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"Seize the state, seize the day": state capture, corruption, and influence in transition

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  • Hellman, Joel S.
  • Jones, Geraint
  • Kaufmann, daniel

Abstract

The main challenge of the transition has been to redefine how the state interacts with firms, but little attention has been paid to the flip side of the relationship : how firms influence the state - especially how they exert influence on, and collude with public officials to extract advantages. Some firms in transition economies have been able to shape the rules of the game to their own advantage, at considerable social cost, creating what the authors call a"capture economy"in many countries. In the capture economy, public officials, and politicians privately sell under-provided public goods, and a range of rent-generating advantages"a la carte"to individual firms. The authors empirically investigate the dynamics of the capture economy, on the basis of new firm-level data from the 1999 Business Environment and enterprise performance survey (BEEPS), which permits the unbundling of corruption into meaningful, and measurable components. they contrast state capture (firms shaping, and affecting formulation of the rules of the game through private payments to public officials, and politicians) with influence (doing the same without recourse to payments), and with administrative corruption ("petty"forms of bribery in connection with the implementation of laws, rules, and regulations). They develop economy-wide measures for these phenomena, which are then subject to empirical measurement utilizing the BEEPS data. State capture, influence, and administrative corruption are all shown to have distinct causes, and consequences. Large incumbent firms with formal ties to the state tend to inherit influence as a legacy of the past, and tend to enjoy more secure property, and contractual rights, and higher growth rates. To compete against these influential incumbents, new entrants turn to state capture as a strategic choice - not as a substitute for innovation, but to compensate for weaknesses in the legal, and regulatory framework. When the state under-provides the public goods needed for entry and competition,"captor"firms purchase directly from the state, such private benefits as secure property rights, and removal of obstacles to improved performance - but only in a capture economy. Consistent with empirical findings in previous research on petty corruption, administrative corruption - unlike both capture and influence - is not associated with specific benefits for the firm. The focus of reform should be shifted toward channeling firms'strategies in the direction of more legitimate forms of influence, involving societal"voice", transparency reform, political accountability, and economic competition, Where state capture has distorted reform to create (or preserve) monopolistic structures, supported by powerful political interests, the challenge is particularly daunting.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2444.

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Date of creation: 30 Sep 2000
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Handle: RePEc:wbk:wbrwps:2444

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Keywords: Roads&Highways; Corruption&Anitcorruption Law; Decentralization; Economic Theory&Research; National Governance; National Governance; Governance Indicators; Economic Theory&Research; Corruption&Anitcorruption Law; Microfinance;

References

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  1. Levine, Michael E & Forrence, Jennifer L, 1990. "Regulatory Capture, Public Interest, and the Public Agenda: Toward a Synthesis," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(0), pages 167-98.
  2. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
  3. Lui, Francis T, 1985. "An Equilibrium Queuing Model of Bribery," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 760-81, August.
  4. Shang-Jin Wei, 1999. "Corruption in economic development - beneficial grease, minor annoyance, or major obstacle?," Policy Research Working Paper Series 2048, The World Bank.
  5. Laffont, Jean-Jacques & Tirole, Jean, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1089-127, November.
  6. de Meza, David & Gould, J R, 1992. "The Social Efficiency of Private Decisions to Enforce Property Rights," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 561-80, June.
  7. Antonio Estache & D. Martimort, 2000. "Transaction costs, politics, regulatory institutions and regulatory outcomes," ULB Institutional Repository 2013/44072, ULB -- Universite Libre de Bruxelles.
  8. Spiller, Pablo T, 1990. "Politicians, Interest Groups, and Regulators: A Multiple-Principals Agency Theory of Regulation, or "Let Them Be Bribed."," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 65-101, April.
  9. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
  10. Dilip Mookherjee & Pranab K. Bardhan, 2000. "Capture and Governance at Local and National Levels," American Economic Review, American Economic Association, vol. 90(2), pages 135-139, May.
  11. Daniel Kaufmann & Sanjay Pradhan & Randi Ryterman, 1998. "New Frontiers in Diagnosing and Combating Corruption," World Bank Other Operational Studies 11530, The World Bank.
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Citations

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Cited by:
  1. Odd-Helge Fjeldstad, 2002. "The fight against corruption and the role of parliamentarians," CMI Working Papers WP 2002:6, CMI (Chr. Michelsen Institute), Bergen, Norway.
  2. Stanley Engerman & Kenneth L. Sokoloff, 2004. "Digging the Dirt at Public Expense: Governance in the Building of the Erie Canal and Other Public Works," NBER Working Papers 10965, National Bureau of Economic Research, Inc.
  3. Erik Berglof & Patrick Bolton, 2002. "The Great Divide and Beyond: Financial Architecture in Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 77-100, Winter.
  4. Evgeny Yakovlev & Ekaterina Zhuravskaya, 2004. "State Capture and Controlling Owners of Firms," Working Papers w0044, Center for Economic and Financial Research (CEFIR).
  5. Reinikka, Ritva & Svensson, Jakob, 2003. "Survey techniques to measure and explain corruption," Policy Research Working Paper Series 3071, The World Bank.
  6. Alexander Alekseev & Natalia Tourdyeva & Ksenia Yudaeva, 2003. "Estimation of the Russia’s trade policy options with the help of the Computable General Equilibrium Model," Working Papers w0042, Center for Economic and Financial Research (CEFIR).
  7. Francisco, Manuela & Pontara, Nicola, 2007. "Does corruption impact on firms'ability to conduct business in Mauritania ? evidence from investment climate survey data," Policy Research Working Paper Series 4439, The World Bank.
  8. Minogue, Martin, 2005. "Apples and Oranges: Problems in the Analysis of Comparative Regulatory Governance," Centre on Regulation and Competition (CRC) Working papers 30589, University of Manchester, Institute for Development Policy and Management (IDPM).
  9. Rodrigues, S.B., 2010. "Towards a New Agenda for the Study of Business Internationalization: Integrating Markets, Institutions and Politics," ERIM Inaugural Address Series Research in Management EIA-2010-043-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  10. Knight-John, Malathy, 2005. "Regulatory Impact Assessment: A Tool for Improved Regulatory Governance in Sri Lanka?," Centre on Regulation and Competition (CRC) Working papers 30626, University of Manchester, Institute for Development Policy and Management (IDPM).
  11. James K. Boyce, 2007. "Public finance, aid and post-conflict recovery," UMASS Amherst Economics Working Papers 2007-09, University of Massachusetts Amherst, Department of Economics.
  12. Åslund, Anders, 2012. "How entrepreneurship could be promoted after the collapse of a socialist economic system," Journal of Asian Economics, Elsevier, vol. 23(2), pages 157-167.
  13. Jean-Francois Arvis & Ronald E. Berenbeim, 2003. "Fighting Corruption in East Asia : Solutions from the Private Sector," World Bank Publications, The World Bank, number 14749, January.

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