State Capture

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Beyond the ‘Grabbing Hand’ of Government in Transition: Facing up to ‘State Capture’ by the Corporate Sector by Joel Hellman, Geraint Jones, and Daniel Kaufmann “I only want to draw your attention straightaway to the fact that you have yourselves formed this very state, to a large extent through political and quasi-political structures under your control, so perhaps what one should do least of all is blame the mirror.” Vladimir Putin’s to Russia’s business leaders in their meeting in late July, reported in Washington Post, July 29th 2000, page A1. “The oligarchs were so called because they had real power, state power. They wrote laws. They appointed ministers, often entire cabinets, and made sure that their interests were served. They corrupted the new governing, legislative and bureaucratic class of Russia, in the centre, in the regions and abroad.’… ‘[The new regime under] Putin,… now much strengthened, is unlikely to face a coup soon. But if he is not to rely on the rule of wealth, on what rule is he to rely?” From article by John Lloyd in the Financial Times, August 5 th, 2000, page I. Corruption is conventionally defined as “the abuse of public office for private gain”. Behind this definition lies an image of a predatory state seen as a large “grabbing hand”, extorting firms for the benefit of politicians, high officials and bureaucrats. In this view, the conventional policy recommendation for addressing corruption and improving governance is simply to reduce the role of the state in the economy. In this article, based on a joint research project between EBRD and the World Bank on governance in transition, we shift the focus to the role of firms. This shift has significant implications for policy. The new evidence suggests that contrary to conventional notions of corruption as extortion of firms by bureaucrats (who can make it virtually impossible for the firm to operate), which we label as administraDevelopment Research Group

tive (or bureaucratic) corruption, many firms in practice engage in high level corruption as a choice strategy and collude with state officials or politicians for their mutual benefit. This strategic choice decision, which we denominate as state capture (by the corporate sector), is becoming one of the enduring images of transition in some countries—as illustrated by the opening quotes by the leader of one nation and by a noted observer of transition in an FT article. In this article, we also summarize new evidence indicating that firms have powerful incentives to engage (and persist) in state capture, in contrast with administrative corruption. The private benefits derived by the ‘captor’ firm from state capture underscores the difficulty in addressing this type of corruption. We thus

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conclude with the rather different implications for action emanating from this shifting focus on state capture. Measuring administrative corruption and state capture To measure and analyze administrative corruption and state capture we use data from a specially designed Business Environment and Enterprise Performance Survey (BEEPS) carried out in mid-1999.1 The survey, commissioned jointly by EBRD and the World Bank, provides firm-level data on obstacles in the business environment in 22 transition economies. Administrative corruption is understood to be the illicit payments required from the firm in the (oft-distorted and arbitrary) implementation of existing regulations,

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policies and laws. Administrative corruption is measured as the proportion of annual revenues paid to public officials to “get things done” (last column in table 1 below). The results reveal considerable variation in the level of unofficial payments across transition economies, ranging from 1.1 percent of gross firm revenues in Croatia to almost 6 percent of gross receipts in Azerbaijan. Since this measure is a proportion of gross revenues rather than profits, in bribes end up accounting for a very substantial proportion of net profits in most countries. The survey also allows for the first time to arrive at a proxy measure for state capture. In contrast with administrative corruption, state capture is defined as the capacity to affect the formation of the basic rules of the game (laws, rules, decrees, regulations) through private payments to public officials. A crosscountry index of state capture (as seen in all its subcomponents in table 1) is constructed as the extent to which the following forms of corruption (by themselves or others) have had a direct impact on firms’ business:

• Sale of Parliamentary votes on laws to private interests. • Sale of Presidential decrees to private interests. • Mishandling of funds by the central bank. • Sale of criminal court decisions. • Sale of commercial court decisions • Contributions paid by private interests to political parties and election campaigns. The transition economies can be divided into high capture group versus those exhibiting a low (or ‘medium’) extent of capture, based on scores on the state capture index. By comparing the last few columns in Table 1, it is noteworthy that there is no necessary tight correspondence between administrative corruption and state capture at the country level (see for instance the gap between both forms of corruption for countries such as Bulgaria, Latvia, Russia, Croatia, Belarus and Uzbekistan), backstopping the importance of unbundling corruption into its different key components.

