This research is devoted to the Extortion Groups (EG) activities as the appeared substances and substitutes to the law system in Soviet Union and Russia further. Such establishments are considering as the transition process product. The appearance of these groups is due to the perishing of the old-type Soviet economy and transition shocks in connection with the job losing and unrequired men s work force especially under the situation which was between two points of time after Afganistanian war and ripening Chechenian conflict.The actuality of the chosen sphere in research is undoubted. The topic is very disputable and arguable. These are the reasons of taking that and necessity for convinction about efficiency of the appearance of such groups in the scene in transition is also the urgent thing for this research to be done.The rumors about russian development are crossing with mafia definition nowadays wherever You are. The author was eager to show that such phenomenon is not fabulous but belongs to the human naturalism in the fillings of weak places in the economy where such fillings are proposed to be direct substitutes to the institutions existed before and functioned not efficiently. Such consideration reverts the crime analysis to usual economic problem with different types of the markets could be in existence under russian conditions of 90th. The thing which is crucial relates to the institutional power, either considered from EG side or law. Here are applying usual economic terms as the monopoly or duopoly but the striking character is that all these terms are connected with EG.The most important thing that EG persistence carries legal base to operate depending on the form of their creature. The author leads own interpretation in this connection inspite of the EG division according to the licenses giving out. It should be noted that such interpretations are not in the contradiction with arising division. Contrary, different types of licensing are directed to specific business activities and services, which this reseacrh reconciles. Coinciding of the interests are going from the nature of EG creating what is actual precondition to make own division.Mafia term is used as many literature sources explain. This is the kind of united form of legal and illegal business groups which are functioning under the common origin and carry out their own plans and aims connected with usual welfare maximization. Mainly two aspects are presented. The first is micro-modeling of the situation with debt recovering activities and protection services as main products of EG proposed to the firms. Efficiency analysis is based on the deriving long-term debt supply function which is getting through the welfare maximization problem. The second aspect of macro-modeling is presented in one regime, which the author calls by socialist one and temporal development is considered via the common country s production function taken as the maximization of GNP devided on labour force. This analysis draws some common conclusions connected with employment and crime in the EG view and has to be continued further in another research.The work is structured in the way of describing micro approach first and macro approach second with some introduction to the problem. Afterwards, some policy implementations are following with conclusions.
1.1. Corruption and extortion groups (EG) as the product of transition
The economy of Russia has not performed well in the years of transition. The failures were predictable given the underlying institutions and rules of behavior of the Russia political and economic system. The idea of a market in Russia is combined with the persistence of old institutions and methods of doing business that use the weakness of the state for private profit. The competition that exists is principally that of competition for rents.Political impacts of corruption are transparently observable in Russia. Political goals deviate from the tasks of national development and are directed at securing political power for the benefit of selected oligarchic private groups. As a consequence, trust of authority declines and ordinary people become more and more alienated from society. As a result, good intentions of the authorities are neither credible nor rewarded. The prestige of the country in international affairs is damaged, threatening political and economic isolation. Political competition becomes a farce. Citizens become increasingly disillusioned with democratic values, stimulating the decline of democratic institutions. The potential collapse of the nascent democracy is thereby made more likely. The threat, that democracy will be replaced by a dictator coming to power on the wave of an anti-corruption program, then arises. I would lead possible impacts of the corruption as it is shown on the next graph (see M. Levin, G. Satarov, Corruption and Institutions in Russia , Central Economics and Mathematics Institute of the Russian Academy of Sciences, Abstract, 1998, ):
The economic impact of corruptionExpansion of the shadow economy reduces tax collection and weakens government budget. As a result, the state loses leverage for management of the national economy, and additional limits are placed on the provision of public goods and other services that government should provide. Social problems are aggravated because of budget shortfalls. Market competition is also weakened, since the winners often prove to be not the most competitive agents, but rather those who gain advantages through bribery and special connections. As a result, market efficiency breaks down, casting doubt in people s minds about the merits of market competition.Government budgetary funds are used ineffectively, in particular when government contracts and credits are distributed. The process puts further pressure on the government budget. Costs of production and distribution are higher because of corruption overheads . The higher prices necessitated by these overheads are paid by the consumer. Market agents lose their confidence in the ability of the authorities