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The Red Mafia: A Legacy of Communism

by Annelise Anderson

The mafia is a major feature of Russia's experience in making the transition to a market economy. This article inquires into the nature and origin of this phenomenon. The evidence suggests that the Russian mafia phenomenon is a direct outgrowth of the informal economy and related corruption that was a significant part of the economy of the Soviet Union. Economists have usually concluded that the informal economy improved efficiency and consumer satisfaction in the Soviet economy. As aspects of this informal economy have developed into mafia activity, it has become less benign and is a possible threat to the success of the market economy in Russia because it threatens to defeat competition and thus the major benefit of a market economy.

In Lazear, Edward P., ed.Economic Transition in Eastern Europe and Russia: Realities of Reform. Stanford, Calif: The Hoover Institution Press, 1995.

Copyright 1995 by the Board of Trustees of the Leland Stanford Junior University


      This chapter inquires into the mafia phenomenon in Russia to evaluate its potential for threatening the success of economic reform. The first section considers the term mafia in popular parlance and in the economic literature. The second section looks at the conditions historically associated with the development of mafias. The third section addresses the underground economy in the latter years of the Soviet Union as the framework from which the current Russian mafia, the subject of the fourth section, developed. The claim that Russia's problems with crime are merely an early stage of capitalism is addressed in the fifth section. A final section considers public policy approaches.

Mafias and Organized Crime

      Economists are uncomfortable with the term mafia, preferring to talk and theorize about organized crime and the criminal firm. The resulting speculations or models are sometimes intended to characterize the entities known to the public and the press as mafia organizations. At other times they are more general, intending to cover all organizations engaged in criminal activity, with the assumption that mafia organizations fall in this more general category.

      The term mafia arose in Italy around 1865 to characterize some powerful Sicilians or Sicilian families engaged in violent and criminal activity who also achieved considerable control of local economic activity. (The term encompasses similar activity by Neapolitan and Calabrian organizations.) In the United States the term was adopted to describe organized criminal groups engaged initially in gambling and loan-sharking and later, during Prohibition, in illegal liquor traffic. As early as the 1970s in the Soviet Union mafia described the combination of underground economic enterprises and the officials involved with those underground enterprises as protectors and beneficiaries. Today it is used to describe a wide range of criminal activity in Russia.

      In Italy and the United States mafia has a more specific meaning than is implied by organized crime, even though the two are often considered to be synonymous. Many crimes are undertaken by gangs or groups with some division of labor, a hierarchical structure, and a distribution of the spoils. (Even small criminal groups, such as a gang that robs banks, have some organizational structure: someone drives the getaway car and someone else rides shotgun; positions in the structure may be vacant and need to be filled.) A gang that robs banks, however, is not a mafia, nor is a terrorist group, despite its use of violence. Neither organization nor violence associated with criminal activity is sufficient to define a mafia.

      The term mafia is more often associated with illegal market enterprises providing drugs, illegal liquor, or gambling. These are usually ongoing enterprises in which arrangements and agreements that are not legal contracts are made among participants. To go beyond personal relationships in which deals are completed at face-to-face meetings, participants may need a larger organizational structure to enforce agreements among members of the group and outsiders and to punish or redress violations thereof. Indeed, the successful groups in such enterprises may be those who succeed in establishing such organizational structures. Such structures may greatly increase the size of the deals they can undertake, expand the scope of their market (the distance over which they can do business and the number with whom they can deal), and entail the use of violence or the threat of violence. An organization able to enforce agreements and punish violators is also likely to decide which agreements it will enforce. It may come to control entry into various lines of criminal activity and the behavior (at least to some extent) of those who come under its protection. Thus a characteristic of a mafia is that it performs governmental functionsÄlaw enforcement and criminal justice -- in spheres where the legal judicial system refuses to exercise power or is unable to do so.

      Another characteristic of mafias is their influence in the legal law enforcement and criminal justice systems. Leaders of the mafia may succeed in bribing individuals anywhere in the criminal justice system - police, courts, corrections. Cases may be dismissed, juries bribed, sentences reduced, parole lifted. The mafia may agree in some cases to use its powers on behalf of others who are not generally under its protection. Thus a characteristic of a mafia is that it performs governmental functions -- law enforcement and criminal justice -- in spheres where the legal judicial system refuses to exercise power or is unable to do so.

      T.C. Schelling of Harvard University, perhaps the first economist to address the mafia phenomenon analytically, defines organized crime as "large-scale continuing firms with the internal organization of a large enterprise, and with a conscious effort to control the market" (1967, 115). Schelling considers the suppression of rivals, possibly in collusion with the police, one of the basic skills of organized criminal groups and argues that their basic business is extortion from the criminal enterprises that actually supply illegal goods and services to the public (Schelling 1971).

      Economist William Jennings agrees that organized crime is carried out for profit by groups but rejects monopoly as its defining characteristic. Instead, he says that "organized crime is distinguished from other group-based crime by the degree to which organized crime employs resources to insure that its members do not aid the police" by requiring oaths of loyalty and silence (Jennings 1984, 317). Jennings developed a model that incorporates profitability and the costs of administering and enforcing oaths of noncooperation with the police, given probabilities of apprehension and conviction, to predict what kinds of crime will be undertaken by organized criminal groups. From the model he predicts that mafias will avoid offenses such as shoplifting, where direct observation is the basis of apprehension, and specialize in activities where oaths are of greater relative advantage. Becker and Stigler (1974,4) suggest another reason mafias are found in ongoing illegal markets: "It is difficult to bribe or even intimidate the enforcers who would be involved in a nonrepetitive violation."

      In Jennings's model the cost of enforcing the oath of noncooperation with the police is a function of the probability of arrest and of time in jail, but the cost is also a function of the authorities' efforts to develop informants among the criminal group and the vulnerability of members to such efforts. One cost of enforcing noncooperation is punishing violators of the oath; in the American and Sicilian mafias the punishment is death. There are also the costs of preventing cooperation by offering, in return for taking the oath, the benefits of membership in the organization: the opportunity to participate in profitable businesses and financial aid and the influence the group leaders wield over the criminal justice system for those arrested.

