Fight Against Corruption Instead of a Development Strategy

27 october 2013

Central and Eastern Europe: The Crisis and the End of Elites

Sergei Pavlenko is an economist; he headed Russia’s Federal Financial and Budgetary Supervisory Service in 2004-2012.

Resume: Economic history provides many examples that undermine Weber’s postulate that economies based on the Protestant ethic are more productive. And the lessons of the global financial crisis of 1997-1998 refute the view that economies based on Confucian values (above all, the moral need for a high degree of family and personal savings) are more successful and stable.

Central and Eastern European (CEE) countries are undergoing a transition from one socio-economic system to another. Individuals, communities and societies are in a state of continuous transformation necessitated by the globalization of markets and changes in basic traditional behavioral modes, primarily economic ones. The changes necessitated by systemic transition, on the one hand, and those  determined by the logic of globalization (for CEE countries the process also means regional unification as they integrate into the European market), on the other, will hardly be agreeable and smooth.

In most CEE countries, the state still remains not only a most influential economic actor but, in fact, also the dominant and, in some cases, hegemonic one. The share of the gross domestic product redistributed through budgets of all levels is still high. Governments have large property and actively pursue their economic interests by establishing new laws.

WHY CORRUPTION

Analyzing corruption in a broad context, one should say that, while agreeing to the preservation of state structures as dominant economic actors, the people of CEE countries tried to limit their activities by a system of checks and balances – parliamentary democracy and civil society mechanisms. But the main contradiction of socialist regimes has survived all revolutions. Citizens in Eastern Europe still willingly delegate a very broad scope of their powers to state agencies and prefer to enjoy only one right – the right to criticize these agencies from the positions of “morality.”

This is why in transition societies the criticism of the authorities, above all their corruption, is becoming more and more symbolic, almost iconic in nature. One of the paradoxes of the transition period is that distortions of the socialist times are now seen again, but with the opposite sign. There is almost no difference between worshiping the authority of Stalin, Gottwald or Rakosi and criticizing present-day authorities. Perhaps, the only difference is the underlying causes – the criticism of authorities today is largely based on hedonism of an observer than on the psychological stress of a participant in the process. This is also paradoxical, since under socialism citizens did not participate in the transformation process, while now the corruption cycle involves almost all sections of society.

Corrupt politicians, police and civil servants de facto service subconscious aspirations of citizens (given the low efficiency of state structures, one can say that this servicing is the only thing that justifies their existence).

The problem of corruption has taken the central place in the Russian public discourse, too. Corruption causes concern among various groups of the population and, last but not least, among corrupt officials themselves. The impression is that corruption has replaced the evil force in people’s minds in all respects – it is  incessantly spoken about and it should necessarily be taken into account when analyzing any private or public situation. Special rituals are even invented to exorcise corruption. The public and foreign experts are unanimous that Russia has bogged down in corruption completely, like no other country. They differ only in one thing. European experts believe that corruption in Russia can be eradicated through confiscation of property and absolute independence of some “anti-corruption agency” (apparently referring to the Investigative Committee), whereas the man-in-street calls for restoring the death penalty (because the confiscated property will be embezzled anyway).

For all the differences of the Russian scenario, the structure of its political and economic cycle is rather the same. In one way or another, Russia will repeat – and is already repeating – all the mistakes and achievements of the CEE countries.

INCENTIVES and DISINCENTIVES OF TRANSITION ECONOMY

The larger part of the world’s population lives in a highly corrupt environment. Interestingly, countries that belong to this environment demonstrate higher rates of economic growth than others. Besides countries like Switzerland and Finland we see China and India, Brazil and South Africa, Nigeria and Indonesia. Naturally, the criteria for measuring corruption in a society are influenced by many incommensurable factors; yet it is certain that a low corruption level is rather an exception than a rule.

The socio-economic mechanism of the transition period opens vast opportunities for fast personal enrichment. Fast enrichment of individual economic agents is made possible by problems of the transition period and (in the short term) by the way they are solved. For example, at the first stage of transformations, super-profits are earned due to the absence of price deregulation in local markets, while deregulation itself (which in the long term reduces the potential for cross-border arbitration) provides short-term opportunities for additional enrichment.

