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Putin Plays Microsoft

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The New York Times once again demonstrated just how important investigative journalism can be in its exposé of how the Kremlin is using selective prosecution of software piracy to stifle political dissent. Microsoft, the alleged victim of the piracy by environmental groups, responded quickly and decisively, stripping away the prosecutors' rationale by declaring that all non-profits in Russia would be automatically licensed to use the company's software at no cost.

End of story? Hardly. Microsoft's unwitting collaboration with Putin Inc. illustrates a far broader phenomenon in the third world (as well as in many advanced economies) whose political leadership is more inclined to take its inspiration from Robert Mugabe and Hosni Mubarek than from Thomas Jefferson and John Locke.

According to the Business Software Alliance, piracy is rampant in Russia, with roughly two-thirds of all programs used illegally (compared to one-fifth in the United States). Presumably the government could do a much better job of suppressing illicit software distribution. But consider the advantages of letting piracy flourish. First, it gives the government the now-infamous discretion to nail enemies at will by charging them with piracy. Second, it generates income for organized crime, which can be persuaded to share the loot with ethically challenged bureaucrats and to aid in the defense of the regime against rivals. Arguably most important, it makes everybody a felon (well, tens of millions of Russians, anyway), giving them a reason to tread warily in criticizing elected officials and opening up opportunities for extortion, small and large.

The make-everybody-a-crook strategy for maintaining power long pre-dates the current Russian oligarchy. Consider, for example, the reality that many governments collect only a tiny fraction of the income- and business-taxes on the books. Indeed, many third world businesses couldn't stay afloat if they paid what they nominally owed. By the same token lots of governments pay civil servants far less than subsistence wages, then look the other way when they sell public services ranging from electricity to education to health care.

Perhaps the most pernicious variation on this strategy is the one described by Hernando de Soto, the Peruvian development economist. In most poor countries, he argues, the vast majority of businesses must operate outside the law (in what's now labeled the "informal economy") because they cannot afford the time and money to comply with onerous government regulation or to establish formal property rights in places where such rights are typically documented poorly. This surely works to the financial advantage of everybody from the food market inspectors to the cops on the beat. But de Soto argues that it is a key roadblock to economic development.

Illegal businesses can't borrow money (except from loan sharks or family members) to expand. They can't raise equity by selling stock. They have a terrible time enforcing contracts with suppliers and customers. And in the end, they are at the mercy of law enforcers who can always put them out of business in order to bolster the fortunes of favored competitors.

Will Russia (and dozens of other countries) mend their ways in the name of promoting economic growth? History is probably on the side of economies that are serious about property rights and the rule of law. But history isn't always in a hurry -- especially when it suits those in charge to slow it down.

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