      The groups that fulfill Jennings's definition of organized crime, including specifically the American and Italian mafias, have one other characteristic: they devote resources not only to ensuring that members do not cooperate with the police but also to corrupting the legal and regulatory authorities. It is this last characteristic --the corruption of legitimate government authority -- that warrants the term mafia in popular parlance around the world, and it is in this sense that the term was first used in the Soviet Union. A mafia, then, is a group that is characterized by profit-oriented criminal activity, that uses violence or the threat of violence, that expends resources to discourage cooperation of its members with the police, and that corrupts legitimate governmental authority.

      When legitimate governmental authority becomes corrupted, the government may lose, if it ever had, the power to protect citizens and legitimate businesses from criminal activity. For example, theft and fencing become more attractive than other crimes when those who fence stolen goods are not prosecuted. But worse, the subversion of the criminal justice system allows the mafia to run protection rackets, that is, to extract payments from, control entry into, and mandate conditions of operation of legitimate business enterprises. Under these circumstances the mafia uses its influence in the criminal justice system to perform activities comparable to the taxing and regulating powers of legitimate government. The corruption of the government may extend beyond the criminal justice system to other regulatory agencies or agencies that award contracts or grants.

      A full-fledged mafia can therefore have serious consequences for the economic growth of the legitimate economy. The mafia may create monopolies in local enterprises, control entry, and maximize revenue by extracting monopoly profits us protection payments. New investment may be discouraged and old investment driven out. Risk-averse investors are likely to seek localities less arbitrary and dangerous.

      Pino Arlacchi (1986, 229-30), a sociologist and leading expert on the Sicilian mafia, points out that in the 1970s and early 1980s the areas of southern Italy with the highest growth rates were those with the lowest levels of both organized and conventional crime, whereas those areas with the greatest mafia presence were the only economically stagnant regions of Italy. In a survey designed by Arlacchi of young Italian industrialists, almost 27 percent of respondents in the three regions of Italy where organized crime is the most established claimed to have decided not to invest in their area because of criminal pressure (the average for the country was less than 3 percent). In the same three regions 58 percent claimed that they had withdrawn tenders for public contracts as a consequence of criminal threats or political pressure (The Economist 1994, 53-54).

      This relationship leaves open the possibility that a common factor is involved in both the mafia presence and the poor economic performance. Political scientist Robert Putnam (1987), who studied representative regions in Italy in the 1860-1920 period and in the 1970s, suggests that the weakness of civic associational culture could be responsible for both. Putnam found that civic participatory culture in the earlier period was a strong determinant not only of civic culture but also of economic development (e.g., the percentage of the labor force in industry) in the later period, indeed a stronger determinant than the level of economic development in the earlier period.

      The American and Sicilian mafias admit members, socialize them to their responsibilities, enforce the oath of noncooperation, and deliver the benefits of their influence over the criminal justice system. They may control entry into illegal and legal markets as well. But those organizations are not themselves the economic entities that undertake criminal enterprise. The criminal activity - the businesses operated by the members of the group that bring in the revenue - is undertaken by enterprises far less permanent than the group itself and often involving outsiders. The economic structure is not the same as the governing structure.1 For particular illegal markets the organization may function like a cartel, a franchiser, or a trade association, with the significant difference that it does not leave the monopoly of violence to the state.

Why Mafias Develop

      Historically, three major conditions are associated with the origins and development of mafias: (1) an abdication of legitimate government power, possibly encouraged by the population's rejection of government authority, (a) excessive bureaucratic power, and (3) the financial potential of illegal markets. These conditions may interact, each providing growth opportunities to a mafia originating for one of the other reasons.


      The island of Sicily, with a long tradition of resistance to outside domination, saw the rise of the Sicilian mafia in the second half of the nineteenth century, especially after the unification of Italy in 1870. Raimondo Catanzaro, an Italian scholar, notes that both "before and after unification, people tended to use new systems of private protection for securing their land and property" (1992, 6). The Sicilian case is thus an example of the rise of a mafia in a vacuum of power or of the inability or unwillingness of the state to ensure public order in a society that had turned, over hundreds of years, away from state power to private means of protecting property and ensuring order (Catanzaro 1992, 20). The state implicitly let local powers control peasant unrest. Catanzaro concludes that "in contrast to what had happened in the past, [violence] occurred within the framework of the weak authority of a state that formally held, but failed to exercise, the legitimate monopoly over violence. It therefore compelled the state to come to terms with those who exercised de facto power at a local level and to delegate to them the functions of exercising that monopoly. Indeed, in practice, the state deferred to their authority, for although it officially prohibited private violence, it nevertheless granted the power to govern on behalf of the central government to that same local ruling class that made use of it" (Catanzaro 1992, 76).

      Owners of large estates hired gabelloti (custodians) to run the estates in their owners' absence. The mafia put many of its men in gabelloti positions and thus achieved control over products and manufactured goods going to market as well as control of the peasants. Thus the mafioso played critical roles of mediation among peasants, landowners, and the state and between the countryside and the outside world (Chubb 1989, 9).

      Between 1925 and 1929 the Italian Fascists made a concerted effort to eliminate the mafia and reestablish government control of the use of violence, but Prefect Cesare Mori - the man implementing this effort - was dismissed when he targeted powerful people supporting the Fascist regime. Mori's effort did replace mafia control of the relationship between peasants and landowners with state control, but it did not eliminate the problem. The mafia reestablished itself when fascism fell and was given a further boost when the Allied occupation in 1943 turned to local powers for assistance in governing (Catanzaro 1992, 110, 113-114).

      The Italian government is not the only government that has fumed to nonstate violence to accomplish what it was unwilling to do for itself. The U.S. Navy turned to Lucky Luciano, the imprisoned leader of the American mafia, to protect the New York docks from Nazi sabotage during World War II (Sterling 1990, 56). They were indeed protected, and it is reasonable to assume that the methods used were not ones the U.S. government would have been willing to employ.

      Two U.S. economists, Stergios Skaperdas and Constantinos Syropoulos, provide a theoretical model of how gangs, which they interpret as primitive states, develop in situations of anarchy. They define gangs as long-lived organizations involved primarily in economic activity and having a near-monopoly of violence in a defined territory and a symbiotic relationship with the authorities. "Gangs emerge," they say, "out of situations in which there is a power vacuum that the State is unable to fill" (1994, 4, 5). One reason may be geographic isolation (as in nineteenth century Sicily), but the inability to govern does not require such geographic distance - for example, the inner cities in the United States. Illegal markets are another source of anarchy. When a government makes a product or service illegal, it also ceases to enforces some laws, such as contract law, in the illegal market.

