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Original Sin, Good Works, and Property Rights in Russia

  • Timothy Frye (a1)


Are property rights obtained through dubious means forever tainted with original sin, or can right holders make their ill-gotten gains legitimate by doing good works? This is a critical question for developing and transition countries, where privatization is often opaque and businesspeople may receive property, but remain unwilling to use it productively due to concerns about the vulnerability of their rights to political challenge. Using a survey of 660 businesspeople conducted in Russia in 2005, the author finds that the original sin of an illegal privatization is difficult to expunge. Contrary to a “Coasian” view of privatization, property rights transferred through a legally questionable privatization are seen as illegitimate long after privatization. Busi-nesspeople, however, can improve the legitimacy of property rights by doing good works, such as providing public goods and using their assets well. Finally, managers who provide public goods for their region are more likely to invest in their firms than those who do not. This suggests a possible political rationale for the provision of public goods by privatefirms.Thesefindingshave implications for studies of privatization, property rights, and business-state relations in transitions and developing countries.



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1 Property rights are the bundle of rights that include the power to use, transfer, and generate income from assets, including land, labor, and capital. Barzel, Yoram, The EconomicAnalysis ofProperty Rights (New York: Cambridge University Press, 1982), 2. Much economic reasoning suggests that where rightholders assume the full cost and benefits of their actions, they use their assets most efficiently and generate greater welfare gains for all.

2 Mikhail Dmitriev, “V zashchitu natsionalizatsii,” Kommersant' January 30, 2006, 1.

3 Joseph Stligitz and Karla Hoff, “The Creation of the Rule and Law and the Legitimacy of Property Rights: The Political and Economic Consequences of a Corrupt Privatization,” NBER Working Papers, no. 11772 (Cambridge, Mass.: NBER, November 2005).

4 Lee Wolosky, “Putin's Plutocrat Problem,” Foreign Affairs (March-April 2000); Bunich, Andrei, Oseri Oligarkhov (Moscow: Yauza Publishing, 2006).

5 Hellman, Joel, “Russia's Transition to a Market Economy: A Permanent Redistribution?” in Kuchins, Andrew C., ed., Russia after the Fall (Washington, D.C.: Carnegie Foundation for International Peace, 2002); Sonin, Konstantin, “Why the Rich May Favor Poor Protection of Property Rights,” Journal of Comparative Economics 31 (December 2003).

6 Anders Aslund, “Betraying a Revolution,” Washington Post, May 18, 2005, A17. This debate centers on credible commitment. To encourage rightholders to use their assets well, states should commit to protect those rights. Yet because states are sovereign and retain the capacity to change policy at any time, making such a commitment is difficult. The minimization of the credible commitment problem is thought to have led to the growth of credit markets in England, the industrialization of Mexico, and, by one account, to the “rise of the Western world.” See, respectively, North, Douglass and Weingast, Barry, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth Century England,” Journal of Economic History 59 (December 1989); Haber, Stephen, Razo, Armando, and Maurer, Noel, The Politics of Property Rights: Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876–1929 (New York: Cambridge University Press, 2003); and North, Douglass C. and Thomas, Robert Paul, The Rise ofthe Western World:A New Economic History (New York: Cambridge University Press, 1973).

7 Djankov, Simeon and Murrell, Peter, “Enterprise Restructuring in Transition: A Quantitative Survey,” Journal of Economic Literature 40 (September 2002).

8 Among others, see Riker, William and Sened, Itai, “A Political Theory of the Origins of Property Rights,” American Journal of Political Science 35 (October 1990); Shleifer, Andrei and Vishny, Robert, The Grabbing Hand: Government Pathologies and Their Cures (Cambridge: MIT Press, 1998); Johnson, Simon, McMillan, John, and Woodruff, Christopher, “Property Rights and Finance,” American Economic Review 92 (December 2002); Frye, Timothy, “Credible Commitment and Property Rights: Evidence from Russia,” American Political Science Review 98 (August 2004).

9 Knack, Steven C. and Keefer, Philip, “Institutions and Economic Performance: Cross-Country Tests Using Alternative Measures,” Economics andPolitics 7 (November 1995); Daniel Kaufmann, Aart Kray, and Pablo Zoido-Laboton, “Governance Matters,” Policy Research Working Paper, no. 2196 (Washington, D.C.: World Bank, 1999); Acemoglu, Daron, Johnson, Simon, and Robinson, James, “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review 91 (December 2001).

10 For an exception, see Besley, Timothy, “Property Rights and Investment Incentives: Theory and Evidence from Ghana,” Journal ofPolitical Economy 103 (October 1995). This article is perhaps closest in spirit to Duch, Raymond R. and Palmer, Harvey, “It's Not Whether You Win or Lose, but How You Play the Game: Self-interest, Social Justice, and Mass Attitudes toward Market Transition,” American Political Science Review 98 (August 2004).

11 Black, Bernard, Kraakman, Reinier, and Tarassova, Anna, “Russian Privatization and Corporate Governance: What Went Wrong,” Stanford Law Review 52 (October 2000).

