Regional

8. STATE CAPTURE AND CORRUPTION

Eastern Europe has a serious problem with corruption and the capture of the state by oligarchical elites, posing risks to the viability of investments and to political stability.

Photo: Getty Images

 

Many countries in Eastern Europe have struggled to establish the rule of law in the post-communist period, in some cases seriously so. Parts of the Balkans and the former Soviet Union consistently languish at the bottom of international surveys of corruption.

 

The causes of this failure are complex, encompassing culture, history and more contingent factors. For many years, the communist system, with its shortages, bureaucratic rigidity and lack of popular legitimacy undermined respect for the rule of law. More recently, chaotic transitions to free market capitalism, conflict and instability, and the exodus of the middle classes have served to erode it further.

 

In many countries, the most tangible evidence of a weak legal environment is petty corruption. Businesses have to pay bribes in order to receive basic services from the state, such as permits and licences, within a reasonable timeframe, or at all. They must also pay to keep predatory officials at bay. Conversely, dishonest businesses can pay off tax and customs officials to reduce their operating costs and avoid legitimate fines.

 

Behind the scenes, some countries are also victim of state capture, that is, when an oligarchical elite succeeds in taking control of the institutions of state and then uses its financial power, access to information and control of the media to determine which individuals and political parties gain and hold power. In the process, oligarchs are able to run the polity and the economy in their own interests, gaining privileged access to tenders and concessions, fixing prices, shaping regulations and buying prosecution in ways that ensure the protection of their commercial and personal interests. The lines distinguishing political and economic power are often blurred: oligarchs, high-level criminals and politicians can be one and the same.

 

Developments over the last couple of years have exposed some of the deeper abuses of the rule of law in Eastern Europe. In Bulgaria, competition between rival oligarchs, one a member of parliament, resulted in the collapse of the fourth largest bank. In Macedonia, leaked recordings, probably made by the local intelligence services, have revealed corruption and criminality on a massive scale at the highest levels of government. And in Moldova, a businessman with close connections to government and to Russia apparently syphoned EUR1bn (around 15% of GDP) from the country’s banking system, necessitating an emergency bailout.

 

The picture is not uniformly bleak. Some countries have made tangible efforts to eliminate corruption, such as Poland, Slovenia and the Baltic States, and the problem is not significantly worse (and in some cases better) than in many western states. Meanwhile, in countries which still have significant problems with corruption, such as Romania, Bulgaria, Albania and Serbia, governments are making serious efforts to strengthen the rule of law.

 

In most cases, the main driver for this has been a massive popular outcry against corruption by a young, post-communist generation which is suffering a lack of opportunity and holds a corrupt elite responsible for rigging the system to help a privileged few. This anger is buttressed by the intervention of the EU, which has publicly condemned corruption and provided incentives to governments to clean up the state.

 

So far the results are encouraging. In the case of Romania, the most advanced in its anticorruption drive, the charging and conviction of hundreds of senior figures appear to have heralded a genuine change in political culture. In September, new charges of influence peddling and complicity in money laundering. were brought against the former prime minister, Victor Ponta, while the minister of interior was forced to resign for blocking a corruption investigation. Meanwhile, under immense international pressure, Albania’s parliament passed a set of constitutional changes that allow for reforms to the judiciary which has long provided protection to corrupt politicians.

 

However, these efforts can proceed in fits and starts, as one part of the state apparatus resists efforts by another to impose standards. In addition, positive efforts at combatting corruption are sometimes qualified by self-interest on the part of the political elites. Ruling officials can be capable of double standards, opposing corruption in general and making genuine efforts to clean up the state, while continuing to take illicit payments; and anti-corruption efforts can be a means by which politicians dispose of political enemies. There is much speculation that an anti-corruption drive by the government in Montenegro, which has been recommended by the EU, is being used by the government to settle scores within the ruling political party, the most recent target being former president Svetozar Marovic.

 

 

Forecast

The trend is for rising standards in public life. Since the financial crisis of 2009-12, civil society has started to demand better behavior from government in a swathe of countries across the Balkans and the former Soviet Union. In the background to this, the EU is continuing to apply political and financial pressure on those states to crack down on corruption.

 

However, there are backsliders in the region. In Central Europe, there is little external pressure for reform from the European Commission – mainly because these countries are already in the EU - and the free movement of peoples within the EU has allowed those opposed to corruption to emigrate rather than remain at home and apply pressure for change. In states such as Macedonia in the Western Balkans, efforts to tackle corruption have stagnated as a single party succeeds in dominating politics, limiting political scrutiny of its actions.

 

In some cases, rising corruption has been accompanied by a decline in the freedom of the media, allowing officials to indulge in greater abuses of office. In this respect, local trends will depend significantly on the direction of events in the EU: its power to influence local politics and its willingness to accommodate free movement within the EU.

 

 

Immediate Impacts

 

  • The EU is refusing to grant structural funding to countries with flawed procurement procedures, retarding the development of local infrastructure.

 

  • The willingness of some court officials to take bribes means that honest investors cannot always rely on the judiciary to enforce contracts or challenge regulations.

 

  • Businesses which refuse to pay bribes in some polities face intensified inspections and punitive fines, even for minor transgressions.

 

 

Potential impacts

 

  • Corruption and state capture can gravely undermine the proper functioning of the market and weaken growth in the economy.

 

  • The denial of economic opportunity associated with corruption can induce a sustained brain drain, starving countries of their most talented workers.

 

  • Popular frustration with corruption and the capture of government can cause widespread civil unrest.

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