Frozen Informality
Arsenian Lusine
Construc4on sector in Moscow • Construc/on sector in Moscow is one of the most profitable for investors • Profit margin of construc/on companies in Moscow reaches 200%, and in the central districts — 400-‐600% Topics: • Complex and intricate regula/on is bad for business and encourages corrup/on • Bureaucra/c over-‐organiza/on, prevents the free development of compe//ve rela/ons • Inflexible legisla/on is causing a high level of informality in the construc/on sector of Moscow 2
According to De Soto, construc4on has high risk of becoming informal as the scale grows In informal ac/vi/es there is a nega/ve economies of scale
This is due to the risk of "being caught" which increases with increasing scale of opera/ons
But in the construc4on sector all work differently There is a posi/ve economies of scale with the growth of informal ac/vi/es
Informal ac/vi/es are spliced with regulators
3
What are the signs of informality in construc4on • Construc/on on land not designated for construc/on • Failure to comply with construc/on procedures • Viola/on of rights of communi/es • Substan/al viola/on of town planning and building regula/ons • Use of informal labor in the construc/on process 4
Object and methods of research • Object: Rela/ons between par/cipants of construc/on process • Theore/cal framework: The Ins/tu/onal Economics of Corrup/on and Reform • Methods: Economic analysis of legisla/ons Econometric analysis of official sta/s/cs Interviews with experts, developers, ac/vists GIS mapping Complaints of residents about the illegal construc/on
5
Par4cipants of construc4on sector and their interests • Business: building on favorable and most cost-‐effec/ve condi/ons • Regulators: economic growth, taxes, supply of housing • Communi/es: maintaining high standards of urban environment 6
Economic theory of corrup4on defines two types of administra4ve corrup4on 1. Involving the_ Example: Road police bribe
2. Not involving the_ Example: Paying for cer/ficate
Replacement of formal ins/tu/ons with informal
Formal ins/tu/ons extended with informal
Can be combated by introduc/on of addi/onal player
No clear solu4on on how to combat!
Usually as a result of rent-‐seeking Usually as a result of inflexible regula/on, or opportunis/c behavior of business
Ins/tu/onaliza/on of corrup/on — the synthesis of administra/ve and poli/cal corrup/on (poli/cian ac/ng in the interests of bureaucra/c structures or the interac/on among officials and business) — is possible when the central government can not control all spheres of economic life 7
Analysis of construc4on process in Moscow Auc/on, conclusion of the lease, state registra/on of the lease
TYPE 2. E.G. CLOSED AUCTIONS
Prepara/on stage of the construc/on project
TYPE 2. E.G. ACCELERATION OF PROCEDURE FOR GPZU
Approval stage of the construc/on project
TYPE 1 AND TYPE 2. COMMUNICATIONS AND ENGINEERING RESEARCH
Issuance of building permits
Stage of construc/on
TYPE 1. PAYMENTS TO INSPECTORS (E.G. INFORMAL SALARY)
Stage of delivery of construc/on into opera/on
TYPE 1. E.G. OBTAINING PERMISSION FOR FINALIZED CONSTRUCTUION
The state registra/on of ownership of immovable property Sources: World Bank, HSE
8
Problem of infill construc4on in Moscow Construc/on of new buildings or structures in historically developed residen/al neighborhood, usually in place of green areas
Hypothesis: • Infill construc/on is mostly concentrated in wealthy areas and areas with good infrastructurea result of informal rela/ons of business and regulators while ignoring the opinion of • Infill construc/on is communi/es 9
While “tochechnaya zastroyka” concentrates in rich areas…
Source: Arsenian Lusine (2014)
10
…arbitrary construc4on is mostly concentrated in less wealthy areas
Informal construc/on Source: Arsenian Lusine (2014)
11
Model results for informal construc4on Number of public services facili/es Number of given construc/on cer/ficates
Number of informal construc/ons dep 0.04*** (0.01) 0.08
Standard errors in parentheses • *p < 0.05 • ** p < 0.01 • ***p < 0.001
(0.11) Constant Observa/ons R2 Adjusted R2
2.39** (0.82) 117 0.19 0.17
• Public services are amrac/ve to informal construc/on • Number of informal construc/ons and number of construc/on cer/ficates are related • Government is involved in the issuing of formal construc/on cer/ficates to developers who building informal construc/ons Source: Arsenian Lusine (2014)
12
Informal construc4on exists for a reason Nega4ve impact • Informal construc/on is a marginal sector of the informal economy: Dangerous for the city (not complied safety) Changing image of the city (changes are spontaneous) • Increases the cost of the final product • Create high barriers to entry, instead of compe//on formed a cartel Posi4ve impact • Allows developers to reduce transac/on costs • Developers can bypass unnecessary bureaucra/c procedures and reduce the /me of their execu/on • Signaling about the bureaucra/c system that needs to be reformed 13
Policy advice • Strengthen the role of communi/es to balance powers • Avoid duplica/on of func/ons within regulators • Decrease entry barriers and increase compe//on
R B
R C
B
C 14