Fighting Corruption in the Post Communist World

CAMBRIDGE: In the last few years, corruption in the former socialist countries has been growing rapidly. In many countries, businesses, small and large, domestic and foreign, pay bribes to officials. The growth of corruption has alarmed policy makers and business people from the Baltics to Bishkek. Some critics even charge that increased corruption exposes the failure of economic reforms, particularly privatization. If only reforms were slower, corruption would not have grown as much.

The critics are right that with slower reforms there would be less corruption. But there would be much less private business as well. Take the case of Russia, corruption is growing precisely because private business is growing. Shop keepers indeed have to pay local officials. Trading firms need to bribe customs bureaucrats. Foreign investors must bribe regulators to start joint ventures. But the fact that all these payoffs are made means that shops are opening, imports are coming , and joint ventures are starting at an unprecedented pace. If none of this were happening, there would be much less corruption, but we would not call reforms a success.

Actually, the rise of corruption shows that reforms have been too slow, since governments continue to have massive power over business. There would be much less corruption if say, local government officials did not have the right to approve the opening of shops, if customs officials could not keep imports at the border for months, and if joints ventures did not require numerous approvals. Bribes are merely payments for the bureaucrats' signatures. As long as too many signatures are required, corruption will be rampant. And since payments for signatures are expensive, corruption is a high cost of doing business.

How can this cost be reduced? One approach is to fight corruption with police and courts. This can never work because police and courts are themselves easily corruptible, as are the politicians who oversee them. Another approach is to reform the bureaucracy and make it an honest and competent civil service. But even in France, where the best and the brightest become bureaucrats, the civil servants are continuously caught taking bribes. In places with a more normal civil service, including most of Europe, Asia, Latin America and Africa, bribing bureaucrats is a way of life. Since the post communist bureaucracies are probably not better than average, reforming them will take decades. Instead, it is smarter to deal with the fundamental problem, namely that too many signatures are needed to do business. If you cannot catch bureaucrats taking bribes, and if you cannot make them honest, take away the power they abuse.