Breaking the Information Monopoly of Bureaucracy: How the Effectiveness of Western Aid Can Be Improved
Breaking the Information Monopoly of Bureaucracy: How the Effectiveness of Western Aid Can Be Improved
This article was inspired by Janusz Szyrmer, Director of HIID. He is the author of the idea to launch in Ukraine a large scale internet project as an “alternative” market institution.
Opening the “Black Box” - What’s Inside the State?
Exploring the Role of Bureaucracy in Virtual Economies
As the Soviet and post-Soviet processes present,
the administrative methods of improving the bureaucratic performance are unlikely to achieve their goals. Why is it so?
In order to understand the position of bureaucracy in partially reformed post-Soviet economies, I employ a public choice approach and examine the role of the government and its performance as an interaction similar to a free market — bringing together “buyers” (citizens) and “sellers” (the government) in a setting where the wishes and expectations of the former can be effectively translated into policy outcomes by the latter. The peculiarity of the situation in post-Soviet partially reformed economies is that the government can not provide “supply” of economic policy necessary for normally functioning markets, while there is no “demand” for full-fledged market reforms. The main customers of government services continue to be interest groups exploiting their connections with bureaucracy and politicians to promote those economic policy decisions that favor them the most. Like under the Soviet system when the rules of the economic game were mostly shaped by the treaty between incompetent labor and incompetent management,
there is no competition within the government and bureaucratic hierarchy. Since the bureaucracy controls the flows of information, the government that is willing to bring some changes is constrained in its ability to introduce competing organization into personalized structure of exchanges in economic system.
Even if the government introduces a reform policy, it would be extremely difficult to break the existing pattern of personalization of exchanges in economic system that nurtures mutual clearance, barter, and other forms of quasi-economic activities increasing rents of the networks of bureaucrats with various actors benefiting from the status quo (red directors, for instance).
The World Bank, for instance, in its report on Ukraine does not take into consideration the “networking” power of bureaucracy in Ukraine, thus its recommendations of combatting corruption, such as simple reduction of the state apparatus, hardly can achieve a goal of improving the governance in Ukraine. See,
Ukraina: Vidnovlennya Zrostannya na Zasadax
Spravedluvosti: Memorandum pro Ekonomichnuy Rozvutok Ukrainu
, (Washington, D.C.: World Bank, 1999), pp.29-35.
Like under the Soviet system, there is “an absence of even slightest desire on the part of bureaucrats to conduct policies designed by central planning organs and, furthermore, using any gaps and contradictions in this policy for personal enrichment.”
Soviet Bureaucracy: An Attempt to Fit Into the Weberian Frame
Legally, personalization in present system is achieved by issuing regulations, laws, rules and decrees that are often contradictory and unenforceable when the bureaucrats via their monopolistic control over information acquire the ultimate role in making judgments and decisions.
Bureaucracy enjoyed extremely high bargaining capacity vis-а-vis the central authorities in the Soviet system as well. During the last years of the Soviet Empire, the central authorities could not maintain the integrity of the system via the ideological means: the narrow base of political support shrank and all interest groups and bureaucrats demanded material benefits to be delivered in exchange for their political support. However, the leadership failed to produce alternative mechanisms limiting the power of bureaucracy. The central authority could not increase its own bargaining capacity as well - it was constrained by budgetary limitations and inefficient economic structures, restraining its direct access to societal resources, while the
institutionally empowered bureaucracies at all levels enjoyed significant bargaining power in intensive struggles against the authorities.
Rogers Brubaker, “Nationhood and the National Question in the Soviet Union and post-Soviet Eurasia: An Institutional Account,”
Theory and Society
23 (1994), p.61.
Bureaucracy enhanced its power tremendously since the collapse of the Soviet Empire. When economic and political institutions were unstable, the bureaucracy acquired a wide variety of mechanisms to be directly involved in the economy and to pursue private gains with official means. They established their own rent-maximizing system which was capable of preventing higher-level authorities from reviewing and intervening in what was going on below.
