Behind the Scenes of Corruption

July 2012
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It goes without saying that we should expose thieves, extortionists and bribe-takers, fight for transparency of information, and protest against the extreme wealth of elected politicians and public officials. But we should also understand that these, in and of themselves, will not eliminate corruption. Moreover, we have to be careful: if informal power is exercised through the selective application of unenforceable legislation, those engaged in combating superficial corruption will end up reducing the options for businesses to, say, buy their way out of the next round of company inspections. This will increase the far more dangerous phenomenon of limited access and enabling those in power to gain complete control over their lowest ranks.

There are far more productive ways of dealing with laws that are impossible to uphold: promoting simplification and deregulation, eliminating discretionary powers and ambiguity, and so on. Here, Georgia offers an excellent example. Of course, if government is entirely top-down, and especially if there are “minders,” as the press has been saying, this will have a limited effect. The thing to remember is that any administration, along with its hierarchy, is not eternal. But when laws do not work because they are impossible to follow, any subsequent government will also face the temptation of renewing the top-down hierarchy. In fact, it may even be forced to do so because, as long as laws do not work, there is simply no alternative form of governing.

Incidentally, among the bottom line necessary conditions for switching to an open access order that North et al. mention, the most troublesome for Ukraine is precisely rule of law. The two other conditions—civil control over the enforcement agencies and a de-politicized civil service—are more secondary as they will not emerge until the principle of “one law for all” begins to work in Ukraine.

Most important of all is exposing deep corruption and limited access as such. They can only be brought down if a significant—it need not be a majority, merely a very active—part of the population becomes aware that it is being robbed, not so much by those who are stealing state assets but by the monopolists. These monopolists take advantage of the lack of competition on the labor market (which explains the low salaries) and sell their products on a monopolized market of goods and services (which leads to prices that are sometimes high even by standards elsewhere in Europe). Moreover, even if limited access does not entirely destroy social ladders, it certainly obstructs and distorts them. It is this inequality of actual rights that largely drives the social stratification in countries with low and medium standards of living, according to Hernando de Soto, a renowned economist from Peru.

Only most Ukrainians still do not understand this. Instead, they keep demanding a "just" redistribution and, in line with the logic of limited access, they receive benefits... or, more precisely, hand-outs. Since theft through monopolization and the cherry-picking of assets take place covertly and are only evident to individual economists, while the handing out of the latest thousand [8]is in the focus of every television camera, the real corruptioneers do little more than pay voters off with pitiful little “kickbacks.”

The point is not to increase such kickbacks—that’s not going to make the economy work better! Quite the contrary, the point is to demand that opportunities be made available—that access be open to everybody. And for this to happen, Ukrainians need to be convinced that, despite what they have experienced so far, the market economy is not a zero-sum game. In fact, exchange and entrepreneurship create value in and of themselves, just like basic labor. Meanwhile, what Ukrainians observe, and what makes them so angry, looks like a zero-sum game precisely because it is NOT a market economy.

Still, even in the best case scenario, Ukraine is unlikely to achieve the index of Finland or New Zealand on the corruption scale because there are far deeper cultural factors at play than mere convictions. For instance, in Northern European countries, the majority of those surveyed are prepared to testify in court against their friends if the latter are guilty. In Southern Europe and Ukraine, the opposite is true! This means that “small group” values are stronger in our cultures than more general values. Since civil servants are also part of this culture, they will always find it harder than their Nordic colleagues, not to succumb to the temptation to help their families at the cost of the community. In return, the inner circle will always be more indulgent towards those who were unable to ignore such a temptation. The only way to strategically prevent corruption in such a situation is to not give people the power that enable it.

So, somewhere in Scandinavia or Germany, the state can redistribute half the national product, regulate many spheres of life, and sometimes even actively intervene in the market—and it doesn’t cause the economy to self-destruct. Because there, all the known flaws of state intervention are not supplemented by the kind of “ax under the compass” effect [i.e. an effect in which the metal ax throws off the readings of the magnetic mechanism of the compass – Ed.] that corruption has in Ukraine. On the contrary, those who live in Ukraine—and in Southern Europe and actually in most of the world—will have to accept the fact that their country will not be so effectively and socially governed as the Scandinavians. And by demanding that their government also “guarantee” or “regulate” something in their favor, Ukrainians are merely opening the doors to corruption that much wider.

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[1] Possibly the only exception to this rule is embezzling from the budget, such as through state procurements. However, this kind of corruption is closer to ordinary theft, than to systemic corruption.

[2] One of the “global indicators of quality of governance” among the World Governance Indicators (WGI).

[3] Latin for “Who watches the watchers themselves?”

[4] The Law “On amending the Customs Duty Tariffs of Ukraine” №2470-IV dated March 15, 2005.

[5] A monopoly sets higher rates for its goods and services while manufacturing and selling smaller volumes (artificial scarcity) because a portion of potential consumers will tend to value the good or service at below the monopolist rate—even if at a price that is higher than on a competitive market—or will gradually become unable to afford the good or service. As a consequence, production levels continue to go down, compared to a competitive market and the society as a whole loses. If the monopoly controls goods or services that consumers cannot do without — so-called “natural monopolies, such as utilities —, demand will go down on other markets as consumers find themselves too poor to spend for other purposes.

[6] Compared to those companies surveyed by the International Finance Corporation (IFC) that consider corruption a major obstacle, the share of those who actually admit that they are expected to pay a bribe or a gift “to get something done” is surprisingly low: a correlation of only 12%. By comparison, the correlation between those who consider corruption and the legal system a major obstacle is 67%. (Calculation by author based on IFC data.)

[7] “Violence and Social Orders: A conceptual framework for interpreting recorded human history,” Cambridge University Press, 2009.

[8] The Tymoshenko Government began reimbursing part of the savings lost in the soviet state savings bank toUkrainian depositors, many of whom are pensioners today. The Yanukovych Administration picked up the ball in 2012 [Trans.].

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