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Can ‘Good’ Economics Coexist with ‘Bad’ Politics?

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Pacific Money | Economy

Can ‘Good’ Economics Coexist with ‘Bad’ Politics?

Across the former Soviet Union, improved rankings for selective governance indicators tend to give a misleading view of governments’ ability to reform themselves.

Can ‘Good’ Economics Coexist with ‘Bad’ Politics?
Credit: Depositphotos

As countries pursue economic reforms, a common objective is also to improve their rankings. One such influential ranking is the World Bank’s Doing Business. Yet, just last week, an independent inquiry found that the rankings had been manipulated. Specifically, it is alleged that Kristalina Georgieva, the managing director of the Bank at the time, instructed officials to improve China’s ranking: a sort of quid pro quo for China’s commitment to a capital replenishment for the Bank. And the problems go further, as it has been alleged that other countries, including Saudi Arabia, the UAE, and Azerbaijan, have also benefited from preferential treatment.

There are other curiosities. For example, for enforcing contracts, Kazakhstan and Uzbekistan – two somewhat unlikely candidates – have ranked 4th and 22nd respectively, significantly ahead of countries like the United Kingdom and United States. At the same time, many of these rankings, including Doing Business, focus on regulatory and governance measures while ignoring political systems. It is doubtless no accident that the apparent discrepancies are mostly found among autocracies. The shortcomings have not just been procedural but also methodological. 

The accuracy of such measures is critical when we assess the progress of reforms. Nowhere has that been more relevant than in the case of the former Soviet Union, which collapsed 30 years ago. That collapse triggered optimism about an impending era of political and economic reform, competition, and newfound openness. Yet, despite improvements in rankings such as Doing Business, many of those hopes have been largely dashed outside of the Baltic states. Doubtless, these expectations were largely fanciful, particularly given the lack of any tradition of democracy as well as the weight of the Soviet economic legacy. And although Francis Fukuyama’s “end of history” was an argument about the dominance of one political ideology, it did not, of course, rule out the emergence of non-democratic regimes.

Indeed, this was what has mostly come to pass. A multitude of autocracies have emerged, almost always organized around figures, and sometimes institutions, with strong ties to the Soviet past. Presently around two-thirds of Soviet successor states are classed as autocracies and the tendency has been for the incidence of autocracy to increase and deepen over time. 

What are their characteristics? Despite local color, there are some clear common features. The first is the personalized nature of power along with its correlates, family and other preferred connections. Some have also taken on a dynastic component. Azerbaijan with the Aliyev family and Kazakhstan with the founding president Nazarbayev and his family are the most striking examples. Yet, precisely because of these characteristics, these regimes remain susceptible to the problem of succession and the related absence of viable exit routes for incumbents. Consequently, they have fragile political equilibria. 

The second common feature concerns the economics of autocracy. There are invariably large public sectors – particularly when natural resources are important – in which state-owned enterprises continue to play a prominent role. The latter often function symbiotically with strategically placed private companies, some of which have been acquired through privatization.

Such companies prosper by leveraging their connections to power, including by extracting contracts from public sector entities. Often organized as business groups, these private holdings represent the interests of members of the dominant – and narrow – elite. That elite generally encompasses the autocrat’s family but also other associates and trusted parties. The autocrat in turn acts as an arbiter, initially to allocate assets and resources and then to ensure that competition among these elite interests is limited and the scope for disruptive rivalry is held in check. 

If autocracy dictates its own economic formats, can such governments successfully steer a course between the politics of autocracy and economic policy that is investor friendly and tolerant of competition? 

Some of these countries have indeed tried to square this circle. For example, the Azeri government has courted high-end hoteliers, trade facilitation companies, and others with a view – as yet unrealized – to establishing Baku as the Dubai of the Caspian. Successive Kazakh governments have gone further, signaling openness to investors through more market-friendly institutions and signing up to investment protection treaties and arbitration procedures, including its own Astana International Financial Center with its fledgling arbitration forum. Kazakh officials have indicated an aspiration to become the Singapore of Central Asia.

Yet, the problem with trying to promote “good” economics whilst sticking with “bad” politics – and perhaps even as an antidote to the latter – is not just bridging a profound credibility problem, but also simple feasibility. These sorts of regimes by their very nature are formed on the basis of the arbitrary and self-interested exercise of power and influence. Grafting on more market friendly institutions or rules is consequently very hard to implement or, perhaps more accurately, very hard to implement consistently. Improved rankings for selective governance indicators tend to give a misleading, and certainly partial, view of these governments’ ability to reform. 

As a result, it is no surprise that investment disputes, including with international investors, have remained quite common. What such disputes have in common with each other is that they almost always involve expropriations by the state, generally compounded by severe and protracted difficulty in securing legal redress. The most visible example has, of course, been the Yukos dispute in Russia. Another notable example has been the Tristan Oil case in Kazakhstan where judgements in Swedish and U.S. courts have been ignored, leading to multi-billion-dollar seizures of Kazakh assets.  In both cases, the respective governments have chosen to disregard international judicial rulings. 

What this all suggests is that policies that project better governance and try to impose rules and obligations will always run the risk of being sidestepped or simply nullified by autocratic governments or parties closely connected to those in power. 

It is this very unpredictability and underlying proclivity for abusive behavior that is a built-in feature of the autocratic political economy. What this means, of course, is that hoping that “good” economics can offset “bad” politics may well be illusory. The sorry reality is the latter radically narrows the space for, while seriously limiting the gains from, the former. 

For more, check out the author’s recently published paper “The Political Economy Of Kazakhstan: A Case Of Good Economics, Bad Politics?” available here.