to establish, commit to, and enforce, fair rules of market behavior. The climate for investments deteriorates. Economic growth does not take place, since the renewal or replacement of productive assets is postponed or abandoned. The social impact of corruptionCorruption distracts resources from the goals of public development and the authorities ability to solve social problems declines. Wealth disparities and the poverty of the bulk of population are prolonged and increase. Some forms of corruption boost the unfair and unlawful redistribution of resources in favor of narrow special interest oligarchic groups, at the expense of the most vulnerable strata of society. The rule of law is not available as the main mechanism regulating the life of the state and society. An image of the citizen lacking protection from both crime and the state emerges in the public consciousness. Corruption within law enforcement bodies, which interacts with corrupt officials and entrepreneurs gaining access to political power and channels for money laundering, promotes the strengthening of organized crime. Social tensions increase, putting political stability in the country under threat.
Table 1.1. Economic and social impact of corruption
The impoverishment of the population and the inability of the state to ensure a decent existence to public servants combine to result in massive grassroots corruption. This trend is supported by the Soviet-time traditions of protection blat as a form of grassroots corruption. Political instability creates a lack of confidence in public officials at different levels. In the absence of guarantees for survival in these conditions, the officials become more susceptible to the temptations of bribe taking. In the conditions of an economic crisis, the state attempts to increase taxes as has been done in Russia. These actions enlarge the shadow economy and consequently the field of corruption. For instance, a businessman who evades taxes is at the mercy of a tax inspector and becomes easy prey for demands for bribes in exchange for a promise of protection. This is of course the markable peculiarity of the appearance of extortion groups (EG) as the form of business defense.In the times of the late Soviet Union and in early post-Soviet Russia, one could observe the reaction of the bureaucratic system to increasingly complicated and multiplying problems. The shortcomings of the system were evident, but staff was swelling, new hierarchical levels of management were introduced, and coordinating structures responsible for nothing were mushrooming. The result was straightforward: the more complicated and clumsy the state management system is, the larger is the gap between its structure and the problems it has to solve, and the easier is the entrenchment of corruption within it.In the first stages of reform, the state could barely employ the authority of state machinery and the law to protect rights of ownership or to ensure unconditional fulfillment of the rules of the game. In the absence of protection provided by the state, entrepreneurs asked for favored private protection from particular state officials. Relations between business people and state officials, established out of necessity in this fashion, continued and developed easily into a corruption-based relationship.The inefficiency of the state also manifests itself in the inability to establish, after the collapse of the nomenklatura, a new modern system for selection and promotion of public servants. As a result, the new wave of public servants brought many less-than-honest people into the state bureaucracy with premeditated plans to misuse their offices for ignoble purposes. Very often, there was direct infiltration of agents of influence from private businesses to the state administration. A democratic state can solve its problems only via the institutions of civil society. The worsening of the socioeconomic situation of citizens that accompanied the first stages of renovation, combined with the disillusionment that replaced high initial hopes, alienated society from the authorities.The weakness of the judiciary is one of the main problems of the transitional period. The system of total party control taught people to seek protection in party committees and not in courts: suing was considered to be almost an indecent act. After the collapse of the socialist system, judicial weakness left a legal vacuum that remains unfilled. The weakness of Russian judiciary system manifests itself in the failure of the fiscal and executive branches of power to provide for salaries of judges and operation of courts. Court decisions are often not implemented. The low effectiveness of arbitrage courts results in long delays in case processing and, consequently, in paralysis of economic activity. There is a shortage of skilled and knowledgeable personnel to meet the requirements of the new economic conditions. The civil courts are consequently unutilized in the confrontation with corruption. The underdevelopment of the public legal conscience originates from the past system of Soviet quasi-law. Besides the weak implementation of laws and regulatory norms, the absence of culture and traditions of using the law by citizens, and the perception of legal immunity for state officials results in little or no resistance to grassroots corruption. The habitual bias of the law enforcement bodies and their representatives is protection of state interests and socialist property. Protection of the legal rights and interests of citizens, including private owners, has not become the main perceived task of law enforcement bodies. Not having found formal legal protection, entrepreneurs are obliged to seek special arrangements by buying unlawful services from state officials. This is exactly the purpose of this research, which is devoted to the EG activities and sub-optimal, second-best solutions which were born in the conditions of the transition. These second-best solution became more rational and more efficient than what the governance could propose for that moment.
