The fate of post-Soviet systems

The fate of post-Soviet systems[i]

by A.Y. Klimenko

The University of Queensland

In order to understand the recent dramatic events that occurred in Eastern Europe, we need to go back two decades. The collapse of the communist system and the Soviet Union in 1991 produced expectations of a better life as well as wide acceptance of both democratic principles and a market economy. Most of these aspirations have not been transformed into reality. After several years of difficult readjustments, a number of new post-Soviet states emerged from the splinters of the USSR. Most of these states possess all of the formal attributes of modern democracies (i.e. elected presidents, parliaments, political parties, etc.) and market economies (companies, share markets, currency exchanges, etc.). I nevertheless argue that the economic/political systems implemented in these states are distinctly different from market economies, and as such they evolve according to patterns that are specific to the post-Soviet states. The systems represented by post-Soviet states are inherently unstable.

While in this article I refer to some economic terms and concepts as needed, the perspective of this paper is not economic. The treatment presented here is more generic, pertaining to the theory of abstract competition, which views evolution of complex systems through competition between elements comprising the systems. The article is addressed to a wide circle of readers. More information about abstract competition and complex competitive systems can be found in other publications[ii].

Post-Soviet states

Conventional market economies are based on separation of the governing state and private economic activity. One may argue that we all have heard stories about private interests using political connections to secure profitable contracts. This can indeed happen in democratic states, but it is considered to be illegal and, as long as criminal activity does not exceed a certain threshold, it does not change the nature of the system. The post-Soviet states have incorporated a substantial fraction of the old communist elites and institutions, and they function in a way that is different from conventional market economies. In post-Soviet states, success in economic activities is primarily related to connections with, control of, or patronage by various government bodies. In other words, economic activity is closely linked to the state, although the state is not in full control of the economy as was the case in the USSR. It is difficult or impossible to be successful in business without the right connections with the government. Initially, the post-Soviet system covered the area of big business while smaller business was left to free enterprise. As discussed below, the evolution of the system tends to result in gradual elimination of free enterprise and a number of other irreversible changes.

Good cowboys shoot first

The main problem with the post-Soviet system is that it is inherently unstable, which is caused by the effect of the “good cowboy” who always shoots first in a duel. Indeed let us assume that individual A is elected or selected into a position of authority which gives him an opportunity to eliminate his major competitor B. Should A do this or avoid hostilities? Obviously, eliminating B is the wining strategy. There is not much of a choice for A since if A does not act now when the chances of success are high, the next time it might B who has the advantage of government connections. Whether cowboy A wants to be aggressive or not, he must shoot first or be subject to a very high risk of being shot by cowboy B since cowboy B is in the same situation as A and will shoot at his first opportunity.

Contraction of the power circle

The good cowboy effect is of course a simplification of more realistic cases that involve many players: say A has a government connection, B is his major opponent and C1,...,Cn are other competitors. All these competitors are initially within the circle of power, that is they all are able competitors and can exercise influence on the common affairs. In this case A is likely to turn to the Cs and offer them division of the estate of B between A and the Cs. The Cs agree, since 1) this is profitable for them and 2) they are afraid that any C refusing to cooperate with A can also be eliminated. The resulting effect is a contraction of the power circle: the group of competitors eliminates them one by one and at every step this remains beneficial for overwhelming majority of competitors. The process continues until only one competitor remains - that is, at the end, all but one are losers. This is indeed a very interesting development: every competitor makes choices in his or her own self-interest, the majority always prevails, and amost all competitors benefit at every step – yet at the end almost all competitors lose.

Cooperative stabilisation

Competitors, who are subject to contraction of the power circle, can nevertheless achieve a stabilisation of the system if they have a degree of cooperation. Specifically, they may agree to compete according to the established rules and jointly resist illegal eliminations. If the strongest competitor A uses resources of the state and acts against his major rival B, all other competitors C1,...,Cn come against this action so that A suffers significant losses. The existence of an agreement between competitors and of a mechanism to enforce this agreement stabilises the system.

