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The Problems of Corruption, Clientelism, and Favoritism in Transition Economies: Notes for Monte Carlo*)

English Pages, 26. 4. 2001

1.            Corruption, clientelism and favoritism have co-existed with human society for a long time and in certain respect represent a permanent feature of human society. They appeared together with the government (or with any other public authority) and with the politicization of economic life. They are connected with the birth of politicians and especially of public officials, of bureaucrats of all types, with the possibility to influence or even to organize economic transactions without being owners (which means without being directly motivated to get the best price or to maximize other people’s welfare). It is not a new phenomenon, what may perhaps be new is the current exaggerating of the problem and exploiting it for political purposes.

2.           It is a complex phenomenon, influenced by many factors. It is an example of human behavior and must be studied as such. It should be discussed in terms of risk and return and of costs and benefits. It should not be discussed in terms of ethic as it is often suggested. One has to look, therefore, at both the micro and macro aspects and connections of it.

Its current discussion is, however, very simplified, largely one-sided and, therefore, dangerously misleading. It is based on a false (and highbrow) moralizing and – in addition to it – on an arrogant stance towards transition and developing countries. These countries are accused of benign neglect, of lack of principles and/or of moral on the side of politicians, of intentional maintaining holes in legislation, of assuming that corruption is “a grease, not sand” in economic development and in the whole functioning of society, of the political influence if not dominance of people who gain benefits from corruption, clientelism, and favoritism.

      It is not only a lie. It is, at the same time, an offense to all of us who try to overcome the problems we inherited because of totalitarian oppression, of irrationalities of a centrally planned economy or of underdevelopment. We have to reject the assumption or prejudice that these phenomena are largely a problem of less – developed countries. It is a serious problem in Western developed societies as well and it does not disappear with development.

3.           There is, nevertheless, some evidence (based on soft, not hard data) which proves that there is more corruption, more clientelism and more favoritism in transition and developing countries (or in emerging markets) than in mature developed countries. (The debate about the reliability of the evidence does not belong among my current interests or ambitions but it should be done because it is long overdue. We have to differentiate the verified cases from accusations.)

But, let’s accept this hypothesis as relevant. Now the question arises: Is it because of deficiencies of men – both individuals engaged in such activities and politicians who tolerate it (or tolerate the legislation or judicial system which made it possible) or because of something else, because of circumstances which temporarily offer bigger possibilities of such a behavior? Is it caused by subjective behavior or by objective circumstances? Is there a different propensity to corruption, clientelism and favoritism on the side of individuals (and their differing willingness to commit crime) in some countries than in others or are there just more opportunities to do it in some of them?

4.           My answer to these questions is simple and straightforward. Men were not created to be angels, neither in mature societies, nor in transition countries. Men always compare costs and benefits, risks and returns of all their activities, both legal and illegal. They do sometimes commit crimes. They do not do it because of their built-in criminality and immorality or their lack of ethic, they do it because of balancing costs and benefits of that (as of any other) human activity. I am ready to accept the argument that the imperfections of the legal framework and the absence of the administrative skills of law-enforcing institutions in transition countries may decrease the costs (by making such activities easier and with lower probability of punishment) but I insist that this is a minor factor.

5.           I look, therefore, for explanation of higher occurrence of such activities in some countries at the other side, at benefits and at opportunities.

6.           My proposition is that there is more corruption – ceteris paribus – where there is more government, and, as a consequence, “the only way to reduce corruption is to cut back government’s role in the economy” (G. Becker). Or, to put it differently, in free societies with small government, limited state ownership and minimal regulation illegal and improper activities are connected with high costs and promise only small benefits compared to those that can be obtained in normal market-based activities. I know this proposition will be disputed, here and elsewhere. Let’s, therefore, structure it a little: The government can be either an owner, or a provider of public goods, or a regulator. No one would probably challenge the argument that state ownership makes corruption possible because officials of the state have to make decisions which can not be sufficiently checked by the implicit control mechanism of the market. They are, therefore, extremely vulnerable and are a potential object of pressures of various kinds. The same is true about providing public goods, about public bids and orders, etc.

In this respect, transition and developing economies have – for many and varying reasons – more of state ownership, and have, therefore, more opportunities for various wrongdoings. This seems to be undisputed and rather simple.

7.           The issue of regulation and control is not so simple. On one hand, the more regulation, the more reasons exist to avoid it. This enhances economic criminality, it does not diminish it. On the other hand, regulation and control bring and clarify rules and function as an explicit guidance as regards what is fair and correct and what is not. It may have a positive role.

I don’t think we can say what is – at the margin – the net contribution of regulation to corruption, clientelism, and favoritism. It is in my opinion an empirical issue, which can’t be resolved on the basis of aprioristic arguments. Saying that, I know I am blowing against the wind but I do not pretend to know the outcome.

8.           Until now, I have not mentioned my hypothesis about the main source of corruption, clientelism and favoritism, which is the transfer of property from public to private hands, usually called privatization. It is mostly connected with standard privatization methods where governments choose the winners. Our non-standard (voucher) privatization was different because we did not choose the winners, they were chosen by the markets themselves.

We have been witnesses of accusations of various wrongdoings almost in any documented case of privatization in any Western developed country. These countries privatized individual firms, we had to privatize the whole economy, several firms per day. There has been – in our countries – quite logically more accusations as well as more proven cases of improper behavior. I almost wanted to say proportionally more, but I would like to argue that much less than proportionally more. The logical and optimistic conclusion is the following: the increase of such cases in our part of the world was only temporary and will quickly subside.

This conclusion is supported by another temporary issue, which is the   impact of the recent and temporary radical changes of rule of the game, of legislation. It seems to me that the changes of rules, not the rules themselves, create more opportunities for breaking them. This is another promising feature.

9.           There is also a confusion between hard corruption and something what I would call soft favoritism. Both are wrong, but the difference between them is as big as between the murder and stealing in a supermarket. Newspaper headlines, when talking about these issues, usually do not differentiate. It creates a very negative atmosphere in transition and developing countries and complicates their struggle for positive development.

10.       To sum up: The increase in the frequency of corruption and similar activities in transition societies is a temporary phenomenon which depends more on privatization and changes of rules than on moral imperfections of men and women living there and on imperfections of institutions in those countries.

Václav Klaus, 25.4.2001 

*) Crans-Montana Forum in Monte Carlo, 26 April 2001.