UNECE SPRING SEMINAR FOCUSES ON
BATTLING CORRUPTION IN TRANSITION ECONOMIES
Afternoon Session on "Tackling Institutional Failure" Features
Two Panel Discussions
Geneva, 7 May 2001The United Nations Economic Commission for Europe
(UNECE) concluded this afternoon a spring seminar on the topic of "Creating a
supportive environment for business enterprise and economic growth" by holding two
panel discussions on the difficulties corruption posed for transition economies in Central
and Eastern Europe.The panel debates were based on papers by Shang-Jin Wei, of Harvard
University and the Brookings Institution; and by Antoni Kaminski, of the Polish Academy of
Sciences, and Bartlomiej Kaminski of the University of Maryland (United States).Mr. Wei, introducing his paper entitled "Corruption in economic
transition and development: grease or sand?", said among other things that research
had shown that economic growth rates were negatively associated with corruption ratings,
and that corruption indexes were negatively correlated with rates of investment; that
levels of corruption affected the composition of government spending, skewing it away from
such things as education and health and towards less publicly useful forms of expenditure;
that payment of bribes by firms did not appear help them much in the long run; and that
the benefits of globalization tended to be lower and the risks of globalization higher for
countries with serious corruption problems.Panellists responding to his report were Krassen Stanchev, of the
Institute for Market Economics, of Sofia; and Ivo Bicanic, of the University of Zagreb.Bartlomiej Kaminski, introducing the paper of which he was co-author,
entitled "Governance and corruption in transition: the challenge of subverting
corruption", said, among other things that there did appear to be a strong
correlation between low corruption and good rates of progress made in transition; that
those countries that had taken a radical approach to economic reforms, introducing major
decisions imposed quickly, had made greater transition progress and experienced lower
levels of corruption; and that, interestingly, those countries also were viable
parliamentary democracies, as opposed to having "presidential" systems as their
primary indication that they were democracies.Panellists discussing the report were Mark Pieth, of the University of
Basel, and Jorge Braga de Macedo, President of the Development Centre of the Organisation
for Economic Cooperation and Development (OECD).The afternoon session followed a morning meeting focusing on the topic
of "market institutions and economic performance".
Summing up the day's debate, Danuta Hübner, ECE Executive Secretary,
said among other things that there was a need for a broad, effective anti-corruption
policy, requiring action on a number of fronts, including reduction of too-complex
regulations that raised opportunities for government officials to exact bribes, and the
simplification of tax and tariff regimes.
IntroductionDANUTA HÜBNER, Executive Secretary of the ECE, said the vacuum created
in transition countries by the elimination of old institutions and the difficulties
encountered in installing effective new ones could lead to crime and corruption, and
ultimately could threaten institutional failure. But it was worth remarking as well that
today's discussion of such failures -- of wrongdoing, of corruption and crime in the
transition countries -- should be placed in the context of the tremendous progress
achieved in recent years by transition countries and economies.
