Custom «Oligarchy» Essay Paper

Oligarchy refers to a form of governance where few individuals control the governance of a given country (Johnson, La Porta, Lopez-de-Silanes, & Shleifer, 2000). They are involved in most of main governance decisions, as they mostly manipulate with an economic status of the given country. In this case, oligarchs have different perceptions from various people, with some of them being critical on the advantages of this form of governance as well as its disadvantages to the nation. Among the leading countries, in terms of this form of governance, are being such as Russia and Ukraine. The Russian oligarchy emerged in the mid 1990s, when the government had sold most of its assets to few individuals that would support the incumbent President to retain power. After the collapse of the Soviet Union, the owners of major businesses such as petroleum and gas companies, as well as those in the major food industries such as the meat industry became as oligarchs. This was facilitated by the fact that only the communists were allowed to hold any office and vote. The oligarchs used their wealth to control the leaders in order to protect their wealth. Their number increased, but their influence on the governance was growing stronger, as depicted in the study provided by Forbes in 1994. It showed that 36 of the Russian oligarchs were worth over one billion of the US dollars.

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In some cases, oligarchy has been condemned from a different side. A good example was in 1994, i.e. the situation in Ecuador, where a small group of oligarchs had overthrown the existing government. Then, they excluded all other citizens in a political decision making process. The oligarchs passed some laws that were suitable to their interests. The general population had no contribution towards the process of running the country. However, many scholars have continually lauded this system of governance, claiming that it had many economic advantages as depicted in the Russian case. In Russia, few oligarchs had been in charge of the whole process of running the government (Johnson, et al. 2000). There is a large network of oligarchs in Russia that are being as private owners. However, they have a large influence on mayors, ministers and other leaders. It has also been said that the United States is also ran by oligarchs; while South Africa is one of the modern country with oligarchs. This paper will delve into different perspectives of oligarchy and show various sides of the form of governance displaying how good it is. Meanwhile, at the same time, it will show some of the negative issues associated with oligarchy.

Oligarchs are the individuals who own property and control the government decisions and policymaking. Curiously, there is no female oligarch in Russia nowadays.

Benefits of Oligarchy to Economy

Investment in Productive Projects

In the study carried out by Gorodnichenko and Grygorenko (2008), it was determined that oligarchs always invest in productive projects, as opposed to social investments that could not be profitable. The study has developed a model that showed that there had been a vertical integration of firms that ensured there had been the gains in every investment. They have developed to elaborate and concise a mechanism to ensure that there are better and more gains from all the investments being made. They control the economy and ensure the maximum gains to the country. The study also has observed that the firms owned by oligarchs performed better than their equivalents owned by other people. This shows that the oligarchs give better returns to the country as compared to any other businesses. With this division of labor between oligarchs and the state, the state is given the freedom to venture into investments that would improve the lives of other people. Such would include the improved healthcare and education programs. Eventually, the living standards of people are being improved because oligarchs would provide the employment for all involved. Meanwhile, the government would provide people with amenities, i.e. as very articulate and productive governance.

High Quality Investments

Oligarchs have a global outlook at their investments. They aim at competing on a global platform. This ensures that they invest into high quality ventures. This guarantees that the general economy of the country they have found makes some exports, thus, increasing a Gross Domestic Product as well as improving the per capita income in the country (Tarun & Yafeh, 2007). This eventually makes a very positive impact on the economy and reputation of its products. Further, since individuals and not teams manage the companies, there is less rigidity and bureaucracy in decision-making, allowing the faster and more efficient performances by these companies. The business owners are flexible enough to collaborate with anyone, as long as they positively contribute to the company. This eventually translates to the economy. This is contrary to the state-owned companies that demand some diplomatic relations and discussions in order to make any major decisions or acquisitions (Tarun & Yafeh, 2007).

