Effects of State Capture: Evidence from Russian Regions

Ever since the emergence of the post-Washington consensus, striking differences in economic performance among transition countries and provinces within transition countries have been attributed to differences in the institutional environment. A wide range of institutions has been listed as important for transition to go smoothly, including federalism, political regime, property-rights protection, presence of an outside anchor, social norms, and trust.’ Institutions, however, are not exogenous. Vested interests often influence the evolution of the very rules of the game in the economy. The literature labels this phenomenon state capture or institutional subversion. A cross-country study done by the World Bank and the European Bank for Reconstruction and Development (EBRD) in 1999 confirmed that state capture is deeply rooted in the economic and political processes of Russia, which ranked fourth in the composite index of state capture among 20 transition countries.2 Indeed, the first decade of Russia’s transition was notorious for the intervention of oligarchs in determining the direction and speed of institutional reforms.3 Russia provides a good case for investigating the effects of state capture not only because the problem is clearly present, but also because the high political autonomy of Russia’s regions resulted in wide variations in regional institutions that one can use to explore the phenomenon. In addition, all regional laws are in the public domain. This allowed us to construct a reliable measure of state capture by studying preferential treatments of particular firms in regional legislations. This essay draws on the results of the formal econometric analysis done by Slinko et al. (2003), which examines the effects the capture of regional legislature exercises on the budgetary and regulatory policies of regional governments, aggregate growth, the growth of small businesses, and the performance of captor firms.