Russia's Virtual Economy Part 5 - U.S.-Russian Business

The concept of relational capital can be used to revise the spatial representation of the Russian transition economy. There are now two state variables that describe the nature of an enterprise. In addition to the dimension of market distance, enterprises can be arrayed in terms of their level of relational capital. The initial conditions of an enterprise can thus be described by a two-dimensional space, r-d space, in which each enterprise has its own location.

Whether one views the enterprise sector in a single (d) dimension or in the two dimensions of r-d space is critical for how reform policy is understood. The conventional, unidimensional, view assumes that economic reform measures will have the greatest impact on those enterprises that have the highest level of d. According to this assumption, for example, if budget constraints are tightened, enterprises that are farthest from the market will be under greatest competitive pressure. Similarly, it is assumed that if the economy is opened to international competition, the greatest impact will be on those enterprises that are most in need of restructuring. In the two-dimensional r-d space environment, the effects of market-type reforms need not have this property at all. Tightening the budget constraint will not necessarily put the most pressure on the enterprise that is most inefficient (has the highest d). If the enterprise has been endowed with high r, it may be insulated against the impact of this policy; it can use relations to evade the budget constraint. And if tight budget constraints are enforced against enterprises that are lower in r, then the policy may, in fact, have greater impact on low-d enterprises than high-d enterprises.

It is not just the initial levels of either r or d that matter, of course. An enterprise’s location in r-d space is not the immutable relic of its past. It depends on the path of enterprise investment decisions. If the enterprise has invested in r, it will improve its resistance to policies of tight budget constraints. The enterprise director’s problem is to decide how much to invest in reducing distance and how much to invest in relational capital.

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Hewett, E. 1988. Reforming the Soviet Economy. Washington, DC: Brookings Institution Press.

Karpov, P. 1997. “On the Causes of the Low Rate of Tax Collection (Nonpayments in the Fiscal System), General Causes of the ‘Payments Crisis’, and the Possibility of Restoring the Solvency of Russian Enterprises.” Report of the Inter-Agency Balance-Sheet Commission, chaired by P. A. Karpov. Moscow (December). [In Russian].