Seize the State, Seize the Day 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 capture, increased amounts of time spent by the firm with officials, poor protection of property rights, and poor enterprise performance. In contrast to state capture, firms in all countries-whether in a 'high-' or 'low-capture' environment-face similar incentives to engage in corrupt public procurement practices. By contrast, we examine administrative corruption and find that it is negatively related to firm performance. Finally, the exploration into the socioeconomic determinants of state capture points policy suggestions for tackling such challenge-within the fundamental political constraints that state capture itself places on reform. The evidence and opinions presented here are the authors' responsibility and do not necessarily reflect those of their respective institutions or their Executive Directors. The authors are responsible for errors and omissions. This paper is also a background contribution to the 'Anticorruption in Transition' Report under preparation (coordinated by the World Bank's Europe and Central Asia Region) for presentation at the Annual Meetings in Prague. The descriptive details on the survey and data we utilize in this paper are contained in: 'Measuring Governance, Corruption and State Capture