Corruption, State

Capture, and Public

Financial Policy in

Central and Eastern

Europe Steven Gawthorpe

EXECUTIVE SUMMARY

This project seeks to critically analyze the following issues in Central and Eastern

Europe:

How State Capture Influences Public Financial Policy Via Public Procurement

How Rent-Seeking Activities Pursue Capital Intensive Areas Over Labor Intensive Areas of Public Spending

How Decreases in Public Spending may Foster Increases in Corruption Related Activity

OUTLINE

REGION: CENTRAL AND EASTERN EUROPE

GENERAL FORMULA

CorruptionAccountabili

ty

Monopoly

Discretion

STATE CAPTURE

“In a state where corruption abounds, laws must be very

numerous” Publius Cornelius Tacitus

• State capture is the manipulation of laws, rules, and regulations of public policy with the intention to serve private interests

HOW INEFFECTIVE POLICY FUELS RENT-SEEKING

• Instructive Example: How the All Pay Auction Concept Instigates Rent-Seeking Behavior

The Consequences? Misallocation of Social Resources Rewarded Incentives for Illicit Behavior Asymmetric Information Major Barriers to Market Entry

ISSUE: HYPOTHESIS Areas of corruption in public

procurement that have yet to be fully explored will emphasize the following:

Decreases in expenditure can increase corruption rather than decrease

Corrupt activity is more prevalent with capital intensive areas of procurement than labor intensive activities

State capture influences public procurement policy under the umbrella of public finance

METHODOLOGY: CORRUPTION DIAGNOSTICS

VALUE CHAIN METHODOLOGY

The value chain basically lays out the sequence of activities that a sector would have to undertake to deliver a particular output

By assessing the vulnerabilities in the value chain of the public procurement process one can determine the exposure to corruption related activities

PROCUREMENT CHAIN EXAMPLE

DIAGNOSTIC QUESTIONNAIRE

Is there an independent audit of the state budget?

Are there clear rules, laws, and processes for government procurement?

Are revenue forecasts realistic?

Are there internal AND external audits?

ECONOMETRICS

An Analysis of Variance (ANOVA) multiple linear regression will regress: State capture indicators Government effectiveness indicators The results from the diagnostic questionnaires

• The Goal is Determine:• Correlation• Statistical Significance• Causality

CONCLUSION: FOOD FOR THOUGHT

The nature of corruption is secretive and can never be analyzed with absolute precision

Corruption can be described much like a black hole: you cannot directly see it but you can see its effects

Through diagnostic measures this project’s goal is to pinpoint where corruption is most likely to occur and analyze the potential problem areas and contribute alternative actionable indicators to better serve anti-corruption policies

QUESTIONS?

Campos, E., & Pradham, S. (2007). The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level. Washington D.C.: The World Bank.

Rose-Ackerman, S. (1999). Corruption and Government: Causes, Consequences, and Reform. New York, NY: Cambridge University Press.

Hellman, J., & Kaufmann, D. (2002, December). The Inequality of Influence. The World Bank. Retrieved from http://www.worldbank.org/wbi/governance/pdf/inequality_influence.pdf

References: