Types of corruption: the effect on business environment

Maria Kravtsova, (PhD student, HSE, Moscow)

Motivation

• The effect of corruption on business climate: • Negative: Corruption hampers investments and

depresses economic growth (Mauro)• Positive: Corruption helps to deal with poor

institutes and to overcome ineffective laws. (Hungtinton, Leff, Scott, Vaal and Ebben)

• In both cases the authors take into account the quantitative aspect of corruption. But they don’t consider the fact that different qualitative types of corruption might have different consequences.

Types of corruption

• J. Scott 1969: "parochial" corruption: only ties of kinship, affection, and caste determine access to the allocation of benefits controlled by public officials “Market” corruption: “impersonal process in which influence is accorded those who can “pay” the most.”• North, Wallis, Weingast 2011:“Power corruption” exchange of power for economic rent (Ex: policemen who extort bribes from business owners)

“+” and “-” of corruption types

• “Market” corruption: “-” financial burdens on enterprises; “+” more equal opportunities for business owners, it offers a virtually universal access to favors to anyone willing to pay (J. Scott, 1969).

• “Parochial” corruption: “-” exclusion of outsiders (Waldinger, 1995), restriction of competition. “+” less financial burdens

• “Power” corruption: “-” fear, insecurity; financial burdens. “+” the probability of uncontrolled violence is lower when social groups possessing power resources have a possibility of rent extraction (North and al. 2011).

Russian case study: corruption ties between police officers and business owners• Aim: to understand how different corruption

types are related to each other within one country.

• Why policemen? For most business owners these contacts are extremely likely to happen, regardless of the nature of their activities.

Data and methodology

• In-depth interviews with the representatives (owners and executives) of small and medium sized companies based in Moscow, the Moscow Region, and Nizhny Novgorod (14 interviews)

• In-depth interviews with police officers of different ranks and different departments based in Moscow and the Moscow Region (12 interviews).

• Questionnaire of police-people of different ranks and departments conducted in 2011 in Russia, Bulgaria and Kazakhstan. (We use only Russian part of this survey)

Types of police-business corruption ties

• Parochial corruption• Police officers set up their own business• Long term friendships (services exchange, may be free

from payments)• Businessmen concede a share in their business to police

officers• “Subscription fee” for the specific set of services.(“roof”)• Fixed fee for isolated services or favors.

• Market corruption, power corruption

Current trend: from “market” and “power” corruption to “parochial” corruption

• Businessmen pay cash bribes and a fixed fee for protection to policemen relatively more rare than in the 90-th.

• The cases of violent business extortions are less widespread than in the 90-th.

• Business owners reciprocate with police-officers more often through gifts and favors.

• Note: this trend refers to what is happening “at the lower level”, i.e. in relations between small and/or medium business owners and police officers from up to district police departments. At the higher levels the situation may be different.

Informal income of policemen can decrease

• Are there any changes among the last one or two years concerning the possibilities of getting additional income working in the police?

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Possible explanations of the trend

• Businessmen don’t want to participate in “market” corruption offering bribes to policemen:

• Businesses become more legitimate, they don’t need to make informal payments in order to hide their law violations;

• Policemen have less possibilities of extortions (“power” corruption):

• The frequency of business inspections by supervising authorities is now restricted by the law;

• Business owners have less fear for criminal structures. Earlier policemen used this fear to extort money for business protection.

• More stringent anti-corruption policies.

How has changed supervisors’ control in your department over the past year? (policemen

survey)

increased decresed nothing changed0

10

20

30

40

50

60

70

80

Possible explanations of the increase in “parochial” corruption

• Because of economic stagnation, when few new players come into the game, business owners and policemen know each other for a long time. Their relations are based on exchange of services instead of momentary payments for favors.

Advantages for business environment

• Businessmen don’t need to spend money on bribes • Business owners have higher assurance in obtaining

the services or favors they need when they are dealing with officers who they know well. According to our respondents paying a bribe to an unacquainted policemen doesn’t give such a guarantee.

• Businessmen have less risk to be a victim of violent extortions when they are dealing with policemen whom they know for a long time. (restriction of “power” corruption)

Disadvantages for business environment

• Unfair competition: many business owners who can not establish good friendship relations with law enforcers and other officials do not enjoy the many preferences available to their competitors.

• Businessmen whose business success depends on personal relations feel insecure, because their friends in the police can, for example, change their job or loos their friendship commitment.

Conclusions from the Russian case study

• Although all three types of corruption could be present within a country, one or two types might prevail.

• Systems with certain prevailing corruption types might transform to systems with other prevailing corruption types.

Market corruptionPower corruption Parochial

corruption

Next steps

• Quantitative comparative analysis on societal level using cross-country data bases (“Life in transition” from EBRD (34 countries), BEEPS from EBRD and World Bank ?)

• To distinguish different clusters of countries according to the prevalent type of corruption.

• To study the effect of different corruption systems on business environment .

Thank you for attention!

• Some people, because of their job, position in the community or contacts, are asked by others to help influence decisions in their favour. In general, how important is it in our country to have the support of such people to influence decisions in the following situations? (34 countries)

• Did you or any member of your household make an unofficial payment or gift when using these services over the past 12 months?

Key questions:

• What types of corruption ties between state officials and businessmen we can observe in Russia?

• Which systemic factors lead to a shift from the one corruption type to the other?

• How such changes affect the business ownership environment?

Increase in parochial corruption

• Business owners and police officers build their relations upon trust and regular exchange of favors much more often than before.

“When you’re working at the same place, and you’ve been there for 12 years, you can be sure to meet each of the inspectors at least once. That’s why you just go and build up those contacts”.

Decrease in market corruption • Today, “roof”-type services are mainly used by businesses with illegal operations, whereas by

late 1990s most business owners used to have a “roof.”

“What kind of a “roof” are you talking about? Can’t even think about it! We operate in the legal environment”.

• Businesses experience fewer inspections from supervising authorities including police than in 90-th

“We try to do everything by the rule so they just don’t come to us.”

• The cases of violent extortions are more rare because businesses are more legal and business owners are more aware about their rights.

What could you possibly bring against us? If you do have something, bring that up, and we will respond to it. And if you’re just looking to get some money… Well, for doing what? That’s just called extortion, and that’s a criminal offense!”