      In the Skaperdas-Syropoulos model, primitive states arise not out of cooperation but out of coercion. Initial endowment of resources are important in determining which people become the rulers, as is relative efficiency in producing the means of coercion (e.g., guns) rather than consumer goods: "the agents with the comparative, advantage in unproductive activities and a greater number of resources become the rulers of the anarchic territory or, in another interpretation those agents have higher rank within the organization emerging out of anarchy (1994, 15). In the resulting primitive state people more efficient at producing consumer goods will seek to migrate to less arbitrary and coercive states.

Excessive Bureaucratic Power       In general, excessive bureaucratic power and discretion provide the basis for corruption -- for bribery, shakedowns, and extortion -- especially when the criteria for bureaucratic decisions are unclear and difficult to monitor and evaluate. The corruption of a bureaucratic agency may begin with the clients of the agency, such as the members of a regulated industry. Thus building contractors may seek to speed up the work of the agencies that give building permits. More often, however, the bureaucrats originate the corruption by demanding payment. Getting a government contract may require a kickback; tips or bribes may be necessary to secure a wide variety of government services. In the Soviet Union bribes were necessary to secure everything from drivers' licensee to medical care and even higher education, as well as goods.

      This sort of corruption Is worldwide and does not necessarily lead to the development of full-fledged mafias. Rather, corruption may be sporadic and action to correct it possible, or a standard pattern of paying government bureaucrats for their services may emerge. Government positions may be awarded to favored people to give them access to a share of the political spoils -- a form of bureaucratic mercantilism. Bureaucratic corruption takes on a mafia character when violence or threats of violence are used to exclude competitors and thus to control market entry or access to contracts. At this point the efficiency benefits sometimes attributed to bribing government of officials to do faster or better what they ought to do anyway collapse. Corrupt bureaucrats in collusion with criminal gangs - "the mafia" - may monopolize industries, award inflated contracts, and operate outside public safety standards. The activity may be extraordinarily persistent, defying repeated investigation and prosecution, as has been the case in New York City's construction industry (Rowan 1988, 129-138).


      In the United States, Prohibition created the potential for a major illegal market in alcohol, and America can trace the growth in scope and power of its mafias to the Prohibition years. Illegal market enterprises generate a good deal of cash that can be used for bribes and investment in other industries. It is easier for legal authorities to overlook voluntary trade among consenting adults, even if illegal, than it is to take bribes to permit crimes that involve victims. Law enforcement agencies may be able to meet their quotas for arrests more easily if they cooperate with the market leaders in illegal industry. The police may exclude new entrants or drive out competition by enforcing the law in cooperation with the dominant criminal group. Illegal drug markets have been a major factor in the virulence of the Sicilian mafia in the last several decades.

The Mafia Phenomenon in the Soviet Union       Two of the three conditions historically related to the development and growth of mafias -- excessive bureaucratic power and illegal markets -- were characteristic of the Soviet Union before its breakup at the end of 1991. The literature on the underground economy in the Soviet Union paints the following picture

  1. A substantial underground economy - "off the books" of the state-owned enterprises-operating within and in association with the legal or planned economy. This was in addition to legal private enterprise, such as the private agricultural plot.

  2. Bribery and extortion as systematic features of economic transactions throughout the economy. From retail outlets to large manufacturing enterprises to medical care and education, bribery was standard in state-operated enterprises and private businesses, both for private gain and to achieve the goals of state enterprises.

  3. Monitoring and control by the Communist Party and other bureaucrats of all aspects of economic activity at all levels of the economy.

  4. Knowledge by those in positions of authority of the underground economy and the bribery and extortion. Selective enforcement of the variety of laws, rules, and regulations governing conduct and selective use of other powers (for example, the approval of job assignments) enabled the authorities to control or manipulate underground economic activity for their own political purposes.

      Joseph Berliner's study (1957) of management methods and factory operations in the USSR between 1938 and 1957 demonstrated that, even for factory managers whose goals were consistent with the incentive structure of the planned economy, "only by engaging in irregular practices can the manager run a successful enterprise" (324). To meet plan targets (and receive bonuses and promotions) under conditions of continual shortages, the effective factory manager used influence (blat) for a variety of purposes. The factory position of tolkach developed to obtain "all manner of scarce commodities through a combination of influence and gifts" (319). In return the factory manager or the tolkach provided supplies or services to others through various illegal methods, such as labeling good products as rejects.

      In the mid-1970s a number of studies demonstrated that the irregular economic activity in the USSR went beyond the pursuit of goals and rewards defined by the state. In a 1977 article, Gregory Grossman of the University of California at Berkeley describes the major forms of illegal economic activity in the Soviet Union. He drew on a variety of sources including extensive Soviet press reports and accounts of emigrants. Stealing from state enterprises including collective farms was practiced "by virtually everyone," providing extra income to employees and "an important, often indispensable, basis for the second economy" (29). Grossman cites peasants stealing fodder, workers stealing tools and materials, physicians stealing medicines, drivers stealing gasoline, truck drivers diverting freight, and enterprise managers diverting goods either to the black market or into barter channels for needed supplies (29-30).

      In the Soviet economy shortages of consumer and producer goods provided the opportunity for additional income at all stages in the process of exchange. Goods arriving at retail stores were often set aside for preferred customers who paid extra, the extra funds - not entered on the books - going into the pockets of employees and management. Those who controlled the distribution of producer goods, housing, and consumer durables were often in a position to extract additional payments from consumers (Grossman 1977, 30). Speculation in a variety of goods was another form of illegal economic activity.

      Illegal production was also a feature of the Soviet economy in construction gangs, household and automotive repair, tailoring, and other services (Grossman 1977). Some underground firms, often operating under the cover of state-owned enterprises, produced goods. These underground firms "are privately bought and sold at capitalized values that presumably reflect their expected profitability discounted for risk." Such activity had gone on since at least 1952 (30-31).

