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Political Thugs: Criminal Corporate Raiding and Property Rights in Early-Capitalist Eastern Europe

  • Author(s): Abrams, Neil Andrew
  • Advisor(s): Fish, Michael S
  • et al.
Abstract

Based on evidence from Estonia, Poland, Slovakia, and Ukraine, this dissertation explains variations across post-communist countries in the frequency of criminal corporate raiding and the effectiveness of property-rights institutions. A criminal corporate raid is the takeover of a private business through the use of force, whether by means of direct violence or the help of the state. I examine raiding among two segments of the business elite: the plutocratic stratum, consisting of the twenty richest individuals, and the non-plutocratic elite, which refers to relatively less wealthy businesspeople along with state officials engaged in private business. Ukraine and Slovakia display extensive raiding among both the plutocratic and non-plutocratic elites. In Poland, raiding is just as pervasive within the non-plutocratic elite but rarer among the plutocrats. Estonia exhibits little raiding among both elite groups. The high incidence of raiding in Ukraine, Slovakia, and Poland means that property-rights institutions are by definition not doing their job. Only Estonia managed to develop a set of robust property-rights institutions, a fact supported by dozens of interviews with state officials. These findings fundamentally contradict much of the literature, which regards Slovakia and especially Poland as among the post-communist leaders in developing sound, market-supporting institutions. Instead, this investigation uncovered shocking and systematic abuses of property rights in both countries of a kind typically seen as restricted to places like Russia and Ukraine.

The reasons behind these variant outcomes boil down to one key factor: the extent to which early post-communist governments imposed hard budget constraints on business actors. Budget constraints are said to be hard when firms cannot access artificial external support in the conduct of their business. They are soft when firms receive external assistance not justified by economic rationality. In Poland, Slovakia, and Ukraine, governments did not go far enough in reining in soft budget constraints; emerging business actors benefited from a proliferation of direct transfers from the state budget, illicitly subsidized privatizations, overpriced state contracts, cronyist financing from banks, advantageous price controls, and one-sided transactions with state enterprises. Soft budget constraints ended up enriching and empowering a class of political thugs whose comparative advantage lay solely in their political connections, not their capacity for productive economic activity. Having accumulated their initial fortunes by stealing state assets, it was a natural and logical step to begin stealing them from others in the form of raiding. Poland differed from Slovakia and Ukraine to the extent that its biggest state enterprises were largely sold at market prices. This accounts for the lower proportion of political thugs among its plutocratic elite and, in turn, the lesser incidence of raiding in this stratum. Beyond that, however, soft budget constraints were widely available there. This explains why the non-plutocratic elite in Poland is filled with political thugs. Estonia avoided these outcomes thanks to the swift and radical imposition of hard budget constraints in the early 1990s. This cleared away potential opponents to the establishment of effective property rights institutions.

The current fashion in much of social science is to look at how institutions shape actors. This mode of inquiry is obviously important and useful. But it has led specialists to give what may very well be mistaken advice to policymakers: change the rules, and the actors will behave in ways better suited to a functioning market economy. The evidence uncovered here suggests that attempts to build market-supporting institutions, however well-intentioned, will likely fail if powerful economic criminals have a large presence.

If the goal is to construct well-functioning state and market institutions, we would be well-served by examining not only how institutions affect actors but also the ways actors shape institutions. This study does both. It first shows how hard budget constraints - which consist of certain key policies and institutions - can help sideline economic predators. It then goes one step further, examining how the presence or absence of powerful groups of economic criminals determines the prospects that effective property rights institutions can emerge.

Theories of institutional origination generally fail to identify the precise ways that governments can undercut the power of criminal business actors opposed to the status quo. This study not only corrects for these shortcomings but provides a clear lesson to policymakers in early-capitalist countries who are interested in building property rights institutions; by hardening budget constraints, reformers can fatally undermine the political thugs acting as a constraint on institutional development.

If specialists disagree on whether policies or institutions are more important in creating market economies, hard budget constraints involve some of both. But they hardly encompass all of both. What they do offer resource-constrained policymakers is greater bang for their buck; by weakening corrupt actors committed to the status-quo, hard budget constraints can open the way for the construction of a much broader array of market-supporting institutions.

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