Instability of post-Soviet systems, transition to a dictatorship

Now we can examine the implications of the power circle contraction for post-Soviet states. Any real society has many power circles at different levels, but my goal is to describe the major trend while keeping all of the details out. One might look at an initially broad group of oligarchs who jointly control most of economic and administrative resources in a post-Soviet country. This system is unstable and subject to the elimination of oligarchs, one by one, until the system is controlled by a single person (i. e. transferred into a dictatorship). In this context, elimination does not necessarily imply a physical elimination and can be limited to relatively benign measures such as deprivation of wealth or imprisonment. The competitors need to be eliminated, replaced or subdued to the extent that their return to competitor status becomes impossible. Similar processes should be observed at lover levels among local elites. The system keeps evolving until it becomes a dictatorship where a power pyramid is formed. In this pyramid, the elements from the lower levels are controlled by elements from higher levels. Horizontal competition is restricted and stabilised by subjugation to a superior element and as the result the whole system becomes more stable. A communist state is a very good example of a dictatorial system (this does not mean, of course, that contraction of the power circle necessarily results in a communist state).

The system engaged in self-consumption

The process of power circle contraction has implications for operation of the post-Soviet systems. Competitors who are still within the power circle must be aware that they might be eliminated at some point, and they prepare for the rainy days by moving substantial funds abroad. If these competitors feel that their elimination approaches, they do not hold their ground; instead they leave for safe havens, which are prepared in advance. This reduces resistance and further accelerates the contraction process. Under these conditions, long term investments are illogical while economic activity focuses on extracting maximal profit and moving it to safe locations. From an economic perspective, this system consumes everything it can: the capital funds and, if available, natural resources. Self-consumption can not continue forever – the state must either collapse or transform into a more stable form.

Dictatorial stabilisation

Contraction of the power circle may result in the concentration of power in the hands of a single individual – a dictator. As the dictatorial stage is achieved, the system can be partially stabilised by the dictator, who begins to identify his personal interests with the interests of the country (i.e. sees the whole country as his own property). This may address short-term problems, but in the long run dictatorships are especially prone to competitive degradation[iii] --- a process that is common for many competitive systems, which results in gradual decay of the functioning of the system, until the system finally collapses.

Oligarchic cooperation

Let us see how cooperative stabilisation can be achieved in the real world. First, there could be an agreement between the oligarchs to play according to “gentlemanly” rules and avoid contraction of the circle. If a potential dictator looms on the horizon they must act jointly to reduce his powers or, in more difficult situations, to eliminate him. While oligarchic agreements may serve as a stabilising factor for a short time, their long-term stability is questionable due to the limited number of individuals involved. A feud between prominent competitors may result in violation of the agreed competition rules and collapse of the agreement. If this happens, the power circle contraction resumes.

Democratic stabilisation

Another opportunity is introduction of a very broad agreement that involves the business, political and community leaders and, ultimately, all of the society. The use of state powers is subject to political opposition, institutional oversight, prominent public figures, the media, and indeed the rest of the society, while economic activity is regulated but not controlled by the state. An individual who is caught violating this agreement (i.e. the state law) through corruption or monopolisation has to face retaliation from the whole society. The broad basis of the agreement makes it very stable. Even malfunctions in some of the controlling mechanisms should be eventually corrected and do not result in the collapse of the entire system. This kind of organisation corresponds to systems that are conventionally associated with civil society, democracy and a market economy. As with any other complex system, a democracy is not a priori immune to competitive degradation. Democracies, however, can periodically rejuvenate the system through the process of democratic elections and change of government. This makes democracies effective in the long run.

Summary

Despite some resemblances, the systems implemented in post–Soviet states are not truly market economies. These post–Soviet states represent hybrid forms where state functions are closely intermixed with economic activities. This kind of system is inherently unstable, and can evolve into one of two major stable states (which we can refer to as dictatorships and democracies), or into one of a number of semi-stable intermediate forms. The outcome and direction of the evolution is determined by many factors, in which historic traditions and the international environment play a major role.