Corruption and Firm Restructuring

Executive Summary - 2007

After more than seven decades of a Socialist experiment, the Soviet Union collapsed into chaos. In a few short months, the economic, political, and social structure established in 1917 collapsed, separating the Soviet states. 

The rewriting of political and economic rules thrust the newly independent countries into a period of redefinition and reform. To survive in a market economy, firms necessarily learned to restructure and to compete. The process was far from painless as firms attempted to position themselves within unstable politics and ambiguous market conditions.

Economic restructuring coexisted with a codification of corruption. Firms had an option between official and unofficial channels, often dominated by long-standing criminal syndicates. As firms chose how to adapt, they also had a choice for the entity to rely on for contract enforcement, to manage supply chains, and to reach consumer markets. 

The period of transition presents a unique natural experiment to study the affect of rising corruption on the firm's restructuring decision. How does pre-transition ownership, private or state, influence that decision? How does the attractiveness of the unofficial economy affect the propensity to restructure?

The collapse of the Soviet Union signaled an international shift in political and economic logic: Socialism had failed. Centralized control was no longer viable in the modern economy. The only way forward for former Soviet republics was capitalism.

These nations faced dual challenges as they established their independence from Moscow: creating a functional political system and liberalizing their economies to market structures.

Some countries embraced Western democracy and deregulation, like Estonia, while others clung to Soviet style governance, such as Belarus. These early decisions have profoundly influenced the trajectory of the former Soviet Union (FSU) countries over time.

This paper explores the paths of these countries, and it explores the relationship between systematic corruption and firm-level decision making within the context of former Soviet countries: Russia, Kazakhstan, Belarus, Ukraine, and Estonia.

·       Background on the conditions facing transition firms, as well as underlining the differences between the five countries.

·       Review of the theory and literature around both privatization and the rule of law. I address two distinct bodies of work with different methodologies of restructuring and corruption.

·       Conceptual model for the research, which tests the correlation between success in privatization and the presence and draw of the unofficial economy.

·       Ideal data to test the model

·       Existing data and constraints. In section seven, I outline the

·       Results, implications, and significance.