12 Vedemosti, July 18, 2003.

13 Timothy Frye, “Property Rights and Property Wrongs in Russia: Evidence on the Legitimacy of Privatization from a Survey of the Mass Public” (Paper presented at the annual meeting of the American Economics Association, Chicago, January 4–7, 2007). Ten percent of respondents disagreed or more or less disagreed with the statement, and 14 percent replied that it was hard to answer.

14 Wealth redistribution continued after privatization because groups grown powerful from their control over former state assets were especially well placed to shape public policy in their favor. See Barnes, Andrew, Owning Russia: The Struggle over Factories, Farms and Power (Ithaca, N.Y.: Cornell University Press, 2006).

15 In an address to the Russian Chamber of Commerce in December 2003, President Putin insisted that not all privatization deals violated the law: “We often hear that laws were complicated and impossible to comply with. These are the statements of those who did not observe them. This is rubbish. Those who wanted to observe the law did so.” More ominously, he added: “If five or seven people did not observe the law it does not mean that everybody did the same.” This quote sparked a guessing game about which businessmen would be the next to suffer the fate of Khodorkovsky.

16 According to the Central Bank of Russia, for only the second time since 1992 more capital flowed into than out of Russia in the second quarter of 2003. In the third quarter, following Lebedev's arrest, capital flight soared to $7.6 billion. In 2004 capital flight exceeded $8 billion in an economy that grew by 7.1 percent.

17 Cited in Verdery, Kathryn, What Was Socialism and What Comes Next? (Princeton: Princeton University Press, 1996), 210.

18 Josepth Stiglitz, “Who Owns Bolivia?” (accessed July 16, 2006).

19 Smith, W. Rand, “Privatization in Latin America: How Did It Work?” Latin American Politics and Society 44 (Winter 2002), 4.

20 Richardson, Craig J., The Collapse ofZimbabwe in the Wake ofthe 2000–2003 Land Reforms (Lewiston, N.Y.: Edwin Mellen, 2004).

21 Nathaniel Jensen, “Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions” (Manuscript, Department of Political Science, Washington University, St. Louis, Mo., 2006).

22 Among others, see Ledeneva, Alena, Russia's Economy of Favours (Cambridge: Cambridge University Press, 1998); but see Hendley, Kathryn, Murrell, Peter, and Ryterman, Randi, “Law Works in Russia: The Role of Law in Interenterprise Transactions,” in Murrell, Peter, ed., Assessing the Value ofthe Rule ofLaw in Transition Economies (Ann Arbor: University of Michigan Press, 2001).

23 Coase, Ronald, “The Problem of Social Cost” Journal of Law and Economics 3 (October 1960).

24 Freeland, Chrystia, The Sale of the Century: Russia's Wild Ridefrom Communism to Capitalism (New York: Random House, 2000)

25 Stiglitz and Hoff (fn. 3) also treat privatization in Russia as guided by a Coasian view of property rights.

26 For a description of good works by the holding companies Interros and Evraz-Holding, see

27 See the appendixes for descriptive statistics of the firms in the sample, the distribution of firms by sector, the text of the public goods question, and descriptive statistics of the variables.

28 Frye (fn. 13) repeated the survey experiment with the mass public in a nationally representative survey in October 2006. In both surveys, responses to the manipulations were similar, but the mass public viewed privatized property as less legitimate than did the managers.

29 Hellman, Joel, Jones, Geraint, and Kaufmann, Daniel, “Seize the State, Seize the Day: An Empirical Analysis of State Capture and Corruption in Transition Economies,” Journal ofComparative Economics 31 (December 2003).

30 Survey-based experiments raise issues of internal and external validity. Concerns about internal validity arise “when the treatment does not exactly correspond to the construct that is envisioned as the independent variable.” Green, Donald P. and Gerber, Alan S., “Reclaiming the Experimental Tradition in Political Science,” in Katznelson, Ira and Milner, Helen V., eds., Political Science: The State of the Discipline (New York: Norton Press, 2002), 811. Internally valid experiments capture the true causal process claimed by the researcher. External validity generates concerns about whether the results produced in an experiment travel outside the setting in which the experiment is conducted. This is a greater threat to the validity of experiments conducted in a laboratory setting, but the threat is also present in field experiments.

31 As managers are typically the largest shareholders in the firm, it is appropriate that they be held responsible for the firm's actions.

32 One way to improve the experiment would be to randomly assign whether violations of the Law on Privatization were major or minor. This would provide a cleaner test of the original sin argument, but doing so would make it more difficult to identify relationships by reducing the number of observations in each cell. Given the novelty of embedding experiments in a survey in Russia and the relatively small number of respondents, I took a conservative approach by manipulating only the two types of good works.

33 This is a minimalist treatment of the legitimacy of property rights that requires only that respondents oppose a review of the privatization described in the experiment to be seen as viewing the privatization outcome as legitimate.

