This document summarizes a presentation on the economic transition of formerly socialist economies and the development of alternative institutions. It discusses how 25 years after transition, political institutions diverged more than economic institutions. It also presents analysis showing the density of connections between Russian business and political elites increased over time, and early connections were linked to greater business success, especially in oil industries. The analysis suggests alternative institutions like personal connections filled the gap when appropriate market institutions did not develop fully.

1. The Economic Transition and Alternative Institutions
Natalia Lamberova, UCLA
Konstantin Sonin, University of Chicago and Higher School of Economics
25 Years of Transition
SITE, Stockholm, December 5-6, 2016

2. Road map
Some general observations on 25 years of transition
Some puzzles that I derive from these general observations
A very simple exercise on political connections in Russia
Some very general conclusions
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3. 25 Years of Transition
Transition is a giant natural experiment
Does transition experience confirm our hypotheses?
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4. 25 Years of Transition
Formerly socialist economies become market economies
 different paths with similar outcomes
There is a whole range of political regimes in formerly
communist dictatorships
 from stable democracies to sultanistic dictatorships, covering whole
spectrum without holes
[Putting the same idea differently:] political institutions are
way more dissimilar than economic ones
 even controlling for history, oil, proximity to the West
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5. Politics of Institutions
Political regimes produces institutions
Efficiency requires good institutions
 normatively - for an economy to grow, it needs good institutions
 positively - people want to get rich
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6. 20 Years Ago
Shleifer (1995): “.. there is simply no political interest in governance
mechanism before privatization. This interest emerges during privatization,
as large outside shareholders are created and come to realize their needs
... Pressure from these new owners can then convince the government to
adopt regulations that foster corporate governance. Under pressure, the
government begins to protect property rights. ... The transfer of control
rights from politicians to private parties gives the process of establishing
property rights a jump-start by creating the political demand for the
protection of property rights.”
 Aslund (1995): ''... [once] the fundamental issues [of] the mutual
independence of enterprises from one another (as well as from the state)
and their profit orientation [have been addressed], under such conditions
owners will forcefully try to ascertain their property rights''.
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7. Alternative Institutions
Taking a step back, demand for good economic institutions
needs to result in a demand for good political institutions
 which is obviously not there
So, demand for economic institutions should result in
alternative institutions
 as there are certainly some institutions
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8. A Small Exercise
“Crony capitalism” as an example
Institution: leaders appoint cronies
 instead of building up impersonal institutions
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9. Why Appoint a “Crony”?
An easy question to a lay person (or a journalist ), but a
difficult one for an economist
Naïve: a crony will give your more benefits, than a non-crony
 economics: that’s naïve
Coasian logic
 total surplus is higher under non-crony
 you could get more from having a higher total surplus
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10. “Dictators and their Viziers”
Egorov and Sonin (2011)
 loyalty as equilibrium behavior
 dictator appoints vizier to guard his door against enemy
 competence is ability to distinguish strong enemy from weak one
 incompetent vizier cannot be bribed into betrayal
Does “dictators and viziers” logic help when appointing oil or
railroad monopolist head?
 yes, as “betrayal” might be money to support opposition
 no, as competence in running business is not same as political acumen
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11. The Exercise
Russia, Putin
list of “inner circle” members
business elite (top-200 Forbes list)
stack two lists
for each pair of people scrap joint mentions in news section of
top Russian search engine for 2004-2005
 controlling for positive coverage
check whether or not early connections matter
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12. Connections 2004-05
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13. What is “a Connection”?
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Connections
 1 and 2 are inner circle members
 A,B,C, and E are businessmen
 3 is member of both groups
Proximity
 A has 3-step connection
 B has 2-step connection
 C and E are directly connected
 D is unconnected

14. Connections 2014-15
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15. Density of Network Increases
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16. Summary Statistics
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17. At a Glance
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18. First Results, OLS
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19. Effect of Oil
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20. KLRS
Misspecification?
 OLS assumes that marginal effect remains the same at all levels.
 logistic regression assumes that log-odds remain constant across different
levels of other variables
Kernel Regularized Least Squares (Hainmuller, 2013)
 to use leverages similarity between observations, so that the closer are
two observations, the more weight it has
 with infinitely many higher-order terms and interactions in the model,
should be penalty on complexity to avoid overfitting
 KRLS helps to address the misspecification bias, yet does not protect from
he omitted variable bias; also does not allow clustering of standard error
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21. KLRS Results
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22. Direct Connections and Oil
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23. Connection to Foes Always Bad
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24. Conclusion
Alternative institutions such as personal connections work
when appropriate institutions would not develop
Their existence reconciles similarity of economics and
dissimilarity of politics in transition
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