Once the bureaucrats adjusted their rent-maximizing technique to new political and economic circumstances, they developed vested interests in maintaining the status quo. Moreover, the privatization program enhanced the power of bureaucracy — bureaucrats became the new owners, and benefiting from re-interpreted in their favor slogan of privatization they stripped the best assets of the former Soviet economy. Usually they had done little with their properties and continued to exploit their good connections with their old buddies in the bureaucracy to get subsidized credits, tax breaks and privileges.
The similar problems were observed in Russia. See, for instance, Roman Frydman, Cheryl W. Gray and Andrzej Rapaczynski, eds.
Corporate Governance in
Central Europe and Russia
Banks, Funds and Foreign Investors
Insiders and the State
(Budapest, London, New York: Central European University Press, 1996); and Joseph R. Blasi, Maya Kroumova and Douglas Kruse,
Kremlin Capitalism: The Privatization of the Russian Economy
, (Ithaca and London: Cornell University Press, 1997).
Particularly impressive were the achievements of such networks of bureaucracy and insider-managers in making personal profits from loss-making enterprises. One of the most widespread devices was to spin off private “daughter companies,” owned by managers and their close allies. Such companies acquired the output of the enterprise and sold it at market prices. Meantime, the main enterprise accumulated debt, held taxes and delayed wages. These schemes as well as other semi-legal or illegal ways of making money were supported by the bureaucracy that protected managers from true financial discipline and did not want to enforce accountability to owners. In sum, a new institutional form superimposed on an old institutional structure proved to be unable to change the behavioral patterns of bureaucracy and insider-managers of new private enterprises and they proved to be able to adjust to new market conditions in non-market Soviet way.
Taking this analysis into consideration, it is analytically superficial to view bureaucracy as a hierarchy implementing the government’s economic decisions. Bureaucracy, which relies on its special quasi-independent status inherited from the Soviet times, and economic power enhanced during privatization and stabilization has a large bargaining power in dealing with the government. Therefore traditional models of political economy that do not treat bureaucracy as an independent player have to be re-examined for the post-Soviet context.
Bureaucracy behaves as a mediator in the dialogue between the central authorities and interest groups. In such strategic interactions bureaucracy benefits from its monopolistic access to information and its ultimate right to make decisions relying on available to it information.
Bureaucracy wins all the games it becomes involved into due to its unwillingness and inability to reduce its demands that make all other players to accept the most beneficial for bureaucracy outcomes in all iterated games. So,
in our model for the case of partially reformed post-Soviet states with weak central authority we have a powerful bureaucracy, various oligarchic networks integrating bureaucracy, a large mass of powerless citizen, and the central authorities which are usually weak but can behave effectively only under pressure of the crises.
Anders Aslund, an economic advisor to the Russian government from November 1991 to January 1994, observed from inside the central authorities - bureaucracy relations: “A mutual, silent hostility prevailed between the reform ministers and the bureaucrats. Rather than opposing the reforms overtly, the old bureaucrats sabotaged them discreetly..
The reformers faced an impossible dilemma. Because they knew few of the old civil servants, it was difficult for them to find the right people to appoint and promote. The reformers therefore often selected ineptly, which further demoralized the old staff. When the reformers appointed young colleagues to senior positions, staffers of the old apparatus naturally regretted it.
The reformers needed the old administration, but it resisted reforms through virtual civil disobedience. No matter what the reformers tried to do with the old administration, they encountered quiet resistance and failed.”
How Russia Became a Market Economy
, (Washington, D.C.: The Brookings Institution, 1995), pp.90-91.
Let’s formalize the patterns of relations between the central authorities and bureaucracy outlined above. I depart from the prisoner’s dilemma (PD) situation to present a peculiar bargaining equilibrium in partially reformed post-Soviet states. The traditional prisoner’s dilemma model is based on interdependent choices and assumes:
1) instrumental rationality, or that people are egoists and they maximize the ends or utility;
2) players choose the optimal behavior.
There are three main elements in prisoner’s dilemma:
3) payoff (utility, preference order).
In classical PD:
1) the actors choose to cooperate or defect with each other
2) they do not know what the other player chooses;
3) the game is played only one time.
The payoff matrix may be presented in the following way:
Where P - punishment for mutual defection
R - reward for cooperation
S - sucker’s payoff
T - temptation to defect
C - cooperate
D - defect
Values of the payoffs are T>R>P>S.
