The Politics of Russian Enterprise Reform: Insiders, Local Governments, and the Obstacles to Restructuring

Posted: 29 Feb 2008

See all articles by Raj M. Desai

Raj M. Desai

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS); The Brookings Institution

Itzhak Goldberg

CASE - Center for Social and Economic Research; Fraunhofer Center for Central and Eastern Europe

Abstract

Russia and other countries in the Commonwealth of Independent States that have implemented voucher privatization programs have to account for the puzzling behavior of insiders-manager-owners-who, in stripping assets from the firms they own, appear to be stealing from one pocket to fill the other. This article suggests that asset stripping and the absence of restructuring result from interactions between insiders and subnational governments in a particular property rights regime, in which the ability to realize value is limited by uncertainty and illiquidity. As the central institutions that govern the Russian economy have ceded their powers to the provinces, regional and local governments have imposed a variety of distortions on enterprises to protect local employment.

To disentangle these vicious circles of control, this articles considers three sets of institutional changes: adjustments to the system of fiscal federalism by which subnational governments would be allowed to retain tax revenues generated locally; legal improvements in the protection of property rights; and the provision of mechanisms for restructuring and ownership transformation in insider-dominated firms. The aim of these reforms would be to change the incentives that local governments, owners, and investors face; to convince subnational governments that a more sustainable way of protecting employment lies in protecting local investment; to raise the cost of theft and corruption by insiders and local officials; and to allow investors to acquire controlling stakes in viable firms.

Suggested Citation

Desai, Raj M. and Goldberg, Itzhak, The Politics of Russian Enterprise Reform: Insiders, Local Governments, and the Obstacles to Restructuring. World Bank Research Observer, Vol. 16, No. 2, pp. 219-240, 2001, Available at SSRN: https://ssrn.com/abstract=873702

Raj M. Desai (Contact Author)

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS) ( email )

Washington, DC 20057
United States

The Brookings Institution ( email )

1775 Massachusetts Ave., NW
Washington, DC 20036
United States

Itzhak Goldberg

CASE - Center for Social and Economic Research ( email )

Al. Jana Pawła II 61/212
Warsaw, 01-031
Poland

Fraunhofer Center for Central and Eastern Europe ( email )

Germany

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