Democratic Transition and Political Patronage

Mr. Korosenyi begins by analysing the particular relationship holding between politics and administration in different countries. Within Europe three major patterns have emerged in the 20th century. Firstly there is the politically neutral British Civil Service, secondly the German and French state bureaucracies, which traditionally are supposed to embody the "common good", and thirdly there is the patronage system of the so-called consociate democracies, e.g. Austria. In general Mr. Korosenyi believes that, though politics do not penetrate into the Hungarian administration to the extent they do in Belgium and Austria, nevertheless, there is a stronger fusion than there is in the traditional British pattern. He is particularly interested in this relationship with regard to its effect on democratic institution building and the stabilisation of the new regime in Hungary, now the old "nomenklatura" system has been abolished. The structure of the Hungarian government was a result of the constitutional amendments of 1989 and 1990. Analysing this period, it becomes clear that for all the political actors who initiated and supported the democratic transition to democracy, the underlying assumption was a radical depoliticisation of the administration in order to maintain its stability. The political leadership of the executive is a cabinet government. The government is structured along ministries, each headed by a politician, i.e. the minister, who is a member of the cabinet. The minister's political secretary is not a cabinet member, but he or she is a politician, usually a member of the parliament. The head of the administration of the ministry is the administrative state secretary, who is a civil servant. He or she usually has four deputies, also civil servants. Naturally it is assumed that there should be a clear separation between politicians and civil servants. However in practice, the borders can be blurred, giving rise to a hybrid known as the "political civil servant". Mr. Korosenyi analyses the different faces of these hybrids. They are civil servants for the following reasons. They need special educational qualifications, working experience, a civil service exam etc., they are not allowed to do anything which is incompatible with their impartial role, and they cannot occupy political office nor may they appear in the name of any political party. On the other hand, the accepted political dimension to their function is revealed by the following facts. The state secretary (a civil servant) may participate in cabinet meetings instead of the minister. The state secretary is employed by the minister. A state secretary or any of their deputies can be dismissed at any time by the minister or the prime minister. In practice then, ministers appoint to these senior administrative positions civil servants whose personal and political loyaties are strong. To the second level of political patronage in ministries belong the ministerial cabinet, press office and public relation office. The ministerial cabinet includes the private advisors and members of the personal staff of the minister. The press office and the PR office, if they exist, are not adjusted to the administrative hierarchy of the ministry, but under the direct control of the minister. In the beginning of the 1990s, such offices were exceptions; in the second half of the 90s they are accepted and to be found in most ministries. Mr. Korosenyi's work, a 92-page manuscript of a book in Hungarian, marks the first piece of literature within the field of political science which analyses the structure of the Hungarian government in the 1990s and the relationship between the political leadership and the public administration.

Compensation, Incentives and Risk: Economic Theory and Russian Practise

Mr. Pechersky set out to examine a specific feature of the employer-employee relationship in Russian business organisations. He wanted to study to what extent the so-called "moral hazard" is being solved (if it is being solved at all), whether there is a relationship between pay and performance, and whether there is a correlation between economic theory and Russian reality. Finally, he set out to construct a model of the Russian economy that better reflects the way it actually functions than do certain other well-known models (for example models of incentive compensation, the Shapiro-Stiglitz model etc.). His report was presented to the RSS in the form of a series of manuscripts in English and Russian, and on disc, with many tables and graphs. He begins by pointing out the different examples of randomness that exist in the relationship between employee and employer. Firstly, results are frequently affected by circumstances outside the employee's control that have nothing to do with how intelligently, honestly, and diligently the employee has worked. When rewards are based on results, uncontrollable randomness in the employee's output induces randomness in their incomes. A second source of randomness involves the outside events that are beyond the control of the employee that may affect his or her ability to perform as contracted. A third source of randomness arises when the performance itself (rather than the result) is measured, and the performance evaluation procedures include random or subjective elements. Mr. Pechersky's study shows that in Russia the third source of randomness plays an important role. Moreover, he points out that employer-employee relationships in Russia are sometimes opposite to those in the West. Drawing on game theory, he characterises the Western system as follows. The two players are the principal and the agent, who are usually representative individuals. The principal hires an agent to perform a task, and the agent acquires an information advantage concerning his actions or the outside world at some point in the game, i.e. it is assumed that the employee is better informed. In Russia, on the other hand, incentive contracts are typically negotiated in situations in which the employer has the information advantage concerning outcome. Mr. Pechersky schematises it thus. Compensation (the wage) is W and consists of a base amount, plus a portion that varies with the outcome, x. So W = a + bx, where b is used to measure the intensity of the incentives provided to the employee. This means that one contract will be said to provide stronger incentives than another if it specifies a higher value for b. This is the incentive contract as it operates in the West. The key feature distinguishing the Russian example is that x is observed by the employer but is not observed by the employee. So the employer promises to pay in accordance with an incentive scheme, but since the outcome is not observable by the employee the contract cannot be enforced, and the question arises: is there any incentive for the employer to fulfil his or her promises? Mr. Pechersky considers two simple models of employer-employee relationships displaying the above type of information symmetry. In a static framework the obtained result is somewhat surprising: at the Nash equilibrium the employer pays nothing, even though his objective function contains a quadratic term reflecting negative consequences for the employer if the actual level of compensation deviates from the expectations of the employee. This can lead, for example, to labour turnover, or the expenses resulting from a bad reputation. In a dynamic framework, the conclusion can be formulated as follows: the higher the discount factor, the higher the incentive for the employer to be honest in his/her relationships with the employee. If the discount factor is taken to be a parameter reflecting the degree of (un)certainty (the higher the degree of uncertainty is, the lower is the discount factor), we can conclude that the answer to the formulated question depends on the stability of the political, social and economic situation in a country. Mr. Pechersky believes that the strength of a market system with private property lies not just in its providing the information needed to compute an efficient allocation of resources in an efficient manner. At least equally important is the manner in which it accepts individually self-interested behaviour, but then channels this behaviour in desired directions. People do not have to be cajoled, artificially induced, or forced to do their parts in a well-functioning market system. Instead, they are simply left to pursue their own objectives as they see fit. Under the right circumstances, people are led by Adam Smith's "invisible hand" of impersonal market forces to take the actions needed to achieve an efficient, co-ordinated pattern of choices. The problem is that, as Mr. Pechersky sees it, there is no reason to believe that the circumstances in Russia are right, and the invisible hand is doing its work properly. Political instability, social tension and other circumstances prevent it from doing so. Mr. Pechersky believes that the discount factor plays a crucial role in employer-employee relationships. Such relationships can be considered satisfactory from a normative point of view, only in those cases where the discount factor is sufficiently large. Unfortunately, in modern Russia the evidence points to the typical discount factor being relatively small. This fact can be explained as a manifestation of aversion to risk of economic agents. Mr. Pechersky hopes that when political stabilisation occurs, the discount factors of economic agents will increase, and the agent's behaviour will be explicable in terms of more traditional models.