Taking into consideration the peculiarities of bureaucracy - central authorities relations in partially reformed economies with weak central authority, the payoff matrix would be different from traditional PD and similar to the matrix of “chicken game” where the payoff assumptions are different: T>R>S>P (where P means death for both players). The payoff matrix would be different:
fail to do anything
new equilibrium satisfying interests of both players
advantage of bureaucracy
fail to do anything
advantage of central authorities
I can list, at least, three reasons why the probability that bureaucracy would cooperate is insignificant:
First, certainly, state collapse is the worst outcome for both players. Since this outcome is not acceptable to the central authorities under any circumstances, they always lose. Bureaucracy, judging from its previous experience of playing these games with the central authorities, know that such an outcome is not acceptable by the central authorities. Therefore they always win by defecting on the issues of reforms and the game ends with an advantage of bureaucracy outcome.
Second, bureaucracy has an extremely high bargaining power because it always disregards the future. Since the bureaucracy tends to discount the future (take all at once philosophy), it is impossible to restrain its demands - therefore even the Pareto-inefficient Nash equilibrium when each group would be better off if all groups reduce their demands, but unilateral limiting of one’s demands is not rational for everybody is impossible to reach. In our model where the asymmetries between the relevant players shift the payoff structure in favor of bureaucracy, the outcome is always a victory of bureaucracy.
Third, although rent-seeking and power maximizing objectives are pursued by bureaucracy, the ways of implementing these tasks depend on personal position, interests, and field of activity of any particular bureaucrat. Therefore, despite common goals, the probability of collective strategic long-term oriented action on the part of bureaucracy is low (it is unable to cooperate even when the payoff associated with reforms exceeds that of maintaining the status quo).
How the Western Aid Can Become More Effective
Although the International Financial Institutions (IFIs), like the commercial banks, have designed elaborate conventions and contract-like arrangements to lower the risk of their lending when finance is provided in tranches as agreement to implement certain policy measures is materialized, this method did not prove to be very effective in partially reformed post-Soviet economies. As the relations of the IFIs and Western donors with Ukraine illustrate, the necessity to take into consideration the variations in the degrees of bargaining power of various actors vis-а-vis the central authorities (mostly bureaucracy) was critical in developing a reform strategy. Because of such bargaining asymmetries, the bureaucracy and associated with it groups were able to select and implement only those measures that benefited them the most and neglected the other broadly-oriented market policies.
This observation concerns particularly the issue of administrative reform in Ukraine. Although the central government backed by political elites and Western donors has tried to make an impression that defection on the part of bureaucracy in administrative reform is to be seriously punished, the bureaucracy, because of the logic presented above, continued to win.
Therefore, the administrative reform, if it fails to address, in addition to the technical issues of optimization the state structure, the problem of transparency and bureaucratic control over the information, is unlikely to achieve its goal.
In the absence of competition within the bureaucracy and demonopolization of information, the reform initiatives will be sabotaged by all layers of bureaucracy.
Judging from the previous experience of the Western donors in Ukraine, it seems these actors often assume that those bargaining with them know and control the situation, but most often the knowledge of Ukrainian central authorities of probable bargaining equilibrium with various interest groups (primarily bureaucracy) is distorted. Therefore, the Western donors should approach the issues of reforms strategically. If this is not done, the “ritual dances” may continue — the government will continue to tell international institutions what they have been instructed to say, while the international institutions may be willing to overlook the flaws of reforms and continue economic assistance.
At some point of “transition” some experts tried to open the “black box” of state and discovered the importance of divided government in reform process, where there were both the economic reformers committed to market reforms, and representatives of industrial and agricultural interests favoring the preservation of status quo. Therefore, it was argued, “aid should in fact be used politically, to strengthen the members of the government committed to reforms against the members of the government not committed to reforms. Under this model, what aid buys is good economic policies and not direct increases in GDP.”
Maxim Boycko, Andrei Shleifer, and Robert W. Vishny, “Second-Best Economic Policy for a Divided Government,” in
European Economic Review
40 (1996), p.774.