1.2. EG as the organized crime versus society and their functioning
Organized crime is such a serious problem because the citizens perceive they have been "robbed" of the assets that they were to have inherited from the Soviet state. Instead of an emergent middle-class, almost all of the successor states have highly economically polarized populations with a small extremely rich new elite and a large impoverished population. This is particularly problematic in the former socialist societies where citizens were educated in an ideology committed to social equality. While economic inequality existed in the Soviet period, it was more hidden from view than that of the new elites who flaunt their wealth both domestically and overseas. The pervasive corruption and the penetration of organized crime into the political process is inhibiting the development of new laws needed to develop a democratic free market economy. The concept of "mafia", widely used to describe rackets, the most pervasive element of low level organized crime, is the most disturbing element of the crime problem in this research. It is connected with possible alliances of the former Party elite, members of the law enforcement apparatus and the gangs of organized criminals who together penetrate the licit and illicit sectors is the most pernicious element of the crime phenomena.The current diversification and flexibility of post-Soviet crime groups operating across all the successor states and the pervasiveness of corruption suggests that the phenomenon will not rapidly disappear once the initial transition period is over. Contacts with international crime groups will contribute to further diversification of criminal activity as domestic crime groups learn from their foreign associates.Former Soviet Union countries lack the legal framework to fight organized crime. Problems of corruption within the legislatures have inhibited the adoption of necessary laws. Members of the legislature who are personally benefiting from the transfer of property from state to private hands are reluctant to pass the laws needed to regulate the economy or to pass criminals laws that might eventually lead to their prosecution.Organized crime has filled the void left by a legal system which can not ensure the enforceability of contracts. Organized crime groups with their links not only inside but across borders help ensure deliveries and repayment of debts as well.
1.3. Some evidence, data and development of EG
Throughout the 1990s private protection and enforcement agencies have created a hybrid sector between economy and the state. This creation did not figure on the agenda of those who designed Russian reforms. Rather, it was a combination of short-term political decisions aimed at reducing the power and capacity of the old Soviet state security institutions, adaptive responses of the state security personnel to these policies, and the institutional demands of emerging markets that led to the quick formation of this whole new business sector. So in contrast to the creation of the private economy which was the primary reform target from the start, the privatization of protection and enforcement came as an unintended and ambiguous development. The most impressing way to prove the existence of EG is to find out them in real life. There are many typical examples of that which you can watch living in C.I.S. or let us say in Russia. If not there are other ways to check such existence. One possibility to look at this via searching systems in Internet. I found many sites of security agencies in Russia there what really says that EG (in myriad forms as the guarding services) are the establishments of legitimated business in Russia nowadays. I lead some of them at the Internet references at the end (see I. S. -). Such sources can be supported by the looking at any kind of business. There are no firms which are working without protection in Russia now. Some of them use the protection as influences sphere distribution, others as the legitimated protection service, showing the brands of EG as their advertisement. The law defined the licensing procedures for three types of security agencies and their personnel: chastnye detektivnye agenstva, private detective agencies (PDA), chastnye sluzhby bezopasnosti, private (company) security services (PSS), and chastnye okhrannye predpriyatiya, private protection companies (PPC). PDAs normally execute narrow and specific tasks requested chiefly by private individuals with regard to their private matters. Consequently, autonomous detective agencies are few (just over a hundred for the whole country), and their services expensive. All these three types will be related to EG (extortion group(s)) term in this research because of possible composition of activities. I will lead my own division of EG below in the aspect of the creature source.
