Barriers to change? understanding the institutional hurdles in the Russian forest sector

Abstract: The ongoing transformation of the Russian society largely consists in changes in the institutional framework constraining actors' behavior in the emerging market economy. While we have a substantial knowledge about the functioning of a market economy we know very little about how to create such a system. The transition in Eastern Europe offers an opportunity to acquire new knowledge about the prerequisites for the establishment of a market economy. This thesis is based upon research performed in a project called "Institutions and the Emergence of Markets - Transition in the Russian Forest Sector" conducted between 1997 and 2001 at the International Institute for Applied Systems Analysis (IIASA) in Austria. The purpose of the study was to identify institutional hurdles for the reformation of the Russian forest sector. The task was approached through a series of case studies of the institutional problems hampering developments in the forest sector of eight Russian regions. Data describing the behavior of forest enterprises was obtained through an interview survey among enterprise leaders in each one of the eight regions. The so-called Institutional Analysis and Development (IAD) framework provided a common design for the eight case study reports comprising the first phase of the project. One such case study report is included in this thesis - the one dealing with institutional problems in the forest sector of the Arkhangelsk Oblast. Based on the previous eight case studies an integrating analysis was made with the purpose of identifying more general characteristics of the institutional framework embedding the Russian forest sector. The results of the analysis were reported in a journal article published in 2001. This article is also included in the thesis. In a third and final phase of the project, the results of the previous studies were disseminated through a series of policy exercises to forest stakeholders in four of the eight case study regions, the purpose being to see if a participatory policy formulation process could be established among regional forest stakeholders. The third paper included in this thesis reports on the results of the policy exercises conducted in the regions of Murmansk, Karelia, and Arkhangelsk in the autumn of 2000 and the spring of 2001. As this thesis illustrates, transforming the old Soviet command economy into a modern market system is a formidably complex task. The reforms taken early during the transition (e.g., privatization and price liberalization) triggered a series of spontaneous changes in the economy actually threatening to bankrupt many Russian enterprises and ultimately to upset the entire social order. However, the development also triggered its own response in that it made many market non-viable enterprises enter the so- called virtual economy. Here enterprises exchanged goods and services through barter trade thus avoiding true market competition. In fact, many of the rules-in-use (institutions) constraining the behavior of actors in the virtual economy originated in the old Soviet command system. A major problem with the virtual economy is that it maintains the sub-optimal resource allocation typical of the command economy. The findings reported in this thesis empirically corroborate central hypotheses generated by the theory of the virtual economy. Some ideas are also explored about ways to disentangle the institutional deadlock preventing a large part of the forest enterprises from restructuring to become viable in the emerging Russian market economy. The study arrived at the very general conclusion that there are no easy top- down procedures that automatically will lead to an efficiently functioning Russian market economy. The results contest the claims made by the "shock therapy" school of (mainly western) reform advisors to the Russian government. While certain basic reform measures could not be introduced gradually, there was no ground for expecting rapid automatic and profound positive changes in the institutional framework constraining actors' behavior in the Russian economy. On the contrary, the institutional deadlock characterizing the Russian economy will take a long time (and quite innovative thinking) to disentangle. The problem consists in envisaging a way to introduce institutional changes with the multiple purpose of improving the efficiency of the economy (raising people's standard of living) while at the same time improving the workings of democracy and doing so in a society where the existing institutional framework does not work properly. The study led to a number of specific conclusions relating to the possibilities of reforming the Russian forest sector, making the institutional framework constraining actors' behavior more conducive to economic efficiency. It was found that there is a need for changes throughout the entire institutional hierarchy, ranging from constitutional rules, through collective choice rules, to operational rules. Separation of duties and obligations between the political and economic spheres of society should be an underlying principle in all these changes. It was also suggested that policies for improving the institutional framework governing the Russian regional forest sector should be elaborated in a dialogue with the stakeholders who are directly affected by malfunctioning of the sector. The study showed that the use of policy exercises for elaborating improved forest policies seems feasible although the Russian civil society is (still) not sufficiently developed to allow participatory policy formulation procedures to work effectively.