Senior World Bank officials admit they were reluctant to even mention the word "corruption" five years ago in their reports or public statements. But money-laundering scandals, as well as the financial crises in Russia and Asia, have led the bank to focus on corruption as a cause of poverty and economic collapse. The centerpiece of anti-corruption studies released this week at the World Bank's annual meeting in Prague identifies countries where powerful private interests are hijacking reforms.
Prague, 27 September 2000 (RFE/RL) -- The World Bank says private vested interests are hijacking economic reforms in much of eastern Europe and the former Soviet Union. In its latest anti-corruption study, the bank says officials in the region are commonly bribed to create policies that benefit one person or firm at the expense of the greater public good.
The study uses a relatively new economic term -- "capture of state" -- to measure the problem. It names Azerbaijan, Ukraine, Kyrgyzstan, and Moldova as some of the worst offenders. Russia, Romania, Bulgaria, Croatia, Slovakia, Georgia, and Latvia are also singled out as countries where oligarchs and other powerful private interests are creating or strengthening monopolies by bribing judges, legislators, and administrators.
Belarus and Uzbekistan are described as countries that retain key elements of central planning. The study says low scores for Belarus and Uzbekistan in the World Bank's corruption index indicates that only a small part of those economies are independent from the authoritarian leaders there.
Serbia is left out of the study altogether because of what the World Bank calls "unreliable statistics" from Belgrade.
World Bank researcher Joel Hellman says one way that oligarchs strengthen their market dominance in former Communist states is to buy legal protections that their smaller competitors can't afford.
For example, in countries like Russia and Ukraine, where private property rights are not firmly established in the law, Hellman says the most powerful businesses are able to secure their property rights with bribes to state officials. Meanwhile, policy makers are discouraged from passing laws that would give the same rights to the rest of the country.
Hellman says foreign investors also bribe policymakers to shape economic policies in their favor. He says the foreign firms most likely to try to hijack reforms are those in joint ventures with headquarters in the country rather than multinational firms operating from headquarters abroad.
When interviewed by the World Bank in the summer of 1999, nearly half of Russia's business owners and managers said their firms were hampered by the mishandling of funds within the Central Bank. About one-third of Russia's business community said their firms were harmed by President Boris Yeltsin's decrees -- laws which were seen as beneficial to oligarchs or individuals closely linked to the government. Hellman said this finding is particularly disturbing in a country where strong powers are vested in the presidency.
In Azerbaijan, the country where the capture of policy-making was ranked as the worst among all former Soviet republics, half of private business leaders felt restricted by presidential decrees. More than 40 percent saw barriers placed against them by parliament, the Central Bank and the courts -- barriers that favored those with ties to the government.
The mishandling of funds by the Central Bank in Kyrgyzstan was named as harmful by nearly 60 percent of the country's business community in the summer of 1999. That was the highest level of complaints registered against any governmental sector in all 23 countries covered by the World Bank survey. In fact, corruption in the Central Bank was seen as such a problem in Kyrgyzstan that it raised the overall corruption rating of the country from a relatively low level to one of the highest. The World Bank says the finding should serve as a signal that Kyrgyzstan needs to take a close look at how the Central Bank is affecting overall economic development.
Parliament, party financing and the Central Bank were seen by more than 40 percent of Moldova's business community as areas that are controlled by vested private interests. About a third of Moldova's business leaders questioned in the summer of 1999 also felt decisions by courts and the president were for sale -- and that the corruption was hurting their firms.
Among the former Communist states competing for early membership in the European Union, Latvia was judged the most corrupt according to the new World Bank corruption index. About 30 percent of Latvia's businesses said in the summer of 1999 that their growth was restricted because they were trying to compete against monopolies that are controlling reforms. The problem was seen as worst in regard to presidential decrees, with half of all business leaders saying they were affected. Forty percent of Latvia's business community felt hampered by parliamentary legislation, and about 35 percent said they were affected by corruption linked to the financing of political parties.
One-third of the private businesses in Georgia in the summer of 1999 felt hampered by the mishandling of fund within the Central Bank and by what they felt was the purchase of legislation from parliament. About 24 percent of the Georgia's business community said presidential decrees were influenced by elite private interests.
The World Bank says 42 percent of Bulgaria's business community felt affected by corruption linked to political party financing in the summer of 1999. More than one out of four Bulgarian firms said they were affected by corruption in the parliament and Central Bank. About one-fourth of those in the survey said their firms were hurt by presidential decrees seen as helping larger, well-connected business groups.
The World Bank study shows that one fourth of Romania's private business community felt restricted by the mishandling of funds in the Central Bank and by corruption in parliament during the summer of 1999. One out of five business leaders in Romania said presidential decrees favored the elite at the expense of new small firms.
In the summer of 1999, 37 percent of private business leaders in Slovakia said their firms suffered from the mishandling of funds by the Central Bank. More than one out of four in Slovakia felt that court rulings were being bought through bribes paid by the country's most powerful business elites. One out of five Slovak firms in the survey said they were affected by corruption in parliament and in the financing of political parties.
In Croatia during the summer of 1999, the World Bank found that about one-third of the business community felt negatively affected by corruption in the Central Bank, the courts and in political party financing. About one out of four business leaders also felt well-connected competitors had gained an advantageous market position by controlling presidential decrees. The findings reflect sentiments before the death of President Franjo Tudjman and the fall from power of his Croatian Democratic Union.
In addition to state capture, Hellman says the World Bank also has created a classification for lower level bribes called "petty" or "administrative corruption."
"The classic image of this corruption is the hapless shop owner forced to pay bribe after bribe to an endless parade of inspectors from the government."
In Central Europe, Hellman says small businesses on average pay bribes equal to one percent of their annual revenue. In the worst countries, he says extortion on small businesses equals up to six percent of annual revenue.
"Now these may seem like reasonably small numbers. However, six percent [of annual revenue] is more than a third of their [annual] profits [going to] this form of bribery. So this is a very, very significant chunk of enterprise profits."
Petty corruption hurts newer, smaller firms the most -- the very businesses that have stimulated growth and job creation in the more successful transition countries of Central Europe.
The World Bank corruption study comes amid heightened criticism that the policies promoted by the bank and the International Monetary Fund actually strengthened oligarchs and monopoly groups during much of the 1990s.
Non-governmental organizations, or NGOs, like CEE Bankwatch Network and Transparency International, say the World Bank has failed to monitor its loans to ensure the funds go to the intended projects. Bank officials deny the allegations. As a sign of progress, they site the blacklisting of five private western firms over allegations that they had paid bribes in tenders linked to Bank projects in Turkmenistan.
Transparency International vice president Frank Vogl predicts it will take many years for World Bank anti-corruption policies to have real impact.
"The whole (World Bank anti-corruption) program is only three years old. I think they have to be modest about what they've achieved. They shouldn't claim to be experts after three years of experience. Most of the people who are speaking for the World Bank have been focused on corruption for less than three years -- and now they're experts. So it's going to take a long time for them to get substantial results."
Vogl says the World Bank could deal more effectively with corruption by improving its communications with NGOs in recipient countries. Vogl also says the World Bank should work more closely with western NGOs on the issue.