Picture 1.1. Development of the Private Security Industry in Russia, 1992-99
Soon after the adoption of the law on private security the new business sector began to expand at unprecedented rates, especially in Moscow and Saint-Petersburg. By the end of 1999 the number of private security agencies reached 11,652, including 6,775 PPCs and 4,612 PSSs, while the number of licensed security personnel reached 196,266 (the total number of employees exceeds 850,000). In 1998 the city of Moscow had the total of 3,125 and Petersburg 816 private security agencies, which amounted to 29 and 7,6 percent of their total number for the same year respectively. Between 1993 and 1996 the growth was especially dramatic; the number of private security agencies almost doubled, reaching nearly eight thousand. After 1996 the growth continued, but the rate slowed down (data are taken from Mir Bezopasnosti , 2, 1997; 3, 2000, ; Biznes i bezopasnost , 2, 1999, ). Dynamics of EG development is shown in the previous picture. Several factors were responsible for the leveling of growth after 1996. First, the reshuffle of the state security, which generated the supply of jobless specialists, receded. Second, the initial market demand for protection services was met, and possibilities of extensive growth were exhausted. Third, the MVD (Ministry of Internal Affairs) supervising organs tightened control and inspection measures, closing down, after 1995, more than 600 agencies each year for violating the regulations. In May 1995 the government of Moscow issued the decree that urged the regional MVD to intensify control over the activity of private security agencies on its territory and introduce an electronic accounting and identification system. The diagram also shows a structural trend: over the last three years the growth of the private security business has been caused by the growth of PPCs, while the number of PSSs decreased progressively. The head of the Committee for Licensing and Permissions of MVD I. Mayatsky explained the trend by two basic factors that time. First, many PSSs were created by banks during the period of their multiplication in the early 1990s. As some banks subsequently went bankrupt, their security services disappeared too. Second, for a bank or a company to maintain a PSS proved more expensive than to contract an independent PPC, and gradually many turned to the latter, more efficient option. This second factor deserves attention, for it seems to point to an important trend, that of the externalization of protection. If in the beginning companies tended to internalize protection by creating their own security service, later, many turned to external protection. Because of the economy of scale and allegedly better technical equipment large PPCs are more cost-efficient. PSS has a different advantage. Being a subdivision of a private company or bank, it operates under two different authorities, public regulations for this kind of activity and private orders of the company's director general. The latter authority is naturally stronger, and in case the two authorities clash the PSS is likely to circumvent formal regulations of external (state) authorities. In contrast to that, autonomous suppliers tend to be less constrained by their customers (unless they are created by the latter). But because they produce services for sale rather than for internal consumption, they are constrained by the rules of the market. According to the public claims of their managers, PPCs prefer to conduct their business on the basis of the formal contract and respect the law. This, however, may be just a successful marketing strategy. Whatever the actual practice, the degree of autonomy of PPC vis-a-vis PSS is greater by definition. The growth of the former and the decline of the latter after 1996 may indicate that for customers, considerations of economy are becoming more important than the ability to exercise direct management of force. If this is correct, then the outcome would be a growing differentiation whereby economic and security enterprises are more clearly separated. As I noted before, this work is organized from the nature of EG and the source of their creation will be important in further analysis and modeling. Hence I will disregard such division (PDA, PSS and PPC) as the licensing formation further and lead another defining.
