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Entrepreneurship in autocratic regimes – how neo-patrimonialism constrains innovation

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Abstract

Autocratic regimes form an institutional environment for entrepreneurship that differs substantially from those in democratic capitalist societies. In general, democracy guarantees equality before the law. According to Hayek, the rule of law protects property rights rather than profits of established firms. Innovative outsiders can thereby challenge incumbents, which is a legal requirement for creative destruction. In autocratic regimes, by contrast, political power is interlaced with the command of economic resources. Entrepreneurship faces political constraints defined by economic interests of political powerholders who are typically, either directly or indirectly, also engaged in economic activities. The paper analyzes how autocratic political systems subordinate the economy in order to create rents and maintain power. The (neo-) Weberian conception of neo-patrimonialism is transferred and used as an analytical tool to describe the institutional environment for market activities. The paper places an emphasis on post-communist transition economies and demonstrates the institutional lock-in effect that makes the market economy dependent on political power. The deliberate coexistence of legal norms and arbitrariness in neo-patrimonial regimes institutionalizes uncertainty in particular. A typology of entrepreneurial adjustments to institutions of the neo-patrimonial order is discussed. Most of them will impede economic dynamism.

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Notes

  1. See https://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/economic-freedom-of-the-world-2014.pdf.

  2. See Hensell (2009).

  3. Relevant state functions performed by the elite group can include (patrimonial) jurisdiction, tax collection or the provision of national defense by a military. In most European countries, these functions were exercised by the nobility until the end of the eighteenth century and often beyond.

  4. The terms “elite group” and “dominant coalition” (introduced by North et al. 2009) are used synonymously.

  5. For a case study in Tunisia see Wegner et al. (2013).

  6. Hayek updates and renews liberal arguments developed by Hume, Smith and Mill with respect to modern welfare states; see Hayek (1982/1993) and Hayek (1969).

  7. In a profound study, Deecke (2015) takes the example of Prussia to analyze how public administration around 1800 started to promote capitalism by extending its influence vis-à-vis the monarch in order to abolish economic group privileges provided by the mercantile system.

  8. See also Eich (1984) for Russia and Wegner, Heinrich-Mechergui and Mechergui (2013) for the Ottoman Empire with emphasis on the Maghreb region. The Tsar in Russia and the Sultan in the Ottoman Empire were absolutist rulers who appointed and dismissed officials at will. In the colonized parts of the Ottoman Empire (Northern Africa, the Middle East) central power was split and regional patrons (“Deys”) gained an independent role in which they established their own patrimonial systems.

  9. This was the case in Prussia after the defeat in the war against Napoleon in 1806 when a group of open-minded senior officials (backed by the monarch) instigated major reforms that launched a capitalist order (Wegner 2016).

  10. For an overview of systemic corruption in the Soviet Union, see Stefes (2006, p. 65–74).

  11. Although elections also take place even in Russia or in Belarus, a change of power as a result of elections is inconceivable in these regimes.

  12. According the Freedom-House-Index, most neo-patrimonial countries rank as partly free, Serbia even as free.

  13. Here, I use the terms „principal “and „patron “synonymously.

  14. In the following, I refer to the centralized neo-patrimonial system because it comprises important elements that also work in its decentralized version.

  15. See Hensell (2009, p. 151 and further literature) for the recruitment procedures in Albania.

  16. Bureaucrats in the Weberian sense also have private interests and motives. However, the pursuit of public interest and private career motives are in many ways mutually supportive.

  17. See McCloskey (2016).

  18. See Kluge (2015, p. 13).

  19. See also Stefes (2006, p. 23) who gives further references.

  20. A similar case is quoted from Nazrullaeva et al. (2013): “Another common scheme is the accusation of improper use of subsidized government bank loan. In 2008 a successful dairy businessman, Dmitry Malov from Kostroma (a city 300 km away from Moscow), was visited by two former officers of Economic department of MVD. The visitors urged him to sell his enterprise to an unknown person. After his refusal they menaced with litigation. Afterwards Mr. Malov was charged with fraud. He proceeded against the accusation and the court proceedings were dropped. But eventually the FSB office in Kostroma reopened the case. Despite absence of complaints from the creditor, timely payments of debt, and using the loan on stipulated purposes he was accused of improper use of investment credit. Mr. Malov believes that he was “commissioned”, i.e. someone involved in property development might have paid officers, as his company’s factory is situated in the city center which makes this plot quite attractive. In 2010 Mr. Malov was sentenced to 5.5 years in prison, and spent in jail almost 2 years”. (Narrullaeva et al. 2013, p. 11).

  21. Systematic studies such as Hensell (2009) and Christophe (2005) are based on interviews with officials and entrepreneurs that give a meticulous picture of the nature of the arbitrary state; of course, the interview partners conceal information about current figures and accrued corruption payments or the number of “victims”.

  22. The key difference to Olson, however, is that governance even in autocratic states must hinge on a dominant coalition. Ruling a state is impossible for an individual, as North et al. (2009) emphasize.

  23. For instance, the capitalist transformation process in the German states during the nineteenth century witnessed continuing efforts to disentangle the economy from state interventions and regulations; this process ended up in competitive capitalism in the second half of the nineteenth century. For an overview, see Boch (2004).

  24. When President Putin came under pressure of economic sanctions applied by Western countries after the conflict in Ukraine, he passed laws (in 2014) that exempted Russian firms from screening processes of public administration, generally disregarding the economic interests of agents in bureaucracy. This action can be seen as a helpless compromise between improvement of the rule of law and consideration of the interest of the dominant coalition.

  25. See Hensell (2009, p. 182–192), OECD (2005a) and OECD (2005b).

  26. See also Elert and Henrekson (2017).

  27. Yakovlev (2013) describes promising developments in Russia in a small period of time before the Yukov-affair; at that time business organizations successfully promoted the rule of law and were backed by President Putin until the corrupt administration gained ground in order to keep rivals at bay.

  28. For Tunisia under the rule of Ben Ali, Wegner, Heinrich-Mechergui and Mechergui (2013) report that entrepreneurs outside Ben Ali’s cronies resorted to this avoidance strategy. This is also to be expected in post-Soviet neo-patrimonial orders.

  29. For instance, German investors in Hungary are reportedly unconcerned about recent attempts of President Orban to bring the economy under his control; instead they are pointing to their close personal connections to him. However, as Kluge (2015) points out, the status of a foreign investor does not protect against arbitrary offenses; in his case, Russian regulators withdrew licenses from the Swedish telecommunication company Tele2 under the pretext of a violation of regulation. The only preferential treatment of the foreign investor was that the CEO was not arrested but urged to sell the company to a Russian firm belonging to the client network.

  30. For the conception of comparative institutional advantage, see Hall and Soskice (2001).

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  1. Erfurt University, Nordhäuser Str. 63, 99089, Erfurt, Germany

    Gerhard Wegner

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Wegner, G. Entrepreneurship in autocratic regimes – how neo-patrimonialism constrains innovation. J Evol Econ 29, 1507–1529 (2019). https://doi.org/10.1007/s00191-019-00617-y

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