‘State Capture in Transition’: Summary Findings

Joel Hellman and Daniel KaufmannThe World Bank

http://www.worldbank.org/wbi/governance

New Research Program & Findings on State Capture and ‘Grand’ Corruption

• New work ‘unbundles’ and measures corruption, state capture and governance: evidence from 3600 firms in 22 transition economies. Key input to new Anticorruption in Transition report.

• Questions about investment climate, enterprise performance and behaviour; interactions between the state and firm

• Implemented jointly by World Bank and EBRD in collaboration with ECA region (Wbank), in context of Anticorruption Report.

• Corruption is dissected: administrative corruption, State Capture and procurement kickbacks -- with major implications

• “Seize the State, Seize the Day” paper, Sept. 2000

• Details and data available at http://www.worldbank.org/wbi/governance

Data subject to margins of error and need to be interpreted with caution. Data and views are not necessarily official-institutional.

…Small firms and New Entrants face more administrative (petty) corruption in transition

0

0.01

0.02

0.03

0.04

Bri

bes a

s a p

erce

ntag

e of

re

venu

es

De Novo Privatized State Owned

...Yet the focus ought to shift to ‘Grand Corruption’: firms shaping the legal, policy and regulatory environment by illegally ‘purchasing’ the

laws, policies and regulations of the state (“State Capture” by corporates)

State Capture Index and its Components(% of firms affected by corporate purchase of:...)

Country

Parliamentarylegislation(% of firms)

Presidentialdecrees(% of firms)

CentralBank(%offirms)

CriminalCourts(% offirms)

CommercialCourts(% offirms)

Partyfinance(% offirms)

CaptureEconomyindex(% offirms)

CaptureEconomyClassification

Albania 12 7 8 22 20 25 16 MediumArmenia 10 7 14 5 6 1 7 MediumAzerbaijan 41 48 39 44 40 35 41 HighBelarus 9 5 25 0 5 4 8 MediumBulgaria 28 26 28 28 19 42 28 HighCroatia 18 24 30 29 29 30 27 HighCzech Rep 18 11 12 9 9 6 11 MediumEstonia 14 7 8 8 8 17 10 MediumGeorgia 29 24 32 18 20 21 24 HighHungary 12 7 8 5 5 4 7 MediumKazakhstan 13 10 19 14 14 6 12 MediumKyrgyzstan 18 16 59 26 30 27 29 HighLatvia 40 49 8 21 26 35 30 HighLithuania 15 7 9 11 14 13 11 MediumMoldova 43 30 40 33 34 42 37 HighPoland 13 10 6 12 18 10 12 MediumRomania 22 20 26 14 17 27 21 HighRussia 35 32 47 24 27 24 32 HighSlovakia 20 12 37 29 25 20 24 HighSlovenia 8 5 4 6 6 11 7 MediumUkraine 44 37 37 21 26 29 32 HighUzbekistan 5 4 8 5 9 4 6 Medium

Overall 24 21 25 18 18 20 20

Source: Hellman, Jones and Kaufmann “Seize the State, Seize the Day”, http://www.worldbank.org/wbi/governance/

Extent of the “Capture Economy” in Transition (based on overall State Capture Index -- see previous slide)

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5

10

15

20

25

30

35

40

45

Sta

te C

aptu

re I

nde

x(%

of

firm

s af

fect

ed b

y st

ate

cap

ture

)

Alban

ia

Armen

ia

Azerb

aija

n

Belaru

s

Bulgar

ia

Croat

ia

Czech

Rep

Estonia

Geo

rgia

Hunga

ry

Kaz

akhsta

n

Kyr

gyzs

tan

Latvi

a

Lithuan

ia

Mol

dova

Polan

d

Roman

ia

Russia

Slova

kia

Slove

nia

Ukrain

e

Uzbek

istan

Ove

rall

For details, including margins of error and data sources, visit www.worldbank.org/wbi/governance/

For Firms, Capture is strategy that started with insecure property rights they faced

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2

4

6

8

10

12

% F

irm

s th

at a

re C

apto

rs

Insecure Secure

Security of property rights three years ago

Country-wide: State capture is associated with incomplete civil liberties (& slow economic reforms)

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0.2

0.3

0.4

Deg

ree

of

Sta

te C

ap

ture

High CivilLiberties

Medium CivilLiberties

Low CivilLiberties

High Reform

Medium Reform

Low Reform

…Capture brings substantial gains to the captor firms -- within the Capture Economy (in high capture countries)

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5

10

15

20

25

30

35

Per

cent

age

grow

th r

ate

of

sale

s

Non-Capture Economies Capture Economies

Captor Non Captor

Further Social costs of state capture: Further Social costs of state capture: Much lower growth in sales and investment in economyMuch lower growth in sales and investment in economy

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5

10

15

20

25

Ave

rage

rat

e of

gro

wth

'97-

'99

High capture Countries Low capture countries

SalesInvestment

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10

20

30

40

50

60

70

80

90

100

Pro

po

rtio

n o

f fi

rms

wit

h s

ecu

re

pro

per

ty r

igh

ts

Estonia Poland Georgia Kazakhstan Russia Ukraine

...And further Social costs for the whole economy: the security of Property Rights for Enterprise is low (selected

countries for illustration only)

Security three years ago Security of property rights today

Source: Hellmann, Jones, Kaufmann and Schankerman (2000). "Measuring Governance, Corruption, and State Capture" Policy Research Working Paper 2312, The World Bank, Washington, D.C. and BEEPS Survey (1999). http://w w w .w orldbank.org/w bi/governance

%

Some Policy Implications

• Anti-corruption efforts should focused more on state capture as the root of governance problems

• Need to factor in that the roots of state capture result from partial civil liberties, lack of transparency and insecurity of property rights

• Need to address link between corporate (including FDI) and national-level governance

• Political and Economic competition limit state capture– deconcentration of economic activity

– civil society, collective action and political accountability

For details and data: http://www.worldbank.org/wbi/governance/