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

Abstract

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