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New World Bank Report Finds Less Corruption in Central Asia

Countries can effectively fight corruption through reforms in public institutions and aggressive pursuit of anti-corruption policies, and there is now solid evidence that the reforms in the past few years in many transition countries are beginning to show results.

These are the encouraging conclusions of a new World Bank report issued April 7 that analyzes trends in corruption in business-government interactions in 26 transition economies of Europe and Central Asia.

The report -- called "Anticorruption in Transition 2: Corruption in Enterprise-State Interactions in Europe and Central Asia 1999-2002" -- finds good news: "Managers' responses in almost half of the transition countries suggest a decline between 1999 and 2002 in the overall frequency of bribery and the impact of corruption on their business," according to the World Bank's Cheryl Gray, one of the report's co-authors.

But in some countries, the report found, corruption remains high, and some indicators suggest it may be worsening in Southeastern Europe.

The ACT2 report and related publications, including Anticorruption in Transition-A Contribution to the Policy Debate (2000) are available at www.worldbank.org/eca/governance

Following is the World Bank press release on the report:

The World Bank
Washington, D.C.
April 7, 2004

NEW FINDINGS ON BUSINESS-RELATED CORRUPTION IN EASTERN EUROPE AND CENTRAL ASIA

WASHINGTON, April 7, 2004-A new World Bank report released today reveals some encouraging signs that the magnitude and negative impact that corruption exerts on business may be declining in many countries of the region.

The report, Anticorruption in Transition 2: Corruption in Enterprise-State Interactions in Europe and Central Asia 1999-2002, analyzes trends in corruption in business-government interactions in 26 transition economies of Europe and Central Asia. The findings are based on a survey of over 6,500 firms as part of a Business Environment and Enterprise Performance Survey (BEEPS) that was run in 1999 and 2002. The World Bank and the European Bank for Reconstruction and Development (EBRD) co-sponsored the BEEPS, the initial results of which were published in a chapter of EBRD's 2003 Transition Report.

"This new report provides an in-depth measure of trends in business-government relations over time and explains what is driving patterns of corruption in the region. By looking at such indicators as the frequency of various types of bribes, the yearly share of revenues paid in bribes, and managers' views regarding the extent to which corruption impairs business performance, we can begin to discern what is holding back investment that could spur higher growth," said Shigeo Katsu, World Bank Vice President for the Europe and Central Asia Region.

According to the authors, from the first to the second survey, most of the countries in the region enjoyed three years of solid economic growth, political stability, and improved macroeconomic performance. Foreign and domestic investment began to recover in many parts of the region. The accession or association process to the European Union made strong progress not only for the countries of Central Europe and the Baltics, but also for some of the countries of South Eastern Europe. As a result, this latest report, known as ACT 2, analyses corruption and government in a very different overall environment, buoyed by a strong upturn in the business cycle, a return to stability after a rocky decade of transition, and a brighter medium-term outlook.

ACT-2 findings -- signs of hope, but corruption persists

"For the first time since the beginning of the transition there appears to be some good news to report. Managers' responses in almost half of the transition countries suggest a decline between 1999 and 2002 in the overall frequency of bribery and the impact of corruption on their business, a finding that is particularly important for this region," said Cheryl Gray, World Bank Sector Director for Poverty Reduction and Economic Management and one of the report's co-authors.

The report shows that corruption -- whether measured by the frequency of bribes, the cost of bribes, or the extent to which corruption is an obstacle to business -- is beginning to ease in many countries. However, ACT-2 also underscores that there is no cause for complacency. Levels of corruption are still high in many countries and in many sectors of the economy. While bribes appear less prevalent for public services, for example, they appear more common than in 1999 for taxes and procurement.

Nor is the news universally positive at the country level -- some indicators of corruption suggest a worsening of the problem in certain countries, for example, in Southeastern Europe.

Firms in most transition countries still view corruption as one of the most severe obstacles they face.

What is causing these trends?

Encouragingly, the report finds that better policies and institutions can help to reduce corruption over the medium term. Many transition countries have undertaken policy and institutional reforms in recent years that led to significant changes in the "rules of the game," helping to fill voids left with the abandonment of communism. These changes and the resulting declines in certain forms of corruption should in many cases prove sustainable, underscoring the critical importance of an active, credible, and well-implemented reform process.

Better policies are not the only determining factor, however. The report finds that firm-specific characteristics play a significant role, with smaller private firms typically paying more bribes and foreign firms fewer bribes than average. Other firm-level characteristics, such as location and sector of operation, also help to explain how managers perceive and experience corruption in their relations with the state. In a novel departure from earlier studies, the influence of managers' attitudes is examined by the report. Managerial "optimism" plays an important role in influencing managers' views on corruption -- much of the perceived reduction in corruption can be explained by more general perceptions of improvements in the business environment. While managerial attitudes should be taken into account in analyzing survey data, their influence on perceptions of corruption does not undermine the usefulness of corruption surveys. After all, attitudes and perceptions do affect important business decisions. Furthermore, the evidence described in ACT-2 shows real changes in levels of corruption even after taking managerial attitudes fully into account.

State capture

The World Bank's 2000 study, Anticorruption in Transition -- A Contribution to the Policy Debate, emphasized that corruption comes in many forms, one of the most pernicious of which is state capture. State capture involves bribes paid to influence the content of laws and regulations, that is, the fundamental rules of the game, rather than simply their implementation in individual instances. While relatively fewer firms complained of being negatively affected by state capture in 2002 than three years earlier, relatively more firms said that they were engaged in such activities. It appears that state capture is changing from a strategy of political influence practiced by a small share of firms to a more widespread practice. Increased competition among captor firms may actually be making its impact on the business community more diffuse.

The domino effect

The best news from ACT-2 is that progress is indeed possible. Countries can effectively fight corruption through reforms in public institutions and aggressive pursuit of anti-corruption policies, and detailed survey data can help to pinpoint priorities for action in individual countries. Most promising of all, there is now solid evidence that the reforms in the past few years in many transition countries are beginning to show results.

"Although it is hard to predict whether improvements in corruption measures as identified in ACT-2 can be continued and sustained, it is important that governments maintain concerted efforts to carry on actively with credible and well-implemented reforms," concluded Ms Gray.