The main feature of a transition period is the high dependence of revenues on the rate of adaptation to the fast-changing economic conditions. The essence of corruption specific to the transition period is the exploitation by the few of adaptation opportunities  that are out of reach for other people, including control of these changes.

At the same time, the losses of an individual who is unable, for some reason, to quickly tap enrichment opportunities are translated to the next generations, which makes them ever more painful.GREED

CEE and post-Soviet countries differ significantly from each other in many ways, but their societies equally face the phenomenon of greed. As one of the characters in the Wall Street movie said, “Greed is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”

Economic history provides many examples that undermine Weber’s postulate that economies based on the Protestant ethic are more productive. On the other hand, the history of the global financial crisis of 1997-1998 refutes the view that economies based on Confucian values (above all, the moral need for a high degree of family and personal savings) are more successful and stable.

In fact, the entire history of the last few decades gives reason to conclude that only those economies prosper whose societies do not fully share (or largely do not share) Protestant values and where “honest living” and “self-reliance” are either questioned or are not viewed as moral values. Instead of analyzing economic factors that caused the 1998 crisis, both left-wing and right-wing politicians blamed violations of moral standards for it. So declaring the struggle for the observance of moral standards as an integral part of the anti-crisis policy is only logical.

This is how notions were changed in 2009-2012. Earlier, corruption was viewed as a by-effect of the dysfunction of market mechanisms (including mechanisms for determining, imputing and registering property rights). It was believed that if a country had problems with institutions and mechanisms, it would have no chance of economic growth, and, as a consequence, corruption would show up – actually, as a compensatory mechanism that allows economic agents to buy state (or rather, quasi-state) services when their provision is not ensured. That was the paradigm of the first stage of the transition period. Accordingly, the initial policies of national governments were focused on the solution of basic problems to achieve economic growth – liberalization and deregulation.

Today, corruption is viewed as an independent phenomenon that is a product of the activities of the bureaucracy or cynical politicians, which are beyond public control. The negative connotation of the word is becoming increasingly evident. As an integrated model of corruption began to dominate the media space, the linguistic and then conceptual difference between “gratitude” and “bribery,” between “baksheesh” and “bribe,” between voluntariness and extortion, and so on, was gradually eroded. Essentially different social plots and models have been reduced to “corruption.” Thus a whole range of traditional and compensatory behavioral stereotypes and patterns are recognized as corrupt.

Moreover, corruption has been declared not only a moral sin but also a factor that directly influences many social and economic processes. Fighters against corruption say corruption determines the state of the environment, the ethnic composition of the population, and economic growth rates. Naturally, the need to fight corruption becomes the main political objective – this is simply logical.

THE FAILURE OF ELITES

The ruling elites in CEE countries have failed to accomplish their historical mission: to ensure the transformation of their economies and societies as efficiently as possible. The economies of these countries are different, yet all of them are inefficient and unstable. The authorities have discredited themselves and their legitimacy is very relative, but the staff rotation they use does not work, while a complete renewal is unreal. The policy of delegating part of the powers (along with maximum responsibility for failures) to pan-European structures has not become a salutary alternative, either. One of the reasons is that these structures, even before they gained full sovereignty and received full powers, already demonstrate the worst examples of behavior characteristic of a big inefficient government. The ruling elites in CEE countries have proven unable to solve their social and economic problems, and Brussels is even less able to do that.

CEE ruling elites initially viewed their countries’ joining the Eurozone as one of their main tasks during the transition period. The move was expected to solve several short-term problems simultaneously: stabilizing the exchange rate without much effort, cutting transaction costs of regional business drastically, increasing their countries’ investment attractiveness, and, as a result, boosting economic growth due to an influx of foreign capital.

The joining of the Eurozone would actually be a transition period deal: post-Soviet authorities were ready to yield part of their sovereignty in exchange for the recognition of their legitimacy by developed European countries. Let us see what has come of it by the example of Slovenia, which has been having all kinds of problems after joining the Eurozone.

The move has denied Ljubljana a possibility to redress crisis imbalances by depreciating the national currency. This means that, instead of devaluation (a simple and quick, albeit painful, measure), it has to conduct institutional and structural reforms. From the point of view of standard economic policy, this is more correct, because devaluation makes possible the existence of inefficient businesses, inefficient management and inefficient governments. From the point of view of domestic politics, this is much harder.

