Russian and Chinese Entrepreneurs

Attitudes to Legal Infrastructure

By

William Gamble

September 20, 2005

An international team of economists from the World Bank; the University of California, Berkeley; and the Center for Economic and Financial Research, did a study of the opinions and sentiments of Russian and Chinese entrepreneurs. The studies covered seven cities, including the capital.

It is not surprising that both groups of entrepreneurs thought that the main problem was a weak legal infrastructure that encouraged corruption and did not protect property rights. What was interesting was the difference in attitudes between Russian and Chinese entrepreneurs toward the state.

According to the study, the Chinese entrepreneurs claimed to encounter fewer problems from the state than in Russia. The Russians felt that corruption in state agencies and the courts was a severe impediment to doing business. In contrast the Chinese business men believed that their courts could protect them against government excess. The Russians placed more faith in people, while the Chinese entrepreneurs believed that the state could solve more problems.

Although the differences between the Russians and Chinese appear to be in conflict, they can be easily explained by the difference in structure of Russian and Chinese business and government.

When legal systems do not work or do not exist business finds an alternative. The Chinese call this guanxi. In Russia I the word is svyasi or connections. In English we usually refer to it as a network. The reason it works is described by game theory. Everyone within the network must maintain a good reputation by not cheating or get thrown out of the network. It is fine to cheat someone out side of the network.

For a variety of reasons, Chinese entrepreneurs have utilized the network of the Chinese Communist Party. This allows them to rely on the local courts and government to actually protect them especially from the central government excesses. Local government is usually a part owner of the enterprise and it uses its power to benefit local entrepreneurs. If the entrepreneurs are not local, they are usually foreigners, who benefit the local economy with foreign capital.

In Russia, entrepreneurs are more often local and private. The local government bureaucrats have no economic or relational stake in the enterprises as they do in China. Therefore, their incentive is to collect rent as an adversary to the entrepreneur by placing various road blocks that would require bribes to remove.

In both systems, as long as the government has power over local businesses either through ownership or through excessive regulation, corruption will increase. The only sure way to prevent the corruption is to limit government by limiting government ownership and by limiting bureaucratic power and discretion.

From: William Gamble

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