Preventing and rooting out corruption: factor determining a proper framework of private sector development
Johannes F. Linn,Vice President, The World Bank
All available world-wide indicators of corruption incidence (Transparency International, EBRD, World Bank) show that corruption is highest in the CIS*.(*Johannes F. Linn will briefly report on new research results, based on a survey of over 3,000 enterprises in 20 transition countries, carried out by the World Bank and EBRD. This is work in progress. Full results will be published in a few months.)
Corruption clearly deters investment and growth, which is not surprising when considering that according to Standard and Poors, the probability of investment loss over five years due to corruption is 95% in Turkmenistan and 71% in Georgia compared with 24% in Estonia and 6% in Singapore.
A New Analytical Framework: The researchers decided to unbundle various aspects of corruption. Most importantly the distinguish between two types of corruption:
1. «administrative corruption», i.e., improper payments and benefits to officials to influence the application of a given set of rules or policies;
2. «state capture», i.e., bribes are paid to officials to influence the formation of policies, laws or rules.
Example for differing degrees and aspects of state capture: In Estonia 14% of firms report harmful effects of the purchase of parliamentary legislation, 7% for purchase of decrees, and 7% for purchase of Central Bank influence. In Azerbaijan the relevant percentages are 42%, 48% and 38%.
General country patterns are:
• High administrative corruption and high state capture: Azerbaijan, Kyrgystan, Georgia
• High administrative corruption, medium state capture: Kazakstan, Armenia
• Medium administrative corruption, high state capture: Latvia, Bulgaria, Croatia
• Medium administrative corruption, medium state capture: Poland, Hungary, Czech Republic, Slovenia
These differential patterns are important, since policy response will differ according to the combination of corruption problems a country faces.
Instruments for Fighting Corruption: Five sets of instruments can be combined depending on country conditions:
Checks and balances: independent and effective judiciary; legislative oversight; accountability of public officials and private actors; independent prosecution and law enforcement.
Accountability of political leadership: political competition; transparent party finance; disclosure of parliamentary cotes; asset declaration and conflict of interest rules for public officials.
Civil Society Oversight: freedom of information; public hearings on draft laws; monitoring by media and NGOs.
Competitive private sector: competitive restructuring of monopolies; simple entry and exit rules; transparent corporate governance; collective business associations.
Public sector management: meritocratic civil service with reasonable pay; sound budget, treasury, procurement and audit management; effective tax and customs administration; effective public service delivery.
Optimal combination of instruments depends on country conditions: special consideration here of the two sets of country conditions of corruption most prevalent in Eurasia:
For high administrative corruption, high state capture: stand-alone public administration and public finance reform is not enough. Focus of reform has to be on accountability of political leadership, checks and balances (including judicial reform), civil society oversight and private sector competition. External technical assistance by donors may be of limited use. This is clearly a very difficult situation to turn around.
For high administrative corruption, medium state capture: focus on public administration and finance reform is OK and external donor support and TA can be very helpful. But it’s important not to neglect the other areas, since there is a tendency for state capture to increase, if not checked in due course.
In all cases, there is a need for credible leadership from the top, good diagnostics, realistic expectations, and action rather than rhetoric, if anti-corruption initiatives are to succeed.
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