The consequences of the devaluation shock will be quickly neutralized by gains for all social groups as a result of subsequent economic growth, which almost always allows the forces that have carried out devaluation to remain in the political field. Institutional and structural reforms are a classic “cutting the tail off piece by piece,” which in daily life brings about conflicts between numerous and diverse interest groups. In addition, the positive effects of the reforms are not obvious to the population and become evident already after the current election cycle ends. The political force that consistently conducts systemic institutional and structural reforms is doomed to suffer substantial (and often irreparable) electoral losses.

The Slovenian authorities in the early 2000s decided to put the prospect of their long-term survival at risk for the sake of short-term preservation of their legitimacy. These efforts resulted in their early replacement for new political forces. This process is not smooth and is full of “national peculiarities,” yet it is already obvious that the disappearance of the post-Soviet elites from the political field is a matter of the nearest future. Will these elites be driven out into the business, as were the remnants of the communist nomenklatura in the 1990s? There is little chance for that. Judging by the scope of the anti-corruption campaign unfolding in the CEE region, there will be much less humanism this time.

Although CEE countries are again witnessing economic growth, the negative impact of the crisis has not been overcome yet. Here are some ideas, which the ruling elites and the populations of those countries have already come to comprehend:

 Integration into the Eurozone in stable conditions accelerates economic growth, but in crisis conditions it reduces possibilities (a Eurozone member cannot change the exchange rate on its own). Slovenia’s withdrawal from the Eurozone is impossible, but its joining by other CEE countries may become a matter of further bargaining;

  • Integration with banking institutions of large EU countries is good in stable conditions; in a crisis, it brings about the loss of liquidity (European banks withdrew funds from the CEE region to make for losses in the balance sheets of parent structures). It is not clear what can be done here;
  • Integration with banking institutions of large EU countries has brought about a crisis in the mortgage market for countries that devalued their national currency, because it has dramatically increased loan service fees.
  • So, joining the European Union has not only failed to prevent a crisis in the CEE region, but has even deepened it (at least, at the initial, “monetary” stage).
  • At the stage of formulating and taking anti-crisis measures, lessons are rather ambivalent:
  • On the one hand, CEE economies have received access to resources of the European Central Bank’s anti-crisis package;
  • On the other hand, budget savings programs have proved very painful for small countries in the region.

Obviously, budget savings programs have not yet fully influenced the political cycle in CEE countries, so there are more developments to come.THE CRISIS AND THE PROBLEM OF MORAL DAMAGE

Classical economic theory views crisis as a generally positive, albeit painful, mechanism for removing accumulated contradictions. Nevertheless, the possibility of (and even need for) government interference in the economic cycle dynamics is no longer disputed. The new role of the state as a regulator of the economic cycle was first formulated during the presidency of Franklin Delano Roosevelt. It was  also the time (actually, even earlier, at the end of Herbert Hoover’s presidency) when the problem of moral damage caused by this kind of government interference was raised. The discussion of the moral damage included the issue of the influence of government assistance to economic agents (including individual ones) on their subsequent behavior. Despite the ongoing discussions on the accuracy of empirical calculations, there is a broad consensus in conclusions: moral damage not only exists, but it is also so great that, with other factors being equal, it can indirectly cause subsequent economic crises.

At the same time, it was during the 2008 crisis that governments and monetary authorities for the first time included measures to minimize moral damage in their anti-crisis programs. In Central and Eastern Europe, however, the situation is much more complicated – the economic crisis has entailed political crises. Unlike developed countries, the crisis in the CEE region was greatly exacerbated by a dramatic deterioration of the credit portfolio of local banks which, under political pressure, issued risky loans to state enterprises. Actually, this region does not need any additional factors to aggravate the situation – the crony capitalism established there itself causes moral damage. Therefore, measures to overcome and prevent moral damage (which in developed countries are taken largely within the frameworks of monetary and fiscal policies) in CEE countries must affect the very foundation of government.

