Tuesday, September 12, 2006

Fighting Corruption in Transition Economies – a WB report

Finally, back – but this time no numbers, just a loose comment. I recently came across a WB report on corruption (or rather anticorruption) in transition economies which certainly deserves some attention.

The problem of corruption is well present in policy debates by now. It is named as one of the most serious obstacles to the development in transition economies, and generally developing countries. In the long term high levels of corruption impede economic growth by leading to inefficient allocation of resources, disrespect for the rule of law and enforcing rent-seeking. Small and medium enterprises seem most adversely affected which in turn hurts job creation, the potential to adjust flexibly and innovation. On the other hand poverty tends to make corruption more tempting – government officials, tax authority workers, policemen etc. are poorly paid, and if the rule of law is weak the gain to risk ratio of accepting the bribe may prove more appealing. Thus we are dealing with some sort of vicious cycle, at least in some of the countries.

As the report justly emphasizes, the early 1990s were focused on macro stabilization, market reform and establishment of legal foundations of a market economy, liberalization of prices and trade and a shift towards private ownership in the transition economies. The institutional reforms that ensure transparency, public sector accountability and efficiency were in many cases given less attention. It mentions the role of many institutional and historical factors, but does not elaborate on this issue. What the report does not emphasize enough is that this ‘spur’ in corruption in the transition economies did not come from nowhere and perhaps was just the revealing and highlighting of a phenomena that has been around all the time. The former communist countries have a long, well established tradition of graft, reaching the start of the communism and far beyond. And while the many of the western economies were already noticing the problems in the post-war era, the communist regimes were a fertile ground for corruption. Obtaining favorable decisions from any, especially local level officials, involved gifts and other sorts of persuasion. Even simple, everyday issues such as shopping, when goods were scarce, often entailed convincing someone to sell the good from under-the-counter. The governments would put a blind eye on most of these rather preferring to swipe the issue under the carpet – as officially corruption was an evil that concerned only capitalism. Most of the ‘private initiative’ was at least partly in the grey zone, and as all sorts of officials could play a decisive role in its to be or not to be – and thus enjoyed skimming parts of their revenues.
Moreover in many of the countries corruption traditions date back further than communism. For instance in the nineteenth century Russian (which encompassed large parts of Poland, the Baltics, many of current CIS’) tsars officials were given low wages in the assumption that they can make a living out of local scale bribery. I do not know the area well enough to cite historical analyses, but it is sufficient to recall the novels by N. Gogol and other authors of the time.
Rooting out corruption requires a good understanding of the mentality and of its history. All the successes attained in combating it are not irreversible, especially as the change of mentality requires more time than the change of legislation.

Measuring corruption is obviously not based on hard data concerning the number of bribes. The numbers concern reported corruption or the perception of corruption. The report cites two sources - company level surveys or “experts’ surveys”. The first concern answers reported by companies on general questions (such as whether bribes are an obstacle to doing business, whether bribes can influence law setting) but also on more specific (like have you paid a bribe, how often do you pay, how much of the revenue goes to bribes). The second type named “experts’ opinions” concern rather foreign professionals perception of graft in a country.

The general picture presented by the report is that in many of the transition economies efforts to combat corruption are present and yield some success – the leaders being Georgia (thanks to strong commitment of the new regime) and Slovakia (partly thanks to commitment and the tax reform). Admittedly, starting from higher levels of corruption facilitates a more spectacular success, thus perhaps a slowdown in the
Moreover the report recognizes that Romania and Bulgaria made substantial progress in facing the problem, which can be certainly at least to a part admitted to the prospects of joining the EU, which as it seems both countries are set to do next year. On the other hand corruption in relatively rich countries which seemed to be dealing well with the problem, like the Czech Republic, especially in areas like government procurement seems to have recently increased.
The two countries that certainly stand out are Belarus and Uzbekistan, with, at first glance, surprisingly low reported levels of corruption. As in these cases the discrepancy between firm level reports and “experts’ opinions are the highest, the report mentions three possible explanations: 1) the measures do not capture the implicit corruption widely spread in such autocratic states, 2) fear of adverse consequences of reporting bribery even in an anonymous survey, 3) the failure to perceive everyday bribery as corruption in the same way that firms in more liberal systems do.

Moreover, probably the fact that companies do not believe that anything can be changed by reveling the truth in a survey plays a much more important role in these autocracies.
Generally I have some doubts about the reliability of these measures for the two countries and think they cannot be interpreted as in case of most other states. Also classifying the two states as “slow progress in transition” seems a bit misleading…

Next, I was a bit surprised to read that “manufacturing firms pay more bribes and pay them more frequently than firms in other sectors”[p.26] which seems to go against the common view of construction companies being among the top – but I did not find an elaborate explanation in the report.

Finally, the report compares levels of reported corruption in the transition economies with respect to benchmark countries: Greece, Portugal, Germany (Eastern Germany) Ireland, Spain and Turkey. The conclusion that overall the level of corruption is still significantly higher than in the EU counterparts, but on some dimensions a number of transition economies score better than for instance Greece and Portugal. What would be interesting to see, is how Italy (especially Southern Italy) would score in this type of comparison.

Summing up, the report is a third in a series of tri-annual investigations within the WB anticorruption in transition (ACT) scheme. It emphasizes continued improvements in a number of countries and progress in some areas but stalling in others. It attempts to identify the driving forces of anti-corruption originating both from within the countries and from outside. In combatting corruption the focus must be on the implementation of anticorruption legislation not just on producing it. Moreover, these steps have to be well though and careful in order not to impede important state decisions, solely because of fear of accusations of bribery. Transparency; accountability; efficient governance, audit and monitoring; free and independent media; reducing state involvement but also commitment and a tough stance are crucial keywords. Progress takes time, but the attention given to the problem is certainly the right way to go.


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