Corruption in the Cis-7 Countries

Corruption in the Cis-7 Countries

CORRUPTION IN THE CIS-7 COUNTRIES Jean-Jacques Dethier, WB The paper was prepared for the Lucerne Conference of the CIS-7 Initiative, 20th-22nd January 2003. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations or to members of its Board of Executive Directors and the countries they represent. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The author is Senior Economist, Office of the Senior Vice President and Chief Economist, The World Bank. Comments from Joel Hellman, Jakob von Weizsacker, Helga Muller, Samuel Otoo, Andy Anderson, Dennis de Tray, Cheryl Gray and participants in the October 17, 2002 workshop are gratefully acknowledged. 2 Table of Contents 1. INTRODUCTION .....................................................................................................................5 Transition in the CIS-7 Countries............................................................................................7 2. SYMPTOMS AND MAIN DETERMINANTS OF POOR GOVERNANCE ..........................................8 Symptoms.................................................................................................................................8 Key Governance Issues..........................................................................................................10 Political Regime.................................................................................................................10 Capture...............................................................................................................................12 Weak Administrative Structures........................................................................................13 Nation-building..................................................................................................................13 Regional Differences .............................................................................................................15 Central Asia .......................................................................................................................15 Caucasus ............................................................................................................................16 Moldova .............................................................................................................................17 High Level Corruption...........................................................................................................18 3. THE CONSEQUENCES OF CORRUPTION ................................................................................20 Impact on the Investment Climate.........................................................................................20 Harassment of Small Entrepreneurs......................................................................................22 Buying Government Jobs.......................................................................................................25 Corruption among Public Authorities ...................................................................................25 Impact on Living Standards...................................................................................................27 Corruption in the Provision of Education, Healthcare and Social Services.........................29 Corruption in Education........................................................................................................29 Corruption in Healthcare ......................................................................................................30 Corruption in Social Assistance ............................................................................................32 Corruption during Privatization: The Example of Agricultural Land ..................................33 4. WHERE DO WE GO FROM HERE? ..........................................................................................37 ANNEX 1. Why corruption is harmful to growth and poverty reduction.............................39 References..............................................................................................................................42 CORRUPTION IN THE CIS-7 COUNTRIES This paper discusses corruption and its impact on growth and poverty reduction in the “CIS-7” which consists of the seven low-income countries of the Commonwealth of Independent States, namely Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan. Because of the importance of corruption as a major constraint on the development of those countries, the paper details the various manifestations of corruption. It largely eschews the discussion of other symptoms of poor governance—such as administrative obstacles to do business, poor public administration and public expenditure management, weaknesses in the legal and judicial system—some of which are discussed in various papers prepared for this conference. Section 1 introduces the issues by discussing governance and corruption in general. Section 2 describes the symptoms of poor governance in those seven countries using available indicators, then discusses the main issues that are responsible for these symptoms:, resistance to reform and policy distortions due to vested interests, weak state capacity and nationalism. It also discusses differences between regions (Caucasus, Central Asia, Moldova) and manifestations of high level corruption. This is followed by an analysis of the consequences of corruption, its impact on the investment climate and on living standards, in Section 3. Finally, section 4 presents brief conclusions. 4 1. INTRODUCTION The focus on corruption and governance by the international community is relatively recent (they were completely absent from the “Washington consensus” ten years ago) but these issues are now central to the policy debate. A turning point in facing up to the corruption challenge took place at the World Bank/IMF Annual Meetings in 1996 when James Wolfensohn placed the corruption issue center stage as a worldwide challenge for development. Since then, these issues have been studied more in depth, and a lot of expertise and knowledge has been built in those areas. One important implication has been the recognition that democratic accountability, voice and transparency matter greatly for development. Development activities function much more effectively if people have the ability to shape their own life which implies that there has to be effective participation in and oversight of publicly financed activity—which, in turn, depends on information, accountability, and the quality of local organizations (see e.g. Stern 2002). In the last two or three years, the overall framework of analysis has been broadened. Different manifestations of governance and corruption have been “unbundled” into clearly defined components which have been shown to matter differently in different settings (see Kaufmann et al. 1999 and 2002; Hellman et al. 2000; World Bank 2000a). Corruption is the abuse of public office for private gain. It covers a wide range of violations of norms including theft or misappropriation of public assets or funds; patronage in civil service recruitment or dispensation of state benefits; influence peddling and bribes. It is highly context- specific and country-specific since economic relations are embedded in specific social and cultural contexts which foster to various degrees the respect of formal norms and beneficial collective action mechanisms. Corruption includes practices that both violate or circumvent formal rules, including laws, and that involve exchanges of cash or favors. The extent and prevalence of corruption in a particular country depends largely on four factors: political and economic incentives (opportunities) for rent-seeking; the effectiveness of transparency (information and monitoring) and accountability mechanisms in the political/administrative structures of the state; the level of discretionary authority of state agents; and the effectiveness of law enforcement by police, prosecutors and justice. These factors, in turn, depend to a large 5 extent on political institutions and on economic policies (because policies which give officials a lot of discretion create more incentives for corruption)—in short, on the quality of governance.1 The literature makes a major distinction between “grand corruption” and “petty corruption.” Petty corruption (also called administrative corruption) includes mainly, but not exclusively, bribes. Rose-Ackerman (1999) distinguishes between bribes that clear markets in excess demand (when there is rationing); bribes as incentive bonuses for public officials; bribes lowering costs; and bribes permitting criminal activity (police protection, intimidation and organized crime). The prevalence of petty corruption should be viewed as a symptom of serious dysfunctions in a society. In the countries of the former Soviet Union, during the socialist period, “blat” and petty bribery were common but social connections and social standing were more important than cash (Ledeneva 1998). With the transition (and the need to earn currency), bribery and the scope of arbitrary discretion of officials increased

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