      All this illegal market activity was accompanied by gifts or bribes to "highly placed authorities, ranging up to the ministerial level; local government chiefs; and, not least, provincial and possibly higher party secretaries and first secretaries" (Grossman 1977, 32). Reporting the sale of a variety of official positions for relatively large sums of money, Grossman finds that the process of bribery and graft was institutionalized. "Very probably there is a close organic connection between political administrative authority, on the one hand, and a highly developed world of illegal economic activity on the other. In sum the concept of kleptocracy . . . does not seem inapplicable" (33). In Georgia, underground entrepreneurs were reported to have "significant control" over major party appointments in the republic. "Illegal private economic activities," Grossman concludes, "are a major and extremely widespread phenomenon that for a very large part of the population is, in one form or another, a regular, almost daily, experience" (36). Grossman also notes that laundering illegally earned cash was a major problem, often accomplished by purchasing winning lottery tickets from the winner (37n. 44).

      Konstantin Simis was a Soviet defense attorney who had many clients involved in the underground economy. He considers bribery and corruption fundamental to the nature of the Soviet regime - "the most prominent characteristic hierarchy. . . unfettered either by the law or by public opinion" (Simis 1977, 35). Those involved in the corruption include "secretaries and heads of departments within the district committees of the Communist Party, district-level KGB and militia commanders, the chairmen of district executive councils, their deputies and departments heads, as well as the heads of district inspectorates (the fire, public health, sanitation, and veterinary services) and, in districts not forming part of a large town or city, the district prosecutors" (36). In general, "the entire senior staff of a district - from the Party secretary to the public prosecutor and the militia chief - provide protection for the very same directors of state farms and shops and chairmen of collective farms who are engaged in criminal activity (embezzlement, deception of customers and fraudulent stock-keeping) . . . any attempt to combat such organized crime is doomed to failure. Even when the criminal activities of a local mafia are reported to higher authority, there is as a rule no attempt to crack down on them, and the mafia then has a chance to round on those who tried to have their crimes exposed" (38).

      Simis's use of the term mafia, an early one in writing about the Soviet economic system, whether journalistic or academic, is consistent with conventional use - criminal activity protected by the authorities, against which the ordinary recourse of going to the police proves unproductive. Simis tells many stories about defending people involved in the underground economy in the Soviet Union, several of which involve people who reported criminal activity and corruption to the authorities and, as a result, were forced to leave town or were themselves prosecuted. Thus the extensive rules and regulations were selectively enforced to meet the objectives of those in power (Simis 1982, 68-72). As a junior Soviet official said, "The government knows exactly who is dealing in what - arrests are made only when there is some larger political reason" (O'Hearn 1980, 219).

      Simis's description of how underground business enterprises function in the absence of legally enforceable contracts resembles the privately adjudicated Law Merchant in Europe in the early Middle Ages, whereby a community of traders was able to ostracize those of unreliable reputation (Milgrom, North, and Weingast 1990). Disputes in the Soviet underground economy were heard by arbitrators who had a reputation for fairness and impartiality. The parties to the dispute agreed to be bound by the results, with which they usually complied. Cheating and misrepresentation were dealt with by ostracism from a community that had some solidarity. Regional communities doing underground business were relatively small, and regions were linked; word of unreliability spread rapidly. In Georgia and Azerbaiijan there were, Simis reports, people murdered for "nonfulfillment of commercial obligations" but he knows of no such instances in the Baltic republics, Ukraine, or central Russia (1982, 155-56).

      Simis (1982) also reports that since the 1950s private enterprise has often been entered by buying an existing businesses operating within a state-owned enterprise. The purchaser acquired the right to the equipment and labor the previous owner had used "off the books," as well as the previous owner's connections within the state-owned enterprise and with outsiders. Sometimes even a private escrow arrangement was used (159). Simis describes a business that he claims is typical, one of whose principals he defended. The three brothers who owned the business, which produced leather products, made decisions jointly or by majority vote. The day-to-day managers were employees of the state-owned Moscow enterprise within which the business operated. The directors of the sate-owned enterprise were paid by the brothers for useful connections, but they did not exercise control over the private enterprise activities. The twenty-eight co-defendants in the case, even those who had admitted guilt, gave little information about the main defendant or the violations of others - because the three brothers were committed to continuing their off-book salaries and paying their legal expenses provided they did not betray others or be "overly frank" with the authorities (162). The code here is similar to that of a mafia family.

      These three brothers maintained good contacts with ministry officials and bribed "people in laboratories or research institutes" to inflate raw material requirements and allowable waste for state production. Thus more would be left over for off-book production. Relations with other factories producing related inputs were good (Simis 1982, 164). In time the output of this privately owned business became large enough to establish a traveling sales force selling to sixty- four regions and towns (165). (The brothers falsified or counterfeited the bills of lading required for transporting the goods.)

      Aron Katsenelinboigen (a Soviet emigrant) and Herbert Levine (1977) categorize the various market relationships in the Soviet economy and describe practices such as bribery and obtaining cash through paying phantom employees. Two articles by Gerald Mars and Yochanan Altman (1987a, 1987b), case studies of firms in the underground economy of Soviet Georgia, describe in detail how supplies are obtained for production, how goods are transported, bookkeeping and documentation problems, and bribery.

      A paper by Peter Boettke and Gary M. Anderson (1992) provides an overview of legal and illegal private economic activity in the Soviet Union and recounts a variety of instances of bribe taking and the sale of important positions, concluding that they are "not isolated cases, but endemic to the Soviet system. Moreover, positions of political authority or influence allow for the holders to extract rents from individuals throughout the economy . . . Protection from legal sanction and regulation was a lucrative source of revenue for strategically placed officials" (24).

      Boettke and Gary Anderson (1992) interpret the Soviet economic system as a form of mercantilism - "an economy where the central government sells strategic rent-generating positions within the economy for the purpose of raising revenue" (6). The function of the central plan was, they propose, "to protect the value of mercantilism monopoly rights" and was thus an important device for monitoring competition within and among cartels (15, 30). The controlling organization was the Communist Party, which determined important appointments and supervised enterprises. Loyalty was rewarded, but rewards - especially the nonmonetary rewards of access to better housing, medical care, food, recreation, and so forth - could be withdrawn if an individual fell out of favor with the party.