1.4. The basic approaches to the extortions modelling
There are big quantity of the mathematical models for corruption in the literature. In the frames of these models there are different questions in studying. The question which I am interesting is not widely expressed due to the most interest of the corruption influence into the whole economy as the macro aspect. So, the works devoted to the studying of the concrete private situations which I am writing about are in the minority among the investigations of external corruption. Started the studying of EG there are actually two possibilities to lead the analysis:1. Via consideration of client-executer aspect in the relations as the game between two agents.2. Via consideration of owner-executer aspect (principal agent problem).The first way to explore the situation is related to the problem of external corruption and includes interdependence of competition and corruption, incorrect distribution of the resources and the proprietor s question. The second way expresses the studying of the management structure, stimulus working out, control hierarchy and power. I would like to note that this work will mainly include the first aspect but will touch the second too in some way where the power will be considered as the establishment of competition and productivity of EG.
1.5. Work structure
The second part of my work consists of micro approach in EG relations. I am defining the possible EG activities and consider debt recovering mainly with protection as the most popular type of business. There is the efficiency aspect also discussed from the two points of view market establishment approach and market separation approach in debt recovering services. This is leading due to the debt supply function which I am getting via welfare maximization problem introducing the probability of debt recovering. Describing the protection service, I am relating to some sources and define the common procedure. Also the temporary aspect is considered.The third part consists of macro modeling of EG problem as the transition shortage. There is socialist regime describing and this approach will be continuing further in my future research. I just define the frames of the model as the starting point and make some possible conclusions, which needs to be explained carefully further in connection with model and relate to the intuitive perception and history. Some forecast of the EG development is also considered.The fourth part concludes. There is considered policy aspect and are made some useful decisions about what has been done to attack extortions and what has to be done.There are many useful references of Internet sources at the end and literature on which I referred during the research is presented.
This work was submitted to the Economic Institute, University of Oslo in 2002, May. Throughout the course of my postgraduate studies at the University of Oslo I had the privilege of working under the guidance of the Professor Karl Ove Moene and Associate Professor Halvor Mehlum. They assisted me in many ways and I am grateful for their constant attention, encouragement, critical comments, editing and inspiring suggestions.My stay and studies at the University of Oslo would not have been possible without a scholarship awarded to me by the Quota Programme. I am gratefully indebted to the Norwegian Government, funded students from developing countries and Eastern- Europe.I am grateful also to the staff at all levels of the International Scholarship Section of Quota Programme, staff at the Economic Department of Oslo University, especially to the Director of Master Programme in Environmental and Development Economics, Professor Olav Bjerkholt, to the Head of the Department of Economics, Vidar Christiansen, to the Head of Administartion, Merethe Aase and of course to theStudent Consultant, Bente Marie Kraabol who assisted me very much during my education and being in Oslo.I am particularly indebted to the following individuals who either in their professional or personal capacity assisted in the completion of my work with advice, comments, compassion, literature finding and friendship:
- Mr. Jens Christopher Andvig, Senior Researcher in Norwegian Institute of International Affairs, NUPI, Oslo, Norway- Professor Vadim Radaev, Chair of Economic Sociology, Vice-Rector State University Higher School of Economics, Moscow, Russia- Torbjorn Traaholt, Editor of Observator , Oslo University Magazine- Jan Erik Rooed, Library Director, Blindern, Oslo, Norway
I am very indebted to the following persons for the possibility of the seminar creating regarding the research for discussion in Norwegian Institute of International Affairs (NUPI):
- Helge Blakkisrud, Head of the Centre for Russian Studies, NUPI, Oslo, Norway- Arne Melchior, Head of the Section for International Economics, NUPI, Oslo, Norway- Jakub M. Godzimirski, Research Fellow at the Centre for Russian Studies, NUPI, Oslo, Norway
I am also thankful to my friends for some useful remarks about understanding of the problem and to my relatives for their advice, which of course are carried out from the great life experience. Misprints and mistakes are mine of course.