Table 1 – State Capture and Administrative Corruption, by Country

Country

Parliamentary Legislation

Presidential decrees

Albania Armenia Azerbaijan Belarus Bulgaria Croatia Czech Rep Estonia Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Poland Romania Russia Slovakia Slovenia Ukraine Uzbekistan Overall

12 10 41 9 28 18 18 14 29 12 13 18 40 15 43 13 22 35 20 8 44 5 24

7 7 48 5 26 24 11 7 24 7 10 16 49 7 30 10 20 32 12 5 37 4 21

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Central Bank

Criminal Courts

Commercial Courts

Political Party Finance

Capture Index (avg)

Capture Index Class.

8 14 39 25 28 30 12 8 32 8 19 59 8 9 40 6 26 47 37 4 37 8 25

22 5 44 0 28 29 9 8 18 5 14 26 21 11 33 12 14 24 29 6 21 5 18

20 6 40 4 19 29 9 8 20 5 14 30 26 14 34 18 17 27 25 6 26 4 20

25 1 35 8 42 30 6 17 21 4 6 27 35 13 42 10 27 24 20 11 29 6 20

16 7 41 9 28 27 11 10 24 7 12 29 30 11 37 12 21 32 24 7 32 5 21

Low Low High Low High High Low Low High Low Low High High Low High Low High High High Low High Low

Countries with low-to-medium prevalence of state capture include Albania, Armenia, Belarus, the Czech Republic, Estonia, Hungary, Kazakhstan, Lithuania, Poland, Slovenia, and Uzbekistan. This is an unusual group because it includes both advanced reformers and least reformed countries in the political and economic dimensions. In countries such as Belarus and Uzbekistan—where there has been minimal privatization, the private sector remains small, and important elements of the command system are still in operation—the capacity of private sector interests to capture the state might be expected to be low almost by definition, since the legacy of the past still suggests a state-led fusion. In contrast, the most reform-minded countries (such as Hungary and Poland) have achieved the most progress in liberalizing the economy, strengthening bureaucratic accountability, and promoting political contestability—all factors that might be expected to place limits on the capacity of powerful firms to capture the state. The high capture group includes Azebaijan, Bulgaria, Croatia, Georgia, Kyrgyzstan, Latvia, Moldova, Romania, Russia, Slovakia, and Ukraine. AdminMost of these countries could istrative Corruption be considered partial reformLevel of ers in both the political and bribery % of firm revenues economic transition. While they have made progress in 4.0 4.6 the liberalization and 5.7 privatization fronts, lesser ad1.3 vance is evident in the 2.1 1.1 complementary institutional re2.5 forms to support a legal and 1.6 regulatory framework for the 4.3 1.7 emerging market. Further3.1 more, while most countries 5.3 have adopted the basic rules 1.4 2.8 of democratic elections, the 4.0 evidence raises questions 1.6 about the concentration of politi3.2 2.8 cal power, limitations on political 2.5 competition and constraints to full 1.4 4.4 participation by civil society in 4.4 many countries. The data sug3.0 gests that state capture ap-

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pears to thrive in such an environment of only partial economic and political liberalization. Indeed, as seen in Figure 1, in countries with a very low level of civil liberties (where the state retains substantial control over the economy), state capture is limited (virtually by definition). At the opposite extreme of the civil liberty spectrum where civil society is developed and active in monitoring and applying pressure on politicians and public officials, the capture economy is also rather small (for very different reasons). And in sharp contrast with both extremes, countries with only partial exhibit extensive state capture. The incentives to engage in corruption Needless to say, the problem of state capture also depends directly on the behavior of firms. Although the image of the powerful oligarch is the media face of state capture we find, somewhat surprisingly, that state capture is a strategy also associated with many new entrants. These firms engage in state capture in part to offset insecure property rights and competition from secure, powerful incumbents. State capture inter alia allows these firms to purchase security of property rights “a la carte” from the state. In countries with a large capture economy—that is, where there is a large segment of the economy affected by capture and with a large market for firms to purchase laws, regulations, or decrees from politicians and bureaucrats—it is also found that “captor” firms perform substantially better than other firms in terms of sales growth. Moreover, these private benefits to captors are bought at substantial social cost, as seen in figure 2. As seen in the last pair of bars in the figure, on average the enterprise sector in the “Capture Economy” end up with much worse performance than enterprises on average in low capture economies, despite the specific private benefits that the captor firms enjoys in the Capture Economy. Within the Capture Economy