      Economists Hillman and Schnytzer (1986) apply the concept of rent seeking2 to the information provided by Simis, Grossman, and others, noting that "the evidence reveals that the illegal economy is not marginal to the official and officially-sanctioned systems" (88). They consider rent seeking an alternative to and better analytic framework than Grossman's kleptocracy. They note that the rents received by officials in the hierarchy were not capitalizedÄloss of a job meant not only loss of income, legal and illegal, but also loss of special privileges. They suggest that this situation leads to an economic theory of the purge. Purges undertaken from above are rent protecting, eliminating competition from below; purges undertaken from lower levels are part of the process of competing for rents (93-94). Like Boettke and Anderson, they find vested interests a substantial problem for reform. "To the extent that a centrally-planned economy generates rents . . . it is rational for individuals to engage in rent-seeking and, consequently, rent-protecting activity The uncertainties of the market remain, while the bureaucratization of society and the illegality of most market operations give rise to a plethora of rents" (97).

      In the Gorbachev era (1985-1991) two pieces of legislation, the Law on Individual Labor Activity, which went into effect in May 1987, and the Law on Cooperatives of 1988, significantly affected the underground economy. These laws legalized private business (albeit with a variety of restrictions), by January 1, 1990, about 200,000 cooperatives were in operation (Jones and Moskoff, 1991, (16, 17). Some of the cooperatives were former underground enterprises that became legal; others, according to Jones and Moskoff's book on the cooperatives of the Gorbachev era, were fronts for racketeers. Some were spontaneous new business ventures; some were created by local governments; but the largest number were created within state-owned enterprises, often by the managers. Like their underground predecessors and the state-owned enterprises, they had supply problems and used venous illegal sources and methods of supply. They also found bribery essential to survival; for example, bribes were necessary to obtain office space in Moscow (36-38, 78-85). In summary, "there were crimes committed by cooperators themselves, crimes perpetrated against the cooperatives, and wholesale extortion committed from top to bottom in the state government" (92).

      The cooperatives came under attack for high prices (open on goods diverted from the state sector) and, in general, their profit orientation, which conflicted with the socialist mentality. The government regularly changed the rules - on licenses, lines of business, prices, hiring, taxation - for cooperatives and brought a variety of law enforcement actions against them, at the same time failing to protect the cooperatives from criminal activity, especially protection rackets Cooperatives responded by paying protection (75 percent of the cooperatives in Moscow and 90 percent of those in Leningrad made protection payments) and establishing their own protection services (Jones and Moskoff 1991, 85-86). Jones and Moskoff also state that violence against cooperatives during the Gorbachev era was "occasional," but threats may have been more common. In the words of former Yekaterinburg police official Yuri Mizum, "When cooperatives were permitted in the mid-80's . . . authorities saw no need to provide them with any special protection. We were all taught to regard private property as somehow illegitimate anyway. The police stayed away from these businesses like the plague and offered them no help, so of course when they were threatened by black marketeers, they had no alternative but to go along. Now, it's too late" (Handelman 1993, 30).

      Under the cooperative legislation many new banks were also created. Although some were independent, some of them were created by associations of cooperatives and made loans to their owners, thus providing the funds the state-owned banks were unwilling to lend. Another group was created by state-owned enterprises (often with partial ownership by government ministries) and made loans to state-owned enterprises.

The Russian Mafia       In the 1960s and 1970s - and on into the 1980s - the Soviet economy was characterized by extensive illegal market activity involving systematic bribery of people in positions of power, which was primarily in the hands of the Communist Party. The close association between illegal market enterprises and the authorities marked this system as mafia,3 although it differed in one important respect from the classic mafias of Italy and the United States: violence appears in almost all cases to have been exercised not by the underworld but by those in positions of power, through the purge in Hillman and Schnytzer's interpretation or, from Boettke and Anderson's viewpoint, the government structures enforcing state mercantilism. As far as can be judged from available accounts, it was individuals or groups in the official sector who competed for the monopoly rents, not underground operators.

      During the late 1980s, however, violence or threats of violence began to come from gangs, who had a vulnerable target (the new cooperatives) and, increasingly the means - firearms and other weapons. By the time of the Soviet breakup in 1991, Soviet officials had identified more than seven hundred gangs or clans operating in the Soviet Union. Organized along ethnic or family lines, each gang was headed by a boss called the thief-in-law (Handelman 1993, 40). By the late 1980s identifiable gangs based on ethnic ties were operating in Moscow. For example, the Chechens controlled black market car sales; the Azerbaijanis had the fruit and flower concessions (Newsweek 1993, 38).

      Since the breakup of the Soviet Union and the demise of the Communist Party, many more gangs have formed that compete with one another for control of illegal markets and the territories for protection rackets. They began using violence extensively in that competition and against uncooperative legitimate entrepreneurs in early 1992. In Moscow and other major cities murders have increased substantially (many of them associated with gangland-style shoot-outs), as have crimes such as burglary, mugging, car theft, and robbery (Bohlen 1993, Al; Newsweek 1993, 38). Russian authorities have provided various estimates of the number of crime groups now operating in Russia, ranging from 2,600, of which 300 are "large syndicates" (Handelman 1993, 15), up to 3,000, of which 150 have become "well-organized fraternities" (Bohlen 1993). Nine or ten large gangs from other regions of Russia operate in Moscow (Bohlen 1993, Al).

      Banking and finance are especially targeted by the mafia in postcommunist Russia. Between December 1992 and August 1993, there were eleven violent attacks against bankers, some of which were fatal (Bohlen 1993, Al). One reason for blackmailing and threatening bankers is to gain access to their books to determine which enterprises to target and how much to extort (Bohlen 1994, 6).

      In Yekaterinburg an investment broker whose business and influence had police think, grown to the point where it was threatening the local mafia was gunned down in September 1992, the fourth such murder in six months. Five gangs, at least one headed by a respected person in the community, are believed to be involved in export-import operations, banking and finance, and construction, as well as the Uralmash machine-producing complex. A Yekaterinburg Internal Affairs spokesman is quoted as saying, "No honest businessman can do anything in this city unless he pays unofficial taxes to crime groups, who in turn control many of our officials through bribes" He believes that "corruption has already penetrated some of the highest levels of the Government and security forces" (Handelman 1993, 32).