Panel discussion on "Corruption in economic transition and development: grease or
sand?" SHANG-JIN WEI, of Harvard University and the Brookings Institution,
introducing his paper, said there was an academic debate these days over whether
corruption was a negative thing or was "grease" that eased economic development;
it was hard to think of models that could prove one claim or the other, but one could
review existing empirical research on the subject. It was best, moreover, to think of the
term "corruption" as part of a broader problem of weak or poor public
governance. Quantifying something so difficult had been attempted, among other things,
through expert opinions; surveys of firms and officials; and "polls of polls",
which meant combining various measurements of the problem. There also had been attempts to
be more "objective", as through a survey of German business exporters a few
years back to ascertain what extent of their business in various countries called for
bribery of government officials. This measure had correlated well with the other surveys
of corruption. This review and various other indexes had shown, for example, high rates of
corruption in the transition countries of Azerbaijan, Russia, and Uzbekistan, and low
levels in the Czech Republic, Hungary, and Poland.Corruption could effect economic growth through discouraging domestic
and foreign investment, among other things, Mr. Wei said -- a 1995 study had shown that
economic growth rates were negatively associated with corruption ratings, and that
corruption indexes were negatively correlated with rates of investment. Another study had
shown that corruption affected the composition of government spending, skewing it away
from such things as education and health and towards less publicly useful forms of
expenditure from which it is easier to extract bribes. Research he and his colleagues had
done, Mr. Wei said, did not indicate that payment of bribes by firms had helped them
much in the long run, especially when one considered the time, effort and confusion
involved. And the benefits of globalization tended to be lower and the risks of
globalization (e.g. vulnerability to financial crises) higher for countries with serious
corruption problems. Overall, corruption appeared to be sand much more than grease for a
country's economic development.KRASSEN STANCHEV, of the Institute for Market Economics of Sofia, said
Benjamin Franklin had said that honesty was the best policy, and Mr. Wei's efforts
appeared to confirm that truism. Entrepreneurs had to deal with government agencies and
bureaus, and while entrepreneurs worked for a profit, bureaucracies were non-profit
organizations; also entrepreneurs were trying to reduce the costs of dealing with
government, while government officials might well be trying to maximize their individual
situations. An important principle for analyzing corruption was the belief that in the
market both buyer and seller gave less than he got. In general, the expert community
believed that honest policies and freedom coincided; countries tended to rank at a similar
level for indices of both economic freedom and absence of corruption. Within the transition countries, Mr. Stanchev said, there were
variations in the "license-requiring" characteristics of governments in relation
to entrepreneurship; in some cases, if there was a quick fix to a corruption problem,
there might well be a failure of the economy, depending on what was left to deal with
economic matters and to support and stimulate growth in the absence of the old, admittedly
corrupt, system.IVO BICANIC, of the University of Zagreb, said among other things that
one could think of sand or grease, or perhaps of jellyfish. If you went after corruption,
those involved, like jellyfish, tended to burn and sting very hard when you got close. A
lot was said about large corruption and the big bucks, but it was also worth talking about
small corruption; in his opinion this was what distinguished the economies in transition;
one saw grand corruption everywhere, but small-scale corruption was not found so much in
developed or "tidy" economies. Small-scale corruption tended to occur where it
was harder for average people to make a living -- the street vendor paying off a
policeman, someone crossing a border and paying off the guard. In Croatia, surveys had
found that the customs service, the police, and the medical profession which were the most
corrupt, and this sort of corruption was largely small-scale.How to reduce it? It was difficult; if everyone was corrupt on a small
scale, it was hard to decide where to start cleaning it up, and hard to find an agent with
the moral authority to do so. It also had been found that dealing with large-scale
corruption hadn't done much to reduce small-scale corruption -- putting high officials
into jail didn't have much effect on low-level officials who also exacted bribes. Also,
when trying to dismantle corruption, size was an important factor, as you had to rely on
home-grown personnel; small economies had a smaller amount of human capital, smaller
resources, fewer judges for replacing those who had been removed for being corrupt.
Sometimes you had to keep people despite the skeletons in their closets, as otherwise you
would have no judges or customs officials.A number of comments were offered from the floor. Speakers said, among
other things, that bribes might be demanded, but they also were offered, and attention had
to be paid not only to those who sought bribes but to those who were willing to pay them;
that peer pressure within countries and between countries could be useful for fighting
corruption, based on mutual support; that anti-corruption strategies done in a way that
made things more difficult for businesses, which were already victims of corruption, were
likely to fail; that governments should outlaw the paying of bribes, and not just the
reception of them, so as to create a level playing field for businesses; and that foreign
influences and globalization could infect transition economies with corruption.
