COUNTERBALANCING MARKETIZATION INFORMALLY: INSTITUTIONAL REFORMS AND INFORMAL ECONOMIC PRACTICES IN GEORGIA (2003-2012) By Lela Rekhviashvili Submitted to Central European University Doctoral School of Political Science, Public Policy and International Relations In partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Supervisor: Professor Béla Greskovits (Word count 65,606) Budapest, Hungary CEU eTD Collection 2015 Abstract This dissertation explores the relationship between market-enhancing institutions and informal economic practices. It critically engages with the dominant perspective on informal economic practices (new institutionalism), and elaborates an alternative, Polanyian institutionalist perspective. Relying on the Polanyian framework, I argue that social inclusion and wellbeing of marginalised, informally operating persons and groups cannot be achieved through the establishment of market-enhancing institutions (as suggested by the new-institutionalist literature), unless institutions for social protection are also established. The prevalence of informality in an aspiring capitalist society is as much related to the lack of institutionalisation of protective measures as it is related to the lack of market supporting institutions. In a context in which the institutionalisation of market economy proceeds without institutionalisation of protective measures, societal resistance and defence against marketization - commodification of land labour and money - can shift to the informal realm. In other words, it can trigger the informalization of the countermovement. While a countermovement against marketization can endanger the capitalist economy even when it proceeds within formal/legal boundaries, informally pursued countermovement runs higher risks of subverting marketization efforts and failing to ease the social consequences of marketization. In supporting these claims, the dissertation presents a case study of institutional transformation in Georgia as a most likely case to have met the new-institutionalist theoretical expectations concerning market-enhancing institutions and their impact on informal economic practices within the post-Soviet region. While Georgia was the only country that successfully adopted the new-institutionalist remedies, the reforms’ social developmental outcomes were hardly impressive in comparison with neighbouring countries. Examining the reasons for the puzzling sub-optimal outcomes of Georgia’s reforms, I identify the limits of the new-institutionalist problem analysis and remedies to the informal economy based on [1] analysis of micro, mezzo and macro level outcomes of institutional transformation in Georgia; [2] critical review of existing literature on post-soviet informality and [3] examination of the new-institutionalist theoretical premises with the help of the Polanyian institutionalist perspective. The dissertation demonstrates that Georgian reforms failed to benefit small and CEU eTD Collection medium size businesses and informally self-employed traders. It also largely failed to ease the social and economic vulnerability of poor and marginalized groups. Relying on the Polanyian institutionalist perspective on informality, I suggest that the suboptimal outcomes of the post-revolutionary reforms can be ascribed to the government’s refusal to institutionalise market-constraining regulations, and protective measures, to i facilitate adjustment to marketization and ease its social costs. Subsequent informalization of the resistance, or countermovement against marketization proved insufficient to ease social conflicts. The limits of informalized countermovement [1] reproduced reliance on informal economic practices, [2] undermined the capacity of the protective measures to ease social costs of marketization, and finally, [3] subverted market- enhancing reforms. The argument and the findings of this dissertation challenge not only the new- institutionalist perspective on informal economy, but also dominant development theories and policies. They challenge the pervasive academic and policy focus on quality institutions (e.g good governance, transparency, rule of law, corruption control, security of private property) by illustrating that the primary focus on market- enhancing institutions at the expense of dismissing the role of market-constraining and social regulation is not only insufficient but also counterproductive. In this light, the transnational development actors' failure to support the governments in improving institutional quality, despite their immense financial and human investments in anti- corruption and good governance promoting projects, can be understood as the result of dismissing the social costs of marketization. CEU eTD Collection ii Acknowledgements I think one of the biggest challenges for a PhD student is the feeling of irrelevance. As we spend quite some time working alone, we are supposed to abstract the arguments from the detail we observe, and we are aware of the limits of the impact our work can have for the problems we study, it is easy to find ourselves detached from what we perceive as social ‘reality’. It was primarily due to the immense support of my fieldwork informants, my supervisor Béla Greskovits, my girlfriend Maša Drndić, my professors, colleagues, friends and family, that I never really felt abandoned, irrelevant and detached, and this work has evolved in dialogue with so many engaged and committed persons. I thank them for the care that has made these five years beautiful, challenging and exciting. Their trust and confidence allowed me to feel safe about taking time to contemplate, to get lost, forgive myself for inconsistencies and confusions. Their uncompromising, critical engagement has made me constantly question my observations, my arguments, and myself. In other words, my social space has given me the access to and enabled me to enjoy the most precious sides of doing the PhD. I want to thank my fieldwork informants for investing the trust and sharing their private stories and vulnerable moments with me. It was always obvious for the informants and for me that I could have never possibly reciprocated their generous support and openness. I never had an ambition to be a researcher that voices the concerns of small traders, nor do I have an illusion that my dissertation will have considerable political relevance for the policymaking process that affects the traders’ lives. Then the only way I knew how to thank them was to follow through the goal I asked their help for, to write a dissertation that (might not manage, but) sincerely attempts to come up with a sensitive interpretation of the complex empirical realities my informants disclosed to me. I thank Béla Greskovits for being such an inspiring academic and a devoted, thorough and engaged supervisor. Besides indulging me with the consistent, insightful and challenging feedback, I also thank him for pushing me to test and overcome my perceived limits as a researcher. In my perspective, he had higher expectations of me than I did. He knew exactly how to enable and support me to explore the skills and capacities I was unaware of, without providing ready answers or intervening in my independent working process. I want to thank him for being so sensitive and observant and for always trying to adjust and respond to my challenges and preferences. I thank my informal supervisor Maša Drndić. Maša has been the most consistent and critical non-academic reader of my writings. She did not only help me think of my writings as a narrative, but constantly challenged my theoretical assumptions and generalisations. She listened to me talking of Polanyi and De Soto in the early mornings CEU eTD Collection while drinking coffee or at our nights out, and endorsed me while I complained and when I needed to withdraw. Above all, Maša has helped me in becoming self-confident, calm and inspired. She will be the first person to read these acknowledgements too. I thank my supervisory panel members, Lea Sgier and Matteo Fumagalli for their patience and critical engagement throughout these years. I am extremely grateful to Lea for being there to advise me on publications, methodological questions and iii fieldwork related difficulties. I thank Political Economy Research Group for providing a safe and inspiring academic and socialising space. Imre Szabo and Zbigniew Truchlewski deserve special thanks for going through my work in detail and encouraging me to be ambitious and forthcoming while framing the arguments and contributions. I thank many other PERG-ers: Vera Scepanovic, Renira Angeles, Bori Kovacs, Kristin Makszin, Anil Duman, Doro Bohle, Gergo Medve-Balint, Sanja Tepavcevic, Sanja Hajdinjak, Bastian Becker. Numerous CEU friends and colleagues, among them, Alex Krasznay, Marianna Szczygielska, Jose Reis Santos, Dodo Karsay, leventelittvay, Erin Jenne, Karla Koutkova, Joanna Kostka, Artak Galyan, Sandro Nikolaishvili, have contributed to completion of this work, but also to keeping me sane and cheerful. I need to particularly thank Elene Jibladze and Adriana Qubaia for their company, advice and engagement. I am grateful to Robin Bellers from the academic writing center, who has provided invaluable support for improving the structure, flow and language of the dissertation. My gratitude also goes to my colleagues, Marine Chitashvili, Nani Bendeliani, Giorgi Khishtovani and Irakli Vacharadze in Georgia. They have invited me to participate in research and educational projects that benefited