      The Uralmash mafia, named after the state enterprise where it originated, is especially interesting it was active in black markets in the days of the Soviet Union, selling goods and materials from Uralmash plants in return for needed supplies. With the state enterprise in financial difficulty in 1991, Handelman reports that, according to the police, the group "virtually moved inside the factory door." It "set up subsidiaries to purchase directly from the factory's assembly line, took over the factory's former Soviet-style youth club and established [its] own soccer team, restaurant, sportswear outlet and, reputedly, brokerage house" (Handelman 1993, 40). Handelman presents no information on what, if anything, this group is now doing that is illegal; this story thus illustrates the problem of sorting out the legitimate from the criminal. The brothers who ran the Soviet-era underground operation have, it would seem, brought their business aboveground and made it legitimate; if they must still proffer bribes to local officials, are they mafia or are the police overeager to so identify them?

      One mafia source in Moscow provided writer Andrew Solomon with a description suggesting that Russia's gangs are developing the characteristics of classic mafia families - recruiting members and helping them with law enforcement problems. The source claimed that more and more young people are interested in joining the mafia. "When I get in trouble he said, "the family helps; I was in prison in Finland, and they got me out" (Solomon 1993, 38-39).

      Another kind of story about the Russian mafias is the direction of violence by the state agencies themselves. According to Handelman, "assumptions are widespread that the crime groups are not only protected, but also in some cases instructed by Government officials and the police" (1993, 32). A government report prepared for President Boris Yeltsin noted that police officers tip off gangs about vehicles carrying valuable cargo in the city of Tver. The same report noted that 70 to 80 percent of private businesses and commercial banks in major cities make payoffs of 10 to 20 percent of their turnover to organized crime (Bohlen 1994, 1).

      Today major illegal activity involves selling or trading raw materials (including oil) at below-market prices. The raw materials are then sold in the West at market prices, and the difference is pocketed by the individuals, sometimes by deposit in a foreign bank account. The security ministry (formerly the KGB) is evidently involved in some export businesses, and other companies involved have been "set up by the Communist Party to get funds out of the country" (Erlanger 1993, As). A commodity trading firm based in Switzerland, headed by Marc Rich, was trading grain, sugar, alumina, and machinery to Russia in exchange for oil and refined aluminum ingot, making profits by "skinning" the Russians. "Has Rich bribed influential pals and bureaucrats in the former Soviet Union?" Forbes asked. "Probably" (Klebnikov 1992, 41-42).

      The accounts of the mafia in Russia are not nearly as detailed as the information that has been gathered over the years about the American and Sicilian mafias by journalists, through court records and the publication of wiretaps, and through testimony before legislative committees. Nevertheless, a fairly clear picture of the current situation is beginning to emerge.

      With the failed coup of August 1991 and the demise of the Communist Party, neither local officials nor those in central government agencies now seem to be constrained in their corrupt activities by any high-level authority. Viktor Shchekochikhin, the president of the Union of Russian Entrepreneurs, puts it this way: "Before, officials took money in a more or less orderly way, because they knew that people could continue to come back to them. They behaved properly, if one can say that. With the arrival of the democrats came temporaries, who know that in the next elections they will be thrown out. They have to assure their future now" (Bohlen 1992, 4).

      Government officials have thus become free to compete within their own spheres of authority using their economic powers and their connections with criminal groups. Their economic influence is buttressed by the continued existence of monopoly production in many sectors of the economy, as well as state control of most output in the major industries (power, communications, transportation). This continuing legacy of the old Soviet economy ensures that connections will continue to be important in obtaining supplies and services.

      Criminal organizations are now willing to use violence. Some of these gangs are new; others existed before the breakup of the Soviet Union. Private protection agencies, often formed by or employing former KGB and army people, may do battle with criminal gangs or front for them. Some larger criminal organizations are absorbing smaller ones and taking their businesses. A small-time hood noted that his gang now supplies muscle for a larger group that controls his gang's old markets. It is widely believed that criminal gangs using violence may at times be operating under the direction and protection of government officials at central or local levels.

      The government's efforts to combat corruption, violence, and business fraud are severely hampered for several reasons. The law itself is unclear, incomplete, and sometimes internally as are property rights. More fundamental is the lack of consensus on what is legitimate, moral, and acceptable versus what is not and thus ought to be illegal and subject to criminal prosecution. The Soviet press vilified participants in the private underground economy and was used to attack cooperatives. Like the purges of the Soviet era, anticorruption efforts may be as much attacks on political opponents as genuine efforts to reform the system. The extent of corruption, and its acceptance and institutionalization as a reward to those loyal to, the communist regime in the Soviet era, makes it difficult to attack. The political forces who support an anticorruption campaign place their supporters as well as their opponents in jeopardy. Even legitimate law enforcement efforts against gang violence and protection rackets may affect the corrupt interests of government of finials.

An Early Stage of Capitalism?       Some Russians and Americans hold the view that crime in Russia, especially organized crime, is simply an "early stage" of capitalism, implying that conditions in Russia today are like those in some earlier era in the United States, perhaps the era of the frontier West or that of the so-called robber barons. "Some Russians argue," Handelman (1993, 50) says, "that a period of lawlessness is part of the price every society pays for radical economic change. Pointing to examples as disparate as the development of the American West and the transformation of Latin American economies, they suggest that without a certain amount of robber-baron-style entrepreneurship, the consumer goods in most Russian cities would disappear."

     "Russia right now is a bit like America west of Dodge City in the mid-1800s," according to George Melloan (1992, A9). "Today's corruption" writes Michael Scammell, a professor of Russian literature at Cornell, "seems to be characteristic of a period of profound change and upheaval, when Russian society is in the stage (to paraphrase Marx) of the primitive accumulation of capital." A Russian friend told Scammell that "the situation should be compared not with profit-making in today's America but with the rough-and-tumble of America of a century ago, and the new entrepreneurs should be compared with the robber barons of those days" (Scammell 1993, 1 IE).

      But the Russian mafia phenomenon and other peculiarities of economic life in Russia have little similarity to conditions in the nineteenth-century United States or to any "early" stages of capitalism.


      An important characteristic of the United States from its formation (and before) was a respect for the rule of law. "For eighteenth-century Americans, like the English writers they admired, liberty demanded the rule of law' writes historian Pauline Maier (1978, 80). Furthermore, property law and contract law had been developing in Great Britain for centuries, and the legal system of the United States drew heavily on British common law. William E. Nelson (1975, 145-64), in a study of the legal system in Massachusetts between 1760 and 1830, found substantial changes in the law on relationships between debtors and creditors and in contract and property law, generally in the direction of facilitating commerce and competition as Massachusetts became less agrarian and more industrialized. But these developments proceeded in an orderly way through legislation and court cases on the basis of colonial and common law.

