Seize the State, Seize the Day1 An empirical analysis of State Capture and Corruption in Transition

Abstract

Corruption has recently risen to the top of the development agenda, particularly in the transition economies. However, existing empirical research has been hampered by the lack of detailed and comparative data on the problem. We use the data from the ongoing Business Environment and Enterprise Performance Survey (BEEPS) to unbundle corruption into its specific constituent components and examine their particular causes and consequences. In addition to conventional measures of administrative corruption, we unbundle the measurement of corruption to focus particularly on two corrupt strategies which firms may use in their interactions with the state. First, state capture, defined as the efforts of firms to shape the very institutional environment in which they operate, and, second, public procurement corruption, the payment of kickbacks for securing public contracts. We show that the incidence, costs and benefits to the firm of both types of corruption differ. The evidence suggests that while ‘captor’firms in some environments benefit through higher sales in the short term, such payoff from state capture may not be sustainable. Furthermore, the social costs of state capture are high: firms in an environment characterized by state capture face strong incentives to join the fray, leading to a downward development spiral of increasing