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Source: «Critical solutions», www.krytyka.com

Behind the Scenes of Corruption

July 2012

Corruption, the use of power for personal gain, is a useful theme for populists. Corruption continues to raise ever more dissatisfaction in Ukrainian society, raising ever more calls for greater punishment in response to the many billions being stolen and the sumptuous properties of those in power. Is this, though, really the way to get rid of corruption? Can Ukraine find a government that will be capable of this? And even if it does, will such a government not be even worse than a corrupt one? Finally, if Ukrainians simply weed out corruption in their lives, will their lives actually get any better?

Let’s start with that last assumption. Imagine that, starting tomorrow, the surgeon will not ask you to pay for your operation. Will he then live on the couple of thousand hryvnia that the state pays him? Impossible! A more-or-less qualified specialist will either move on to a private clinic or move abroad altogether, so you will either have to follow him by foot or by plane. Either way, you will pay more. Imagine that the bureaucrat you deal with will not take any bribes to simplify a complicated, mindless procedure, and that the highway cop will actually write out a ticket for a several-hundred hryvnia fine for every person who was caught speeding on an empty highway between two woods as though that were the same as a busy city street. Your costs for all this will only grow—even in the first instance, because you yourself will freely agree to the bribe as the less—in comparison with the lost time for a legal procedure—of two evils.

So it is that, if they did not already exist, all these examples of corruption and many more similar ones would have to be invented —which, in fact, people did long ago.[1] The main flaw of corruption is, then, not that it costs us too much directly, but that it distorts incentives. The highway patrol supervisor has no interest in raising the speed limit to a reasonable level (or in organizing parking places and other necessities) as long as he has the option of collecting kickbacks from his underlings. Incidentally, monthly fine quotas cause the same kind of distortion. For the same reason, the surgeon will resist the switch to a system where “the money follows the patient” as long as he has the use of state-owned equipment and hospital premises for his work.

The worst thing, in the end, is that the corrupt government bureaucrat is keen to see red tape remain just as protracted, rules as burdensome and opaque, and laws just as vague, contradictory and impossible to follow. That way just about everything depends solely on him. And as soon as such an official gets what he wants, the vicious cycle is complete: corruption becomes systemic. The result, as lawyer Oleksandr Paskhaver puts it, is that the state system itself becomes distorted: functions that lend themselves to corruption expand exponentially at the expense of vitally important ones such as strategic planning.

Indeed, these effects are true for any country—and corruption exists, to one extent or another, everywhere. So why is it that in some countries, it is not much of a problem, while others suffer from corruption, but not overwhelmingly so—and some of these countries are, hard as it may be to believe, not less, but possibly even more, corrupt than Ukraine—but it is Ukraine that is howling with the pain of corruption?

The World Bank’s corruption index[2] has one telling indicator called “Control of Corruption.” The countries with the least corruption differ from more corrupted ones precisely in that they exercise tight, effective and daily oversight of civil servants. Moreover, this control is not handled by law enforcement agencies, which themselves require oversight—Qui custodiet ipso custodes?[3]— but directly by voters and their political representatives in the opposition and, of course, the press, which is always interested in hot news. In short, these countries have a system of checks and balances, so that a civil servant cannot steal too much, cannot enjoy the fruits of ill-gotten gains with impunity, and, most importantly, cannot have a serious impact on the adoption of the laws that govern the work of the civil service. This prevents the vicious cycle from being complete and becoming systemic.

However, this will happen only when laws are adopted as a largely natural process, that is, as a confirmation of common practice. By contrast, when laws conflict with common practice, when they are, for instance, forced on the nation by an authoritarian government in the name of “modernizing,” then every citizen is turned into an offender. At the same time, punishment ceases to be inevitable: the lowly bureaucrat and traffic cop suddenly gain enormous power, become decision-makers, and determine of their own accord who should be punished and who should be pardoned—for money or some other benefit, needless to say. This is what happened in the Russian Empire, a trend that reached its peak of absurdity under the Bolsheviks: its economic, cultural, ideological and other laws were absolutely artificial. The communist idea actually took root in this region because the people here were already used to the idea that "laws were written for fools," but were in fact used as the individual boss saw fit. It is in these soviet and pre-soviet times that the roots of the current rise of corruption took hold, as corruption, in the form of “blat” or personal connections, was already pervasive through all of society. The only difference, perhaps, was that people gave and took bribes not so much in hard cash as in kind, in services, based on the principle that one hand washes the other.

When it becomes impossible to act in compliance with the law, any attempt to combat corruption from above loses sense, as anti-corruption laws are applied just as selectively as any others. There are plenty of examples of “inconvenient” officials and local mayors being removed from office for alleged bribery in Ukraine, while an endless parade of high-profile corrupt individuals are left alone—as long as they remember how to cut a deal.