Crony capitalism without super profits from oil and gas exports still follows standard operating patterns of “big government capitalism.” Therefore, corruption in CEE countries is not the reason but partly a direct result, partly a by-product, and partly a tool helping economic agents and service customers adapt to the inefficiency of regulatory and law enforcement agencies. In the peculiar CEE conditions, where large governments continue to distort the organic functioning of market mechanisms, corruption serves as an indicator of the degree of this distortion. It should be clearly understood that the threat to the economy and society comes from the actions of big governments, and not from compensatory responses. It is the system of government that needs to be changed, not one of its inherent properties.

But reformatting the system of government is a difficult and painful process, which may also be humiliating in a situation of external pressure. Therefore, it needs to be morally justified in the eyes of society. The ruling elites’ instinct of resistance must be paralyzed, and fighting corruption is probably the easiest and most efficient way to “discredit, delegitimize and mop up” the existing post-Soviet elites.

THE ANTI-CORRUPTION CAMPAIGN: LIMITS AND NEGATIVE SIDE EFFECTS

The anti-corruption agenda, already being formulated and even partly implemented, has its limits:

  • The political resources of “moppers-up” are limited; pressure groups are numerous, and if they unite on some platform they can form an electoral majority. A unifying platform can well be built on a nationalist agenda, laced with a slogan of “preserving the traditional national values” – that is, outwardly against gay propaganda, but actually meant to prevent all kinds of foreigners asking why we steal a lot (this is not about Russia, by the way, but other countries, like Hungary and Poland);
  • There is an obvious danger of totally discrediting all government institutions in case of a full-scale and unlimited fight against corruption. New elites may found themselves in a collapsed state – what is the point of fighting then? It is like a nuclear war – the winner will die too, but the next day;
  • Corruption, as a response to distortions brought about by big government, cannot be fully eradicated, because it is no longer possible to drastically reduce the influence of governments on the economy and society. Attempts to achieve the best result possible would be an inefficient waste of public resources. No one knows where there is the point of Pareto equilibrium here.

The possibility of implementing an anti-corruption agenda in CEE countries is limited – but is there a limit to negative side effects?

The most obvious effect will be greater independence of special services (up to their going out of public control). The need to combat corruption may be a very good excuse for that (fighting terrorism would do, too, but serious terrorism is non-existent in Central and Eastern Europe). One of the main points in the agenda – the creation of an independent special service to fight corruption – seems quite logical. Indeed, how can a special service, controlled by corrupt officials, fight corruption? However, special services out of public control is the last thing that CEE societies need. The decommunization of special services in most of the CEE countries was superficial, and it is post-Soviet special services that are, if not the backbone of the CEE elites, then major actors in the backstage orchestration of the privatization of public funds and the laundering of dirty money. But even if we leave this fact aside, a greater role for special services even in this case would threaten to turn the process of removing post-Soviet elites from the political scene into a process of rotation within these elites.

It would be fair to say, though, that the widespread use of secret services in intra-elite conflicts by politicians who control them is not good, either. When these services in Bulgaria or the Czech Republic spy on opposition leaders on orders from the authorities, this is bad. But this does not mean that security services should independently determine who is the illegal actor. The meaning of the transformational transition is that both must go.

But when we speak of grassroots corruption, then suspension of a judicial reform would have a very negative effect. Corrupt and inefficient courts cause much more damage to economies of the region than corrupt practices among doctors in Hungarian or Romanian hospitals. If an anti-corruption agenda were formulated with a view to really completing the transformation period, a reform of the judicial system would be given top priority.

The main issue – the creation of an independent and non-corrupt judicial system – has not been resolved in any of the countries so far. There is a logical trap here. On the one hand, there is the need to ensure the independence of courts. On the other hand, the judiciary is unable and unwilling to reform itself. Self-reform is a dubious thing and it is only possible in exceptional cases and under exceptional circumstances. But the creation of closed judicial corporations having an internal coordination and communication structure, and, most importantly, having a political mission of their own is not rare. In this case, the internal coordination of the judicial community allows it to channel the reform process and the concomitant purge into collective negotiations.

So, it may well be that negative side effects outweigh positive results. The outcome may be similar to what happened when syphilis was treated with mercury in the Middle Ages. The patients died, of course – but cured of the shameful disease.

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