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East: Analysis From Washington -- Overcoming Corruption

Washington, 15 November 1999 (RFE/RL) -- Macroeconomic reforms alone -- such as privatization, price liberalization and making national currencies convertible -- are not sufficient to overcome the corruption now holding back many post-communist countries, according to the European Bank for Reconstruction and Development.

In its annual report on transition economies released last week, the EBRD argues that such reforms have not had the effects on either the relationship between the state and the economy and hence on the level of corruption that both that bank and most other advocates of reform had hoped and expected.

And it concludes that post-communist governments must do more to promote fair and transparent laws, strong regulatory agencies, and efficient and effective court systems if they are to bring corruption under control, something the bank said few of these countries had yet been able to do.

In short, the solutions to the multifaceted problems of corruption are more often to be found in politics rather than economics.

In the past, the EBRD, like other international lenders, generally has shied away from discussing corruption in these countries, typically treating it as a transitional problem certain to be cured by the kind of free market reforms it and other Western institutions have advocated.

But as the bank's report acknowledges, both the high levels of corruption in these countries and even more the real sources of it have prompted the EBRD to change its approach.

The level of corruption in many of these countries is staggering. According to the report, officials in Georgia extract in the form of bribes some 8.1 percent of the annual revenues of companies operating there. In Ukraine, it is 6.5 percent. And in the Commonwealth of Independent States as a whole, it is 5.7 percent.

By adding to the costs of doing business, bribery by itself keeps many firms from making a profit and thus dooms them to an early end. And at the same time, demands for bribes discourage new investors from both within the countries involved and abroad.

Indeed, the EBRD found that newly formed companies in these countries had to pay almost twice as much of their revenues in bribes as did more established concerns -- 5.4 percent as opposed to 2.8 percent. And thus bribes serve as yet another barrier to the establishment of new businesses.

Perhaps the most striking aspect of the EBRD's annual "Transition Report" this year, however, was its focus on what macroeconomic reforms by themselves cannot achieve. The bank noted that most post-communist countries have privatized many firms and reduced direct state intervention in the economy.

But those macroeconomic steps have not necessarily reduced "the overall level of intervention or the informal tax imposed on firms in the form of bribes and time spent dealing with government officials."

Indeed, the EBRD found that state-owned firms and privatized ones of the same size were forced to pay approximately the same percentage in bribes, an indication that privatization by itself has not had the impact on corruption that many had expected.

Sometimes this appears to be because the new owners are the former communist-era managers who have a special relationship with government officials. Sometimes it is because the firms or the government agencies with which they must deal have one or another kind of monopoly power, something privatization has done little to change.

Because economic changes alone have failed to overcome corruption, the EBRD argued that these countries must turn to political means instead. Indeed, in releasing the report, the bank's president, Horst Koehler, said: "I underline this twice. Weak institutions are the main obstacle to economic growth in a number of transition countries."

But in contrast to some analysts who have written off any chance for improvement in these societies, the EBRD notes that the fight against corruption can be won by leaders and governments willing to take the political risks involved in breaking with the past and building institutions capable of managing a modern, free market economy.