Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is from Stanislav Markus, assistant professor of political science at the University of Chicago. Markus outlines his findings from a recent article on how firms in Russia and Ukraine can use bottom-up methods to protect their property rights in a weak state environment.
Secure property rights constrain governmental and private predation, enable capital accumulation, improve worker productivity, enhance credit availability to the private sector, and facilitate stock market development. There is a solid consensus that secure property rights constitute one of the fundamental drivers of development.
But how do property rights become secure in the first place? Many studies from the global south addressing this issue focus on Africa’s failed states and the potential of rural communities to delineate and protect property rights in the absence of state support or interference. Other literature invokes, for example, medieval Europe, which faced the opposite problem of modern Africa: not too little state, but rather an unrestrained Sovereign. Yet this conceptual bifurcation of failed versus domineering states applies poorly to much of the developing world where states are weak but not failed. This insight has profound implications for the nature of predation and the process through which the property rights of private firms can be secured, as I argue in a recent issue of World Politics.
In weak states, the state ruler is unable (even if willing) to make credible commitments to property rights on behalf of lower-level state agents, due to a severe lack of accountability within the state bureaucracy. At the same time, state agents are sufficiently empowered to engage in expropriation in their public capacity (unlike in failed states), while being unable to constrain private predators. Forms of such expropriation may include a corrupt municipal court issuing an injunction paid for by a firm’s competitor; a policeman harassing retailers to collect bribes; a local official pressuring a firm to give a job to his relative lest the company lose its operating license; and so forth.
I argue that in response to the challenges posed by weak states, owners can enforce their property rights without resort to mafias by forming alliances with stakeholders such as foreign actors (including investors, governments, intergovernmental organizations, NGOs, and media), community residents, and employees. These stakeholders can impose costs on the potential aggressors through diverse political strategies, allowing firms to defend their property rights not only from private predators but also from the state. My article evaluates this “bottom-up” theory of secure property rights statistically with data from an original survey of firms in Russia and Ukraine, and also uses case studies to demonstrate the causal mechanism.
My main argument is that a weak state can be disciplined by non-state actors. Oleyna, a firm producing vegetable oil in the Ukrainian city of Dnipropetrovsk, provides an example. The firm’s property rights were attacked by the financial-industrial empire Privat Group, which paid the local law enforcement to help expropriate a 60 percent equity stake in Oleyna through a fabricated legal case. It is Oleyna’s stakeholders who came to the rescue. The European Bank of Reconstruction and Development, Oleyna’s key creditor, helped the firm organize a joint press conference that generated a tremendous media response. Oleyna’s employees defended the majority owners by writing a letter to the upper executive state organs. Oleyna also capitalized on its community involvement to generate local public support. Through its stakeholders, Oleyna created substantial pressure on the local government to stop assisting the raiders. As a result, the fabricated case against the firm was dropped by the prosecutor’s office. Without political support, the raiders lost interest and did not resort to some criminal tactics they had threatened. Oleyna’s case is not exceptional, as my earlier study of Russian corporations with foreign stakeholders shows. Sometimes, organized communities and labor can also prevent a physical confrontation, as in the case of the Ukrainian plant NZF where, in 2005, the workers faced down a cordon of special police forces who were trying to implement a politically motivated takeover of NZF.
Firms create alliances with stakeholders by engaging in benefit transfers to outside stakeholders; such benefits include various forms of corporate social responsibility, favorable investment terms, etc. Such alliances pool resources and effectively outsource the task of property rights enforcement to third parties. Alliance members can make the expropriation itself or its consequences more expensive and hence less profitable for the aggressors. In the case of state predators, for example, domestic firms and foreign investors allied to the target enterprise can impose costs through investment withdrawal. Alternatively, electoral pressure, public protests, or behind-the-scenes lobbying by the allies of the target firm can make a difference. Vocal support of the owners by the community where the firm is located also makes collusion between private predators and the local government less likely. State expropriators below the top executive level are particularly sensitive to negative publicity, as it can trigger their demotion in the bureaucracy.
In sum, secure property rights can emerge through a process with substantial bottom-up initiative by the potential victims of expropriation, rather than a single top-down act by the state executive, as conventional wisdom suggests.
My bottom-up stakeholder model has profound implications for development, since development is unthinkable without secure property. While state institutions are commonly treated as the sine qua non of secure property rights, their establishment typically involves substantial resources and shifts in norms on the part of rulers and bureaucrats alike. As a result, the realistic timeframe for generating such institutions may be measured in decades or even centuries, not years. Bottom-up stakeholder alliances present a prime case of “second-best institutions.” They may be less desirable than an impartial and effective state, but since this ideal is often unattainable, they can be the best way to launch developing economies onto an evolutionary path toward secure property rights.