we also find the least secure property rights: state capture allows a few firms to create a zone of relative security, while increasing the overall level of insecurity for other firms. This fuels a vicious circle in which more firms have an incentive to resort to state capture to protect their rights and interests. By contrast to the private benefits to capture by firms in the Capture Economy, in countries in which the capture economy is small, those few firms opting to captures exhibit worse performance in terms of sales growth than other firms (Figure 2). In low capture settings firms opting to capture as a strategy do not out-perform firms pursuing more market oriented strategies— and the adverse impact of their capture activities on the overall economic environment is more limited and less socially costly. Furthermore, also in contrast with the private benefits to state capture in the Capture Economy, firms subject to high levels of administrative corruption do not accrue private benefits from such illicit payments (depicted in Figure 2 as well). These results on administrative (‘pettier’) forms of corruption are consistent with a “grabbing hand” notion of state-induced predation, one where the discretionary power of politicians and bureaucrats in the application of regulations dominates their relationship with the enterprise sector — and thus is closer to extortion from the state apparatus (in contrast with the much less frequent (but vastly more damaging) state capture, where the firm does face a strategic choice to collude or not to collude with politicians or bureaucrats in purchasing the laws and policies of the state). Other forms of corruption and influence While much of the focus on the research paper summarized here is on state capture in many transition economies, we also emphasize that this is not the only manner in which firms attempt to influence the state. Some firms, by dint of their power and connections, have the capacity to in-

fluence the state (and benefit accordingly) without necessarily having to resort to overtly corrupt strategies. Indeed the privileged position of many older incumbent firms (such as many larger state enterprises where the directors may have colluded with politicians long ago to protect the position of such incumbents) do compel some new entrants to ‘purchase’ laws or regulations to enhance their competitiveness and property rights vis a vis such influentially protected incumbents. Indeed, it is found that there is a cadre of incumbent firms which are influential and do not have to engage in the purchase laws, policies or regulations. Furthermore, our empirical research provides clear evidence of the importance of public procurement corruption, defined as efforts to secure public contracts through payment of kickbacks to officials, as an oftused channel of influence as well. Across transition economies, we find that firms that choose rent-seeking strategies based on kickbacks for public procurement also show substantially greater gains than other firms. A companion paper stemming from this ongoing research project (summarized in the July 2000 Transition issue) addresses the extent to which firms with foreign direct investment and transnationals are also involved in paying public procurement kickbacks and engaged in other forms of corruption. How to Fight Corruption in the Capture Economy? Policymakers need to focus on strategies for addressing state capture and corruption in large-scale procurement. The persistence of these problems is related to the strong incentives that firms have to engage in them. Conventional recommendations of economic and trade liberalization advocated to address administrative corruption will not suffice. Where state capture has led to entrenched interests, breaking up monopolistic structures will be a particularly daunting chal-

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lenge. Its success will of course depend on the role of the political leadership. At the same time it will be critical to implement strategies to deepen competition and entry policy, promoting the ability of new entrants to compete with powerful incumbents. This will entail improvement in the security of property rights faced by new entrants, and their ability to have competitive access to assets which are still being privatized (or being liquidated from moribund older firms). Over time, a new cadre of multiple ‘smaller oligarchs’ may emerge and through competition by a cadre of, say, thirty-to-fifty influential firms in a country the current policy and legal distortions (and in law making) brought about by state capture may be mitigated.

Figure 2 – The private and social costs of state capture and administrative corruption Non-Capture Economies

Capture Economies

Captor

Non-captor

High bribes

Low bribes

Overall

The focus of reform options ought to shift some to addressing the channels through which firms interact with the state. For providing a set of checks and balances to make such relationship more transparent and conducive to economy-wide gains it will be key to support the development and deepening of societal “voice”. Further, the social cost of state capture needs to be made transparent to the population, proreform groups, and NGOs. In this context, the implementation of in-depth surveys of citizens, firms and public officials and their wide dissemination can help empower and

0

5

10

15

mobilize civil society and reformists in the executive and legislative bodies. Policymakers should also consider introducing transparency reforms already prevalent in many countries in Latin America and OECD, such as public hearings to determine the “rules of the game” in large procurement contracts and NGO

0.5

High Azerbaijan

State Capture

Moldova Ukraine

Russia Kyrgyzstan Croatia Georgia

0.3

Latvia

Bulgaria Slovakia

Romania

0.2

30

35

monitoring of the public procurement bidding process. Introduction of periodic mandatory public declarations of assets and income sources by government officials and their dependents would also help. The ongoing revolution in internet and knowledge-based services can foster the emergence of a new cadre of potentially powerful entrepreneurs. The internet revolution also allows for the wide dissemination of data on corruption and state capture, helping to expose the extent of the problem and mobilizing public opinion. The internet should also permit the quick and broad codification and public dissemination of parliamentary votes, thereby enhancing disclosure on potential conflict of interest between lawmakers and the corporate elite.