34 It is important to note that these responses were not generated using random assignment. Each respondent was asked about both major and minor violations; I simply compare the mean response. These results depend in part on question format. In a survey of the mass public that used the same experiment but also randomly assigned the severity of the violations of law, the original sin argument was insignificant when public goods were provided but was significant when they were not; Frye (fn. 13).

35 In analyzing the individual determinants of responses to these scenarios, I found some evidence that younger managers have a “more conditional” view of property rights controlling for a variety of firm- and individual-level factors. They were more likely to reward “good works” and more likely to punish “bad works” than were their older counterparts, suggesting that a socialization process is at work. Results available from the author.

36 Alexei Goriaev and Konstantin Sonin, “Is Political Risk Company-Specific? The Market Side of the YUKOS Affair” (Manuscript, Center for Economic and Financial Research [CEFIR], MOSCOW, 2005), 1.

37 More specifically, one might like to estimate a statistical model that regresses a proxy for the security of property rights on a dummy variable for the good use of an asset (proxied here by investment), a dummy variable for public goods provision, and the interaction of these two dummy variables. This specification would require a behavioral proxy for secure property rights other than investment.

38 Firms privatized with minor violations of the law may also have incentives to provide public goods, given the difficulty of distinguishing firms privatized with minor violations of the law from those privatized with major violations of the law. Thus, firms that provide public goods are not necessarily revealing that their rights were obtained with significant violations of the law. Indeed, they may view the provision of public goods as a costly signal to try to distinguish themselves from those who benefited most from a corrupt privatization.

39 Leonid Polishchuk, “Biznesmeny i Filantropy: korporativnaya blagotvoritel'nost v Rossii” (Manuscript, Center for Economic and Financial Research, Moscow, 2005).

40 The dummy variable treatment of public goods provision is crude, but asking for estimates of funds spent on public goods would likely have produced unreliable responses. An additive index that tallies each type of public good provided produces similar results. These responses may be biased upward, as managers may have wanted to paint themselves in a positive light. To the extent that some respondents overstated the provision of public goods but not levels of investment, this bias should make it harder to find a relationship between the two.

41 In a nonrepresentative 2006 survey of 210 business leaders, government officials, and researchers in Russia, respondents cited “administrative pressure from authorities” and “business development strategies” as common reasons for the participation of firms in social programs. Maria Levitov, “State Pressure Motivates Most Corporate Giving,” Moscow Times, February 14, 2006.

42 Similar results are produced by other proxies for relations with the government, including ratings of the performance of the governor and ratings of the extent to which the governor is motivated by the good of the region.

43 The results are unchanged if a variable that captures concerns for the quality of managers, rather than workers, is included. The two measures are highly correlated.

44 Results are not altered by other proxies for performances, such as a subjective measure of the financial condition of the firm and a variable for whether a firm made a profit, broke even, or lost money in the last year.

45 Dropping variables related to bribes to the regional governor increases the number of observations by about 10 percent. Doing so does not affect the results of the variables of interest.

46 The results also hold using continuous measures of changes in investment in capital goods and new technologies, respectively. Results are available from the author.

47 The provision of public goods is no guarantee that rights will be respected. YUKOS conducted a highly visible campaign to improve its image but ultimately lost its property. Given the great public enmity toward the owners of YUKOS, perhaps no amount of good works could have changed the outcome.

48 Some of these questions are addressed in Frye (fn. 13).

49 Andy Baker, “Consuming the Washington Consensus: Mass Responses to the Market in Latin America” (Manuscript, Northeastern University, Boston, 2006), chap. 4.

50 Research Department Inter-American Development Bank, “The Privatization Paradox,” Latin American Economic Policies 18 (2002).

51 Lora, Eduardo and Panizza, Ugo, “The Future of Structural Reform,” Journal of Democracy 14 (April 2003); Panizza, Ugo and Yanez, Monica, “Why Are Latin Americans So Unhappy about Reforms?” Journal of Applied Economics 8 (May 2005); Carles Boix, “Privatization and Public Discontent in Latin America” (Manuscript, Inter-American Development Bank, Washington, D.C., 2005).

52 North, Douglass, Institutions, Institutional Change and Economic Performance (New York: Cambridge University Press, 1990).

53 Olson, Mancur, The Logic of Collective Action (New Haven: Yale University Press, 1965).

54 Sergei Guriev and William Megginson, “Privatization: What Have We Learned?” (Paper presented at the Annual Bank Conference on Development Economics, St. Petersburg, 2005).

* I thank three anonymous reviewers, Quentin Beazer, Jim Fearon, Scott Gehlbach, Sergei Gu-riev, Rick Herrmann, Kathleen McGraw, Tom Nelson, Kira Sanbonmatsu, Konstantin Sonin, Sarah Wilson, Ekaterina Zhuravskaya, and seminar participants at Duke University, Ohio State University, and the Center for Economic and Financial Research (CEFIR) in Moscow for comments. I also thank the Mershon Center of the Ohio State University and the William Davidson Institute for generous funding of this project.


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