Responding, Mr. Wei said, among other things, that he agreed that the
costs of corruption fell disproportionately on small- and medium-sized enterprises and on
the poor; that understanding corruption was like understanding many social problems -- to
deal with it you had to approach it from the perspectives of both incentive and
opportunity. He considered globalization a spur for fighting corruption. Because it
intensified competition, globalization made the liabilities of corruption -- the
inefficiencies and lack of competitiveness that resulted -- more severe, and hence had
made countries more willing to fight it. Openness and transparency reduced such countries'
vulnerability to corruption, as did increasing civil servants' pay to match that available
in the private sector. His advocacy of special governance zones was based on the idea that
a country had to start somewhere; such a zone was contained, concentrated and
experimental; it could be kept clean and thus used to develop a good example and to
establish momentum for wider efforts to reduce corruption.
Panel discussion on "Governance and corruption in transition: the challenge of
subverting corruption"BARTLOMIEJ KAMINSKI, of the University of Maryland, introducing his
paper, said among other things that a recently published book in Poland by a Holocaust
survivor had noted that the author was only able to save his life on several occasions
because someone was willing to accept a bribe. An index on aggregate corruption of the
World Bank had placed, among transition countries, the Czech Republic and Hungary and
Poland among the least-corrupt nations and Azerbaijan, Ukraine, the Russian Federation,
and Albania among the most corrupt. Two other countries were missing because of the form
of government involved and the lack of cooperation with the survey -- those governments,
paradoxically, appeared to have low levels of corruption and at the same time had
performed very poorly in recent years in terms of economic development. They were Belarus
and Uzbekistan.There did appear to be a strong correlation between low corruption and
good rates of progress made in transition, Mr. Kaminski said. Also, those countries that
had taken a radical approach to economic reforms, introducing major decisions quickly, had
made greater transition progress and experienced lower levels of corruption.
Interestingly, those countries were viable parliamentary democracies, as opposed to having
"presidential" systems as their primary indication that they were democracies.
To reduce corruption, there had to be political commitment -- among other things, a
government had to set and apply laws that prohibited and punished it, had to close
loopholes, had to suspend regulations that limited individual rights and freedoms, had to
increase competition in both business and politics, including through increasing the
accountability of elected officials, and had to eliminate networks that operated to the
advantage of political or business insiders.MARK PIETH, of the University of Basel, said as a non-economist he saw
things from a different perspective and couldn't judge the methodologies involved in the
paper. But no one had mentioned here the large numbers of destitute, impoverished and
possibly homeless people generated by the switch to market economies; he had looked in
vain all day for what might be called a "solidarity" approach, for a discussion
of what might be called adequate distribution of existing wealth. He agreed that taxes
should be simple, fair, realistic, and imposable; beyond that, of course, a State did need
its resources to deal with such important matters as health and education. It was
necessary for the North and the West to be careful about telling the South and the East
that a market economy solved everything.Those who paid bribes were rather let off the hook in this study, Mr.