Albania Poland Estonia Hungary

Kazakhstan 0.1

Belarus Uzbekistan

Low

Armenia

Lituania Czech Rep Slovenia

0 0

1

2

3

4

5

Low level of reform

TRANSITION, May-June-July 2000

Medium level of reform

6 High

Civil liberties

Low

4

25

Average Rate of Sales Growth For Firms (Over 3 Years)

Figure 1 – State Capture and Civil Liberties

0.4

20

High level of reform

The internet also offers revolutionary new ways to increase transparency and reduce corruption and costs in public procurement. Local NGOs could conduct and disseminate periodic in-depth diagnostic surveys on state capture and public procurement corruption, detailing the extent and manifestations of such practices in dif-

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ferent institutions and by different industrial groups. Joel Hellman is Senior Political Counselor at EBRD, Geraint Jones is a Consultant at the World Bank Institute (WBI) and Daniel Kaufmann is Senior Manager at WBI. This article is based on their paper (presented at the ABCDE 2000 conference held in April in Washington, DC) entitled

“Seize the State, Seize the Day: State Capture in Transition”. The joint research project on governance by EBRD and the World Bank Institute is led by J. Hellman and D. Kaufmann, and also serves as an input to the forthcoming report “Anticorruption in Transition” to be presented at the Annual Meetings in Prague. For the research papers, visit http://worldbank.org/wbi/ governance/

1

Survey data were collected through face-to-face interviews with firm managers or owners in site visits conducted between June and August 1999. In most countries, 125–150 firms were interviewed, except for the larger samples used in Poland (250), Russia (550), and Ukraine (250). Sampling did account for the domestic structure of the enterprise sector, with quotas placed on size, sector, location, and export orientation. (see Transition, December 1999, p. 6, and “Measuring Governance, State Capture and Corruption”, PRWPaper 2312 at http:/ /worldbank.org/wbi/governance/).

Are Foreign Investors and Multinationals Engaging in Corrupt Practices in Transition Economies? by Joel Hellman, Geraint Jones, and Daniel Kaufmann Foreign direct investment (FDI) plays an increasingly important role in emerging economies. Among transition economies, substantial investment has gone to a few countries in Eastern Europe and the former Soviet Union, while little investment has reached other countries in the region. Between 1994 and 1999 Poland received $20 billion, the Czech Republic $13 billion, and Hungary $12 billion in cumulative FDI flows. In sharp contrast, Armenia, Belarus, Georgia, Tajikistan, and Uzbekistan received less than $1 billion over the period, according to EBRD data. During that five-year period, annual average FDI in Belarus, Kyrgyzstan, Moldova, the Russian Federation, Ukraine, and Uzbekistan was less than $20 per capita, while the Czech Republic and Hungary received about $200 per capita a year, and Poland and Slovenia received about $100.

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n countries rich in natural resources, such as Azerbaijan, Kazakhstan, the Russian Federation, and Turkmenistan, FDI was made, but flows were weaker than they would have been had better governance prevailed. In fact, for all 22 countries in transition for which data are available, after controlling for natural resource wealth, there is a significant negative association between per capita FDI and the extent of administrative and “grand” corruption—meaning kickbacks in large-scale government contracts. The assertion that corruption deters FDI is not new. In our research we concentrate on the converse question: compared with their domestic counterparts in the host country, do transnational firms (and local firms with substantial FDI or foreign ownership) exhibit higher standards of corporate responsibility? Do these firms engage in corrupt practices less often than other firms? Conventional wisdom would answer in the affirmative. Most foreign firms are gov-

erned by additional legal constraints, the most recent being the OECD Convention on Combating Bribery of Public Officials in International Business Transactions, which went into force in early 1999. For more than 20 years U.S. firms have been subject to the Foreign Corrupt Practices Act, which prohibits U.S. firms from bribing foreign public officials to obtain international business. Foreign firms are also keen to enhance their reputations and respond to stakeholder pressures for more responsible corporate practices. In fact, many firms have adopted voluntary codes of corporate conduct, which typically include anti-bribery commitments. It might thus be expected that relative to their domestic counterparts, firms with foreign capital would tend to avoid corrupt practices. To study in depth the issues of governance and corruption in 22 transition countries, the World Bank and EBRD jointly carried out the

Business Environment and Enterprise Performance Survey in mid-1999 (A.C. Nielsen administered the survey). Using the survey data, we analyzed the nature of the relation between firms and government, focusing on