Taking the present above analysis into consideration, I argue that
the efficiency of the aid may be increased if the aid is provided in support of particular economic policies creating pro-market constituency capable to exercise pressure on the government via the institutions created with the Western aid
. As the experience of Ukrainian transition clearly presents, the policymakers are incapable to think strategically because they are preoccupied with short-term trends and current problems, therefore the long-term impact of their decisions are viewed through the distorted lens of these more immediate considerations.
the similar point is made in Samuel Huntington,
The Third Wave: Democratization
in the Late Twentieth Century, University of Oklahoma Press, 1992.
Therefore, it should not be expected that the economic policies supporting politically weak pro-market constituencies will be adopted soon without extensive support of donors.
Given the limited amount of financial resources available for supporting the reform effort in Ukraine and declining interest of Western donors in Ukraine, it would be beneficial to develop a strategic and complex vision of reform priorities first. If this analysis of peculiarities of Ukraine’s policymaking is taken into consideration, the Western aid would make a great impact if it is directed to the expansion of the ranks of pro-market constituency and strengthening its positions institutionally. Too simplistic approaches based solely on the structure of economic interests defining the costs borne by different groups hardly can adequately reflect the Ukraine’s realities where political institutions controlled by the most powerful groups and bureaucracy do not allow the potential supporters of reforms to express immediately their preferences and hence shape the policymaking process.
Since the bargaining equilibrium always favors bureaucracy and connected with it interest groups, it should not be expected that the administrative reform limiting the power of bureaucracy will be successful in a short or medium run. Therefore in addition to economic policies expanding the ranks of pro-market forces, the policies creating institutions that may limit the power of bureaucracy should be implemented. Although the skeptics may argue that the expansion of the number of interest groups who claim subsidies or other forms of economic benefits from a common pool of resources is not advisable for the Ukrainian economy, the consequences of dramatic asymmetries in bargaining power of actors involved is even more devastating for Ukrainian economy.
The institutions created with the donors assistance may help the pro-reform constituency in resolving the collective action problem. Obviously, if too many individuals stand to gain from a particular policy, each of them may view the probability of gains as being largely independent of his behavior, since the contribution of every participant will be relatively small in comparison with the total. Due to this difference in small bureaucratic and oligarchic groups where a small number is to gain the group members perceive their own contribution as mattering, therefore it is much easier to achieve collective action.
Such tailored to the needs of pro-market constituencies institutions will encourage cooperative behavior, reduce transaction costs and
will not only coordinate the different aspects of societal life, namely the extensive linkages between society and decision making bodies through which societal demands are channeled to the political system, but move the present power balance favoring bureaucracy to a more adequate balance reflecting the interests of pro-market forces as well
. More specifically, the institutions supported by the Western donors should make the government to behave like an arbiter among various interests, where the pro-market interests will be not suppressed by bureaucracy but adequately represented. For instance, various associations representing small and medium-sized enterprises may be supported by donors.
Particularly important role in increasing the bargaining power of pro-market forces should
play a country-wide internet project that make the information flows on local and government level transparent. Although the bureaucracy will resist these efforts, the Western donors may benefit from their high bargaining capacity to move this project through. Internet may be viewed as an “alternative” market institution, by-passing bureaucracy. The central authorities, ministries as well as local authorities should be integrated into the internet that will make their activities transparent and impose pressure on them.
The donors, utilizing their high bargaining capacity, could create
competitive climate within the government and state structures by infiltrating Western-educated Ukrainians into the policymaking bodies.
Again, I have to emphasize that it is not enough in conditions of Ukraine and other post-Soviet states to get a coalition in support of a reform program inside the government - the coalition should be built outside the government. In other words, the pressure on bureaucracy should be put from above and below via coordinated activities of the central authorities and pro-market groups.
Чешский Клуб: Высшее Образование в Чехии, Клуб Чешского Языка:
Курсы чешского языка в вечернее время (включая углубленный курс)
Курсы чешского языка (интенсив/суббота и воскресенье)
Как получить высшее образование в Чехии (включая магистратуру и аспирантуру)
Государственные высшие учебные заведения Чешской Республики
Нострификация аттестатов о среднем образовании
Нострификация дипломов о высшем образовании
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