      As the settlers moved West they sought to adopt the legal codes established in other states and create legal institutions in the new territories and states. Nevertheless, law enforcement was stretched thin on the frontier and the Western states. Sometimes local officials could not handle the problems confronting them, and help from the statewide law enforcement authorities, depending as it did on the state's priorities, was not always available. There were interstate criminal gangs as early as the eighteenth century and, especially in frontier areas, horse theft and counterfeiting of private bank notes; after the Civil War gangs robbed trains and banks (Brown 1969, 44).

      The response to this "absence of effective law and order in a frontier region" was not the gang as a primitive state but a uniquely American response: the vigilante group of citizens who took the law into their own hands. Brown notes that members of these groups were leading citizens in their communities and often well-known public figures. He sees their purpose as establishing in frontier regions the community structure of older areas "along with the values of property, law, and order" (Brown 1969, 63, 64). Some of these groups functioned well; others did not.

      Brown differentiates the vigilante group f rom the lynch mob - "an unorganized, spontaneous, ephemeral mob which comes together briefly to do its fatal work and then breaks up" (1969, 63). In fact it was not until the mid-nineteenth century that lynch mob came to imply illegal hanging or killing. Before that, from its origin in the late 1760s, it had meant whipping or other physical punishment for real or alleged crimes without due process of law. Nevertheless, like the vigilante groups, the motivation of lynch mobs was anticrime and supportive of what was understood to be the law except in the South, where it was racially motivated and the black victims had often committed no offense.

      Thus there was no mafia phenomenon in the early United States. No "gangs as primitive states" emerged. Scholars are also beginning to question the popular assumption that the Western frontier was violent and lawless. A study of two typical frontier mining towns (Bodie, California, in the 1870s and 1880s and Aurora, Nevada, in the 1860s) by Roger McGrath 1989 found that robbery, theft and burglary were rare and that bank robbery, rape, racial violence, and serious juvenile crime were nonexistent (123). A considerable number of homicides occurred, but most were the result of fights between willing combatants - men who were "brave, strong, reckless, and violent" (123, 142).

      It was not until the early twentieth century that "centralized, city-wide criminal operations under the control of a single 'syndicate' or 'organization' began to take shape in New York." Urban criminal gangs appeared in the decades before the Civil War but were "limited in significance and restricted to ethnic 'slum' neighborhoods" (Brown 1969, 45).


      Bribery was not an institutionalized practice in the early United States, but neither was it rare. The Constitution identified bribery as one of the reasons for impeachment (the others being treason and the catchall, other high crimes and misdemeanors). Revelations of bribery brought forth public outrage, and laws were passed relating to conflict of interest and bribery. Noonan (1984) recounts the history of bribery and antibribery legislation in the United States as well as the writings of journalists and novelists about bribery, the general thrust of which is that the public found bribery and corruption severely objectionable. By the 1960s the United States, "unlike any previous society," had "statutes comprehensively extending the criminal law of bribery to almost every class and occupation" (579). With the Foreign Corrupt Practices Act of 1977, the United States "for the first time in the history of the world . . . made it criminal to corrupt the officials of another country" (680).

      It is possible to compare the extent of antibribery legislation in Russia with that in the United States at different times in history, but quantifying the extent of bribery is another matter. Certainly bribery was extensive in the United States in the era of big-city machine politics. "Where the voters, the legislature, or the newspapers of New York needed to be won, Tweed was a bribegiver. Where the city had a say, Tweed took.... Bribery is central ' says Noonan (1984, 525).

      But any comparison or any attempts at quantification is overwhelmed by the fact that in the early United States and even until the Second World War, government expenditures - at all levels - were small relative to the size of the economy (see table 10.1), and regulatory controls minor, so that whatever the level of corruption, its effect on the economy was limited. Most of the economy proceeded unhindered by authorities at either the federal, state, or local levels.


      Changing technology and economic growth provided opportunities for business fraud and dishonesty in the nineteenth and early twentieth centuries. Changing technology is always a source of new kinds of crime, but law enforcement and legislation continually adapt to changing technology. Today the challenge comes from computers and electronic property. The question is not a "stage" of capitalism but the ability to respond to change with appropriate legislation and law enforcement - and appropriate judicial decisions - by building on existing concepts of contract, property, and commercial law. Again, commitment to the rule of law and substantial consensus on what the law should accomplish have characterized the United States since its founding. It is also far easier to deal with business fraud if the authorities are not themselves involved in corrupt practices.


      The early United States differed from Russia today in a number of other important ways.

     The Banking System. The banking system of the early United States had its ups and downs but on the whole served developing farming and commercial interests well. Banks were privately owned, although regulated by state legislatures. In Russia, by contrast, few banks arc truly privately owned. Most are partially or entirely owned by state-owned enterprises, the central bank, or ministries, which have powers left over from their role in the communist era. Writing about how things work, Bill Thomas and Charles Sutherland (1992) say this about Russian banks: "Bankers control business assets by approving (or disapproving) quarterly budgets that have to be sent in long before any withdrawal. And even then, getting them to okay a request often has less to do with the soundness of the budget than the size of the accompanying bribe" (104). Other sources of financing - the capital markets - developed in the early United States, as well, and thus the dependence of business on government as a source of funds was minimal.

     The Interstate Commerce Clause. For the economy, one of the unique aspects of the U.S. Constitution was the combination of decentralization of authority - the central government was relatively weak - and the limitations it placed on the powers of state authorities through the interstate commerce clause. The result was a considerable limitation on the influence of government economy and a check on the powers of state governments through people and businesses' ability to move to competing jurisdictions.

     Taxation. Taxes were low by today's standards, reflecting the low level of government spending. There was no income tax until 1913. Businesses paid no payroll taxes. The federal government collected only customs duties and excise taxes on tobacco and alcoholic beverages (Webber and Wildavsky 1986, 342). The low level of taxation for much of the nation's history may be responsible for the tradition of voluntary compliance and for the low level of corruption of tax authorities.