Reduction of Effects of Disorganization in Industries

Firms often face the difficulty of transition from one state to another. When they make a leap into another stage and fall, they often need a third party to ensure that they make a safe landing. That picks up their profitability (Tarun & Yafeh, 2007). In this case, they require the strong political and economic power to get back on their feet; and they face a threat of crumbling if this support is not forthcoming. With oligarchs, this is no threat because they possess both the economic and political powers. They are able to get the financial support as well as soft legislations that would allow their quick recovery (Tarun & Yafeh, 2007). Therefore, oligarchs are beneficial to the economy since they ensure that large firms and corporations remain on their feet even when faced by the large issues such as the 2008-year economic slur. During this period, the businesses owned by oligarchs were heavily affected. However, they took relatively less time than those firms owned by the state. Eventually, this gives to oligarchs a bigger hand in ensuring the good economic performance. In the time of the Russian and Ukrainian performances, for instance, during the transition of the economy in the 1990s, oligarchs showed that they had enough resources. That would ensure that there had been enough resources to ensure the continued production (Hoffman, 2003). They discouraged some harmful institutions such as a flawed and corrupt bureaucracy, which eventually salvaged the economy of these two countries. They were able to make the conversion of potentially integration synergies into profits through such activities as the enforcement of contracts. Generally, oligarchs were responsible for saving the economy of Ukraine during a transition period. The medieval Chinese case that had involved stationery bandits was another important issue. In this case, the bandits were governors being not pleasant. They protected any trading activity that would give them a part of profits. They promoted business and ensured that as much legal business as possible was conducted. Their policies would be favorable to traders.

Economic Disadvantages of Oligarchy

Transfer Pricing

This is a technique that is used by firms to transfer resources from one company to another. The prices of resources are often controlled and reported to the government. This is usually a source of revenue to the government. It is always done in a transparent way in the countries where governance is democratic (Gorodnichenko & Grygorenko, 2008). Therefore, this process is usually controlled by policies and legal apparatus in order to ensure that all of them are being beneficial to the companies involved and the country, at large. However, oligarchs are known to skip and deceive the government with figures. They often understate profits, sales and any other aspects that would allow for their own gain and not that of the country. Therefore, the government ends up losing a lot of its revenues. Scholars have made such cases of issues that have adversely affected the revenue. Hoffmann (2003) has explained that their process of transfer pricing was an avenue being misused by oligarchs. He has given an example of an oil-mining company, which was selling petroleum at a low price of 2 USD per barrel. This was an artificial low price. The second company would then sell to another one at a relatively high price for the export at 18 US dollars per barrel that cost them only 2 US dollars (Gorodnichenko & Grygorenko, 2008). The overall implication was that the company that had been involved in the process of extraction and tedious drilling received a very small amount of oil; while the second one made a kill in all transactions. This is usually a silent wealth transfer where outwardly the first company would face losses; but, actually, the real trade is very secretive, and each firm is gaining substantially. They export goods secretly, accumulate wealth on their own, and eventually hurt the home economy.

Adverse Effects of Personal Differences

This form of governance is often marred with difficulties, especially when two oligarchs develop some personal differences or any other reasons (Guriev & Rachinsky, 2005). Since the control trade and economic performance of the economy, they may have some adverse effects on the economy as a result of personal feelings. These ones could translate into a business rivalry. For instance, an oil producer may have some problems with an oil exporter. In case a substantial disagreement or rivalry has been developed, and the mining company declines to have any dealings with the exporter, this would hurt the economy by a large magnitude. This is due to the fact that the amount of foreign exchange into the country would be reduced. Though the effects would not be long term, they would have a significant effect to the country economy in the short term.  