What’s more, even if anti-corruption efforts were to achieve success, it would be a Pyrrhic victory: life would become simply unbearable. Where laws are bad, the far better solution all around is for them not to work. For instance, the operation called “Contraband–STOP,” which came into effect shortly after the Orange Revolution, did little more than stop imports and, to a large extent, encourage their monopolization. Indeed, this was easy enough to predict because many rules, such as prohibitive import duties on mobile phones and household appliances, were clearly not there for the purpose of enforcement. Frightened after the victorious Revolution and the stronger oversight it brought with it, civil servants began to work within the law—which, incidentally, granted them considerable powers without including accountability before their clients, the importers. The result was that the movement of imports came to a virtual standstill. Those whom officials trusted, that is, who they knew would not turn them in, were able to clear their goods, as well as the controllers themselves—or, more precisely, the companies whom they covered. In the end, the battle against corruption resulted in a complete rout—on the part of corruption. The ensuing shortages and monopolization led to rising prices and the government was forced to quietly ease its pressure…and perhaps to reduce or drop a slew of customs duties.[4]

It must be said, however, that bribery and embezzlement are only the tip of the iceberg, the icing on the top, as it were, of more serious machinations. For this reason, the government is somewhat indulgent of the public futility of this issue, although it is not drawing the necessary conclusions. The biggest and most damaging corruption is due to what developed countries call “conflicts of interest:” the marriage of government and business. Officials with a personal interest in a certain business may actually not take bribes or kickbacks, not divert funds, and not bleed the budget. They simply establish exceptional conditions and benefits for certain companies, while deliberately choking all their competitors in order to monopolize the market in favor of the preferred business. In this manner, they not only rob consumers, but they reduce actual well-being through the effect of deadweight loss[5] and the pace of economic growth by distorting the competitive selection process of the market.

Not surprisingly, countries where corruption is mostly a matter of bribe-taking are not doing nearly as badly as countries where monopoly reigns.[6] At one point, East Asian consumers found themselves paying bribes for just about everything, according to eye-witnesses. But everyone knew the going rate, so they could come to a given office, pay the fee and be guaranteed the necessary result. Corruption did not eliminate equal opportunities, it did not interfere in property rights, and it did not determine the winners on a competitive market. It was little more than a kind of surtax. Of course, it increased the cost of doing business, but no more so than any other tax would have done. Given that regular taxes tended to be low in most of these countries, while risks (such as loss of ownership) remained nonexistent, the overall picture was quite attractive (even if not entirely politic). In Ukraine, corruption not only adds to already substantial budget contributions: it has become a means for divvying up markets, resources and even property itself for the benefit of companies belonging to officials and elected politicians.

This kind of marriage between a government and business is a typical characteristic of “limited access orders” as they are called by Douglas C. North, John Joseph Wallis and Barry R. Weingast.[7] The essence of this social order lies in offering privileges to those who are prepared to resort to violence that would be dangerous for those in power. It means restricting access to lucrative economic resources, property and markets for any outsiders. In other words, those with de facto power are given opportunities to use this power for personal gain on a regular basis in order to encourage peaceful coexistence. What is seen as corruption from the point-of-view of a modern order with “open access” is considered the norm for surviving in a “limited access order.” Authors North, Wallis and Weingast note that, in some cases, fighting this corruption may not only be pointless, but even life-threatening, as those leaders or groups who have lost their corrupt perks may resort to open violence.

How does this situation threaten Ukraine? The question remains open for discussion. It seems that, today, the main threat to the stability of the limited access order is the social unrest stirred up by corruption in all its forms. People are no longer prepared to tolerate the excessive lifestyles of officials and the extreme wealth of the tycoons or oligarchs close to those in political power. The other side of this unrest is anger over the illegitimacy of assets gained through corrupt means, not only assets gained during the privatization process, but also, unfortunately, any other wealth. People assume wealth's illegitimacy because they are unwilling or unable to distinguish its provenance. The public awareness of Ukrainians is modern enough today to want to get rid of special privileges, but not modern enough to distinguish between business owners who have gained their wealth in fair competition and those who gained it thanks only to their privileged position.

Ukrainians are also not aware of the consequences of any potential reprivatization. Precisely because of this, a populist government à la Lukashenka could rise to power on the wave of anti-corruption sentiment. And the logic of redistribution of wealth inevitably leads to dictatorship, which simply centralizes corruption—almost the way that Ukraine’s current administration has done, only under a different banner. Together, these two consolidate the limited access order and pull the country away from the path towards a more progressive social order. And unless the country completes this transition, corruption, as we can see, will not be overcome.

What can be done in this situation?

 

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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