      In addition, the nineteenth-century United States was a country with a low median age, a minimum bureaucracy, few regulations, virtually no welfare state, a weak central government, capital inflows rather than capital flight, and courts that could draw on the common law to deal with economic change.

      In sum, there is little support for the view that the fraud, violence, and development of mafias in Russia are simply an early stage of capitalism. They have no counterpart in the early history of the United States and have arisen instead from the legacy of the communist era: excessive bureaucratic regulation, massive illegal markets, and, with the demise of the Communist Party, a vacuum of power engendered by confusion in the legal code and unsureness about what should and should not be legal.

      These conditions are not an early stage of capitalism but an early stage of organized crime, when gangs abound, compete for territories and markets, and are especially violent. As some competitors are eliminated (often with the complicity of law enforcement), spheres of influence are established, and future gang wars arise primarily when there are new markets to contest.

      An appealing feature of the early stage of capitalism argument is that time and the normal course of development will provide the cure. Unfortunately this is not the case. Mafias tend to be extraordinarily persistent, probably because the governments that control law enforcement are themselves beneficiaries of the underworld through corruption or other benefits provided by the mafia organizations. In Sicily the mafia controlled peasant unrest in its early years and delivered the vote in more recent times. So unwilling were the politicians to support any definitive strategy against the mafia that law enforcement agencies were unable to counter threats to their own people or other government officials, and the murder of prosecutors and public officials became characteristic of Italian life. By contrast, in the United States law enforcement officials have rarely been at risk from the mafia.

Public Policy Implications       The greatest risk of the mafia phenomenon in Russia is that an entrenched alliance between central or local officials and mafia groups will prevent competition in many markets and reduce the benefits of the fledgling market economy.4 Theft from state-owned enterprises and export for personal gain will continue and perhaps accelerate. More serious is control over market entry in legitimate businesses to create competition with state-owned enterprises or other private enterprises. The means to limit entry is extensive, ranging from demands for excessive bribes to control of permits and licenses, enforcement of detailed regulations, and violence. Significant in this mix is control of the banking system and thus enterprises through the banking system. The primary objective of law enforcement in the economic arena should therefore be the encouragement and protection of genuine competition.

      To deal effectively with the mafia phenomenon in Russia, it will be necessary to eliminate its causes by reducing anarchy, reducing the size and influence of the government bureaucracy, and eliminating most illegal markets.


      It will be difficult for the government of Boris Yeltsin, given the December 12, 1993, parliamentary elections, to pursue reform at the pace his supporters would prefer. Clear legislation on property rights, contract law, and a commercial code may be slow in coming.

      Nevertheless, the executive branch does control law enforcement and can set policy objectives and priorities. If the objective is to encourage competition, law enforcement agencies must target practices that are designed to prevent or drive out competition. By this standard, for example, violence and threats of violence would be more serious than a protection racket that extracts a modest sum from retailers but makes no effort to prevent new businesses from entering the market.

      One former police chief considers the failure of the police to protect legitimate private businesses a key problem, one that began in the Gorbachev era. The new cooperatives had no alternative but to comply with gangs running protection rackets (Handelman 1993, 30). Defending legitimate private enterprise against violence and threats of violence would greatly reduce the scope of mafia activities.

      The courts are a potential source of clarifying the law through its application to specific cases. Unlike the early United States, Russia has no common law tradition on which to draw, but it does have a new constitution that provides a framework for interpreting the statutes. A series of consistent decisions on commercial relationships, contracts, and property, free from political influence, would help reduce confusion.


      One method to reduce the powers of government officials is to reduce their discretion. For example, businesses could be required to register (if necessary) rather than obtain a license requiring official approval. Also, routine small bribes are less damaging than anticompetitive practices that prevent entry. Anticorruption efforts directed toward public officials should be targeted at those who employ the services of groups willing to use violence in pursuit of their objectives.

      Continued privatization will gradually reduce government power and enterprise theft as private owners become residual claimants to profits. The continued privatization of the banking system and the commercialization of banking as a service rather than a device for controlling enterprises will also further competition.

      In the area of taxation, a tax code that eliminates negotiated privileges (tax holidays and the like) reduces discretion and opportunities for corruption. Without special privileges, lower tax rates could collect the same amount of government revenue and sharply reduce the benefits of bribing the tax negotiator or collector and the potential for extortion by government of finials.


      The communist economy created a vast array of illegal markets in products and services that are accepted as legal in market economies. Some prices are still controlled in Russia, providing opportunities for illegal gain in what should be legal enterprise, such as exporting oil rather than selling it internally.

      Russia's new constitution, accepted by referendum on December 12, 1993, includes, in Article 8, a clause that empowers the government to pursue policies that favor competition and limit the powers of local officials to obstruct markets: "In the Russian Federation the unity of the economic area, the free movement of goods, services, and financial resources, support for competition, and freedom of economic activity are guaranteed." A clause in Article 71 places within the jurisdiction of the Russian Federation "the establishment of the legal foundations of the single market; financial, currency, credit, and customs regulation, monetary emission, and the foundations of pricing policy; federal economic services, including federal banks." Article 4 (as well as other clauses) gives primacy to federal over local law (Foreign Broadcast Information Service1993, 19, 26).

      Thus the central government of Russia now seems to have the basic tools it needs to encourage competition and prevent lower-level governments from defeating the market economy. In fact the greatest potential for the future may lie in competition among regions and cities. If the central government succeeds in establishing and enforcing basic property rights, a commercial code, and contract law, the cities or regions that manage to elect honest politicians committed to making their jurisdictions attractive to new enterprises and foreign investment are likely to surpass those that do not.


  1. See Anderson (1979, 1994) for a more extensive discussion of the functions of mafia families in the United States and Italy.

  2. Rent seeking is competition for economic privilege allocated by the government in the form of licenses, grants, and the like. The resources used in seeking rents are an economic waste. The term was invented by Anne O. Krueger. See Bates and Krueger (1993) for the application of the concept to several reforming economies and Buchanan, Tollison, and Tullock (1980) for theoretical analyses.

  3. Indeed, the Soviet system as a criminal enterprise is the thrust of a book by Arkady Vaksberg (1991), who as a Soviet journalist had published account of official corruption.

  4. A related danger is that politicians will turn to mafia violence to deliver the vote.


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