Thomas Hobbes (1588-1679) in his Leviathan describes the conditions where “there is no place for Industry; because the fruit thereof is uncertain; and consequently no Culture of the Earth; no Navigation, nor use of the commodities that may be imported by Sea; no commodious Building; no Instruments of moving, and removing such things as require much force; no Knowledge of the face of the Earth; no account of Time; no Arts; no Letters; no Society; and which is worst of all, continual fear, and danger of violent death; And the life of man, solitary, poor, nasty, brutish, and short.”

Most of us take as a given the necessity of strong property rights protection. It is hard to imagine economies that could flourish and develop if security of persons and property conditions are not met.

But do we necessarily need the authority of the government - a ‘state’ - to guarantee property rights?  Surprisingly many people nowadays would disagree. While carrying a gun and defending one’s own life and property may seem like a viable alternative to relying on the state for protection, can we fully imagine what happens when the authority of the state seizes to function?  Georgia can draw on its own experience to answer this question.

A FAILED STATE

Kutaisi, the hometown of the first author of this article, was a city known for the so called “thieves-in-law” until the early 2000s. No business would sustain long without protection provided by Krisha, i.e. an “authority” that would secure the business against crime and other Krishas. It was strongly recommended to stay at home after 6pm, as there was much violence in the streets. Even home was not a safe place. Burglars would not mind to break into an apartment of house for a TV set or a leather coat.  Moreover, after the robbery you would typically get a call from an intermediary, trying to sell the robbed item back to you.

Police has usually been out of the game. First of all, victims of crime have rarely been willing to approach the police due to the widespread attitude that a real man should solve own problems himself and not deal with the “dogs” (a slang for “policemen”). Second, police has been quite closely cooperating with instead of fighting against the criminal society. Consequently, when thinking about rule of law violation, the first thing that comes to mind are those dark 1990’s. It has not been just Kutaisi, organized crime affected (in some of them it still does) citizens all over the post-soviet states. As the American sociologist Louise I. Shelley puts it: “Organized crime affects citizens through: the privatization process, increased violence in daily life, higher rates of personal and property crime, more deviance, higher prices, and reduced personal security.” (“Post-Soviet Organized Crime,” Demokratizatsiya, Vol. 2, No.3, (Summer 1994), pp. 341-58.)  The most alarming part of the story was the influence of the criminal ideology on the youth. In Kutaisi, many young boys dreamed about becoming a “thief-in-law” and were proud of acquaintances with (abundant) criminal authorities in the city.

Georgia was in fact a failed state. Under the circumstances when the sovereign state lost its ability to protect citizens from violence and crime, the demand for security in the society was met – ironically – by the criminal authorities themselves. Thieves-in-law supplied the security guarantees (of course, for a hefty price) when the state was too weak to do so.

The existence of a large shadow economy provided, at the time, another justification for criminal authorities’ existence. According to Austrian economist Friedrich Schneider, in 2002-2003 Georgia had the second largest shadow economy (after Bolivia) among the 145 countries of the world. While the shadow economy was flourishing even during the Soviet times, in 2002-2003 as much as 68% of the country’s economic activity was not legal (cf. “Shadow Economies of 145 Countries all over the World: What do we really know?” Working Paper, 2006). This of course implied that the state would not be able to serve as a legal authority for solving the disputes between conflicting parties. In this kind of situation, having criminal authorities to solve interpersonal disputes was simply a necessity. Arguably, without such “dispute-solving institutions” and the state so weak at the same time, country’s economy would perform even worse.

WHY DO WE NEED THE STATE?

A model developed by the American political economist Herschel I. Grossman (“Producers and Predators”, Pacific Economic Review, Volume 2, No. 3 (Fall 1998), pages 169–187) gives an insight into why the equilibrium with ‘collective protection’ of property rights is superior to the one with ‘individual protection’. In Grossman’s model people can earn income by choosing to be either producers or predators (criminals). When predators are present, the producers would have to divide their time between production and protection of property. The model shows that in the absence of collective “guarding against predators”, social costs of predation are high, as producers themselves individually spend time on guarding their own possessions, devoting less time to productive economic activity. As a result, society achieves only a sub-optimal outcome, with lower return to every party involved: both predators and producers. In case of collective guarding, on the other hand, producers devote their whole time to productive activity and predation is also reduced as a result of increased costs to the predators.

Yet, the question remains: why is it not optimal to rely on criminal authorities to provide collective protection, instead of relying on the elected government’s authority?  It is perhaps best understood in terms of the ‘conflict of interest’ between the criminal organization’s ‘job’ as private security guards and their goal to maximize the rents from theft.  Once a criminal group achieves a monopoly power in a certain area, no one prevents them from seizing the private property they vowed to protect. This would be the most likely outcome given that a criminal group in a monopoly position does not have a reputation to preserve, and cannot be ‘voted out of the office’. The same argument would of course hold for any authoritarian state that usurps the political power. Any state where courts and police are regarded as ‘puppets’ manipulated by the authorities.

A HAPPY END FOR NOW, BUT RISKS REMAIN

For Kutaisi, and for Georgia, one can say, the crime story had luckily a happy ending. The robust reform of police system and intolerance towards criminal brought the indispensable characteristic of the state - monopoly on the legitimate use of physical force - back to the state. Crime rates, as well as the share of shadow economy have gone down significantly. “Criminal qualification” is no more attractive for the youth of Georgia. However, people still do not trust the party that judges who is right and who is wrong. Looking at CRRC figures, Georgian people’s trust in the institutions directly responsible for enforcing property rights (i.e. courts and police) has improved from 2008 to 2011 and is higher than comparable numbers for our South Caucasian neighbors. Even so, trust in police is almost twice higher than that in court system. Obviously, additional work needs to be done in this respect. According to Babych and Fuenfzig (“An Application of the Growth Diagnostics Framework: The Case of Georgia”, ISET Policy Institute, 2012) lack of broadly interpreted property rights is a binding constraint to Georgia’s economic growth. And property rights include judicial independence, among other things.

Even though the situation now is better than back in the 1990’s, protection and enforcement of property rights is and should still be on the government’s to-do-list.

After the experiences made in the 1990’s, it is difficult to change people’s prior belief that the state is the one who abuses (and not protects) the private property. As security depends on subjective attitudes, it is very important to instill people’s trust in the system. Before the reforms, local businesses avoided taxes but paid to criminal authorities for their security. Now they are paying taxes to the government. Without successful prior experience in a market economy, for some of them the only thing that has changed is the recipient of the money they paid. In this situation, it would be good if the state representatives illustrate the difference between the two payments. Politicians like to brag about how long roads they have paved but nobody ever mentions that taxpayers’ money is spent on the provision of public services by the government. People should realize the difference between taxpaying and racketeering, and if Georgia will succeed in building an impartial judicial system, the country may move on towards the rule of law that is so essential for its economy to succeed.