the Confucian origins of Guanxi and thus is more prone to corruption and is more easily monetarized.

As the level of trust decreased during reforms from an already low level, people turned away from blat practices. Instead, they were replaced by an institution named ―kryshi‖.

Originally, a krysha1204 is part of the mafiya1205, later also other criminal gangs and even government officials acted as kryshi. However, they provided private security ‗services‘, Hsu, 2005, p. 311.

Kiess, 2007, p. ix, 52.

Hsu, 2005, p. 314f., 321f.

Banfield, 1965, Woolcock, 1998, p. 171f.

Platteau, 1994, p. 799.

Hsu, 2005, p. 316, Kiess, 2007, p. 53.

Krysha, pl. kryshi, literally: roof.

Mafiya is the transcribed term for the Russian mafia.

enforcing contracts also by intimidating the contracting party which again led to a decrease of trust in other people and towards the state. Kryshi served as facilitator of business transactions but also as replacement for the state in enforcing contracts, ensuring the safety of their costumers (or their business), settling legal issues, protecting property rights, acting as creditor. As often even members of the police or the government appeared as kryshi, they were regarded as quasi or ‗private‘ state, often being in the position of mediator between businessmen and ‗real‘ state. For these ‗services‘ they charged at least ten per cent of profits as ‗taxes‘ or rather protection money. They had their heyday in the 1990s without completely disappearing thereafter.1206 In Russia the distrust in the government and the violation of laws is widely morally accepted and has a long tradition, which goes back before communist times and can be summarized with the Russian saying ―nel‟zya, no mozhno‖ (prohibited but possible).1207 As a consequence, the whole state apparatus became prone to corruption and even the Kremlin was considered as krysha for the Russian oligarchs. The kryshi can be blamed to not a small part to be responsible of the sinking level of trust and the resulting reluctance for cooperation within the Russian society which ultimately also led to a decline of the significance of the kryshi.1208 Apart from that, the small blat networks were also less well equipped for entrepreneurship, as for that many connections also to less well known people would be necessary which with the ―relatively static population‖ of a Russian network was much more difficult to achieve. This made it also very hard for newcomers to break into a market and thus entrepreneurship was confined to those with a lot of social capital, which included mostly political elites and their offspring, whereas in China it were especially the former peasants that had entrepreneurial motivation.1209 Generally, blat lost its central role for (economic) transactions in post-reform Russia as it is a transaction that requires trust in the future in the sense that it has to be trust that the other party will reciprocate. Russians rather resort to ‗spot‘ transactions with the help of money or barter. Thus money replaced favors, although Kiess, 2007, p. ix, 97ff., 106ff., 112f. It is interesting to note that the norms of a criminal gang like the kryshi, whose authority stems from their experience in prison, pervaded the entire post-soviet society. An explanation for that might be that a large fraction of the population had experiences with camp and prison life. The kryshi had their own set of rules and behavior and interacted within informal but structured networks with each other, having conflicts solved by ‗arbitrators‘. During the 1990s other gangs joined ‗business‘, without having such an ethical code, only being interested in short term profits. This deteriorated the overall ‗morals‘ of the kryshi which ultimately led to the replacement of the kryshi by institutions with similar function but set up by the state.

Kiess, 2007, p. 99f., Ledeneva, 1998, p. 1.

Kiess, 2007, p. 110, 115f., 136.

Hsu, 2005, p. 322.



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