Discouraging Foreign Investments

Oligarchy involves few people that make decisions on behalf of the country. They hold the majority of major businesses in the country and eventually have all the political influence on major industries. When competitors show some interest in investing into their country, they often whisk it away and use their political influence to scare the foreigners away. At times, the foreign companies may be scared away in a manner in which other foreign companies might have been treated in the past. They decide not to make their investments in a given country. Though the state always insists that it is impartial, the leaders are always oriented to a certain direction. A good example of the international investors’ scare was the TNK-BP partnership that had faced many logistical challenges due to some differences between various leaders (Guriev & Rachinsky, 2005). The partnership was between the British oil exploration and extraction company. The BP and the Russian Alfa group became so pronounced that other potential foreign investors went away. In another example, the Alfa group, a Russian Company, wet into boardroom wars for a very long time with a Norwegian firm, Telenor, over the investments that had been done in Russia (Guriev & Rachinsky, 2005). Eventually, Telenor saved their face by joining their assets and becoming a single business by combining their assets in Russia and those in Ukraine to own the stakes in OAO Vimpelcom. Further, a US based firm, Coboco Phillips, decided to reduce their stakes in the Russian market due to similar issues of control by Russian oligarchs (Gorodnichenko & Grygorenko, 2008). Generally, these controllers are not always very successful in ensuring that the economy of their country has got better. Their main aim is to remain in power and take care of their wealth, which may eventually hurt the country’s economy as the examples discussed above have shown.

Huge Losses during Recessions

It is known that oligarchs make huge borrowings when there is an economic stability. It was, therefore, a big blow to these companies when the global economy had been hit by a recession in 2008. The recession, which hurt the Russian economy as a result of the oligarchy control, prompted the government to reconsider taking control over the country’s economy. During the recession, companies lost a lot of their capitals that heavily was reflected on the national economy. For instance, Oleg Deripaska, who is one of the Russian oligarchs and was ranked as the richest man in Russia in 2008, lost 25 billion US dollars after the recession. He owns the largest share of Russia’s car, aluminum and construction industries. These industries have the substantial influence on the economy. He was helped by the Russian government to take one of his companies in Hong Kong through an IPO. This salvaged his companies as he had repaid some of debts. Another example was Shalva Chigirinsky, when he made huge losses after the real estate industry in Russia collapsed in 2008 (Gorodnichenko & Grygorenko, 2008).

Platform for Money Export

Oligarchs provide a channel that could easily hide currency from one country to another. Oligarchs own the overseas companies which could be used to hide money from the home country, leading to the loss of revenue, thus, damaging the home economy. Hoffman (2003) shows an evidence of a Russian oligarch, Khodorkovsky, who has continued to create a network of businesses and financial movements. One of the main examples is the Menatep, which is branched off into Switzerland, Gibraltar and other secretive locations, where money can be easily hidden (Shleifer & Treisman, 2005). He has started up this network and other oligarchs followed suit.

Despite the unattractiveness of this revelation, the business streaks have provided a soft landing to the main business in case there was an unseen threat to the company. Firms can use their sister firms being in sable countries to salvage the misfortune of one firm that performs poorly.

Adverse Effects of Death of an Oligarch

In this system of the economic governance, the economy faces a threat when one of the powerful people dies from the natural causes. Though the companies may remain stable, they often face a problem of governance because oligarchs are usually the main creators of business empires. After their demise, the company is left with new people to manage that may not be able to effectively articulate the business with the rest of the country’s dynamics.  

Conclusion

The economic implications of oligarchy are a mix-up. Though they have been bedeviled in many aspects, they have many benefits and can be very beneficial to the economy. However, the extent of their success is determined by the situations at hand. This form of economic management performs well in a regular environment. In some instances where it has not performed well to an extent of hurting the economy, it has been a result of an anomaly in between the government or between the oligarchs, such as disagreements. They also perform negatively when they are faced with the global threats such as the 2008-year economic recession, which led to a lot of losses to oligarchs. Despite this, they are very efficient in the economy and would ensure that there is enough revenue for the government as well as enough employment opportunities for people. The Russian economy has been a good example of the successful oligarchy, while South Africa remains to Africans as the best economy, despite being governed through this system.