Pieth said. More attention should be paid to them. They perhaps should be more courageous
in refusing to play the game, even if they were small or medium-sized companies. He had
been Chairman of the OECD working group on bribery for the last ten years, and his
experience was that companies had to change their attitudes; a "common bad" had
to be made out of active bribery; the cost of bribery had to be raised for those companies
that were ready and willing to bribe. The private sector had to monitor itself to reduce
the "supply side" of the equation of corruption.JORGE BRAGA de MACEDO, President of the Development Centre of OECD,
said among other things that a coalition involving governments, NGOs, and private firms
might do well in fighting corruption and in making it clear that corruption was bad for
business. Globalization, openness to trade and capital movements, and willingness to
change institutions and to improve governments appeared to characterize countries willing
to grow on the faster track of the world economy. It was important not to put countries
into boxes -- and the words "transition" and "development" did just
that; these perceptions mattered, and affected the future. Another factor, surprisingly,
was that in some countries a wealth of natural resources could be a liability because it
raised unrealistic expectations for short-term results and raised opportunities for
corruption.It appeared that globalization actually reduced corruption and improved
governance, Mr. Braga de Macedo said. Reforms did not necessarily require a crisis to get
them going, either; the important thing was to make a substantive positive change and to
avoid a subsequent reversal -- if you had a reversal, you had accomplished nothing and
made things more difficult for the next try. It was important not only to begin but to
sustain and expand reforms.Those contributing to the debate from the floor said, among other
things, that instead of engaging in sophisticated intellectual exercises, the experts
should suggest that governments, especially the Russian Government, prosecute a few cases
in the courts and see what, in practical terms, to do about the problem of corruption;
that what was needed was more practical effort and experience in battling corruption; and
that building reform in many cases, for many countries, required gradual reform -- that
"shock therapy" wouldn't work for some nations as it had for Poland.Bartlomiej Kaminski said in response that on the issue of gradualism
versus shock therapy, he did not feel that Russia had had shock therapy; there had been
partial reform that had opened the system to widespread abuses, and when a more radical
approach was finally tried it was too late. Whether you did shock therapy or not, you
weren't going to have a viable banking sector overnight -- that would take time. But you
could move quickly to a uniform tariff rate -- that could be a clear, fast, decisive step.
It was standard to say that corruption deepened inequality and worsened poverty, but he
wasn't sure that was always true -- sometimes it improved the incomes of some very poor
people, especially in places with bad governments that didn't care about the poor.
Therefore in fighting corruption you had to be very careful about the effects that would
result.ANTONI KAMINSKI, of the Polish Academy of Sciences and co-author of the
paper, said no one wanted shock therapy, but sometimes it was necessary; sometimes you had
to change the rules of the game all at once or you would have total anarchy. Shock therapy
didn't apply to institutions, it applied to policies. You couldn't change institutions
over night. He also agreed that one should care about the poor and the homeless; they
should not be lost track of during transition. On the other hand, unemployment figures
often were overstated, especially in transition countries, as small- and medium-sized
enterprises frequently had employees they hadn't officially acknowledged as a way of
avoiding red tape and added expense; quite a few people worked clandestinely or
informally.
As for practical things that could be done, one could introduce a rule
as had been done in Poland where a director of a government agency that issued permits had
ordered any employee to notify him of any attempt by a politician to influence a case;
also that each time such an approach was made, the person propositioned stated to the
person attempting to exercise such influence that a report would be made to the director;
within a few weeks, all such attempts had ceased. Where there was political will, quick
and substantive progress could be made against corruption.
Concluding remarksDANUTA HÜBNER, ECE Executive Secretary, summarizing the day's debate,
said that this morning Professor William Lazonick had proposed a new theoretical
framework, saying that emphasis should be based on enhancing skills and capacities and on
promoting innovation; his point was that governments should not become slaves to theories
and should keep their eye on the important matter of what led to practical economic
progress. It also had been agreed that institutions definitely mattered in promoting
economic progress; and that at the beginning of transition institutional reforms had not
been assigned the needed priority -- that too much attention had been paid to dismantling
State enterprises and not enough on promoting the creation of new private enterprises.Over the course of the afternoon meeting, corruption had been described
as a universal phenomenon, Ms. Hübner said; much had been said about how it could or
couldn't be measured, but there seemed to be universal agreement that corruption was bad.
It appeared to have a major negative impact on foreign investment and on economic growth
for countries in transition. Countries with high levels of corruption were denied the
benefits of globalization, and it was important in confronting corrupt practices to pay
attention to the root causes. There was a need for a broad, effective anti-corruption
policy, requiring action on a number of fronts, including reduction of too-complex
regulations that raised opportunities for government officials to exact bribes, and
requiring simplification of tax and tariff regimes.
For further information
please contact:
Economic Analysis Division
United Nations Economic Commission for Europe (UNECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: (+41 22) 917 27 78
Fax: (+41 22) 917 03 09
E-mail: [email protected]
Website: http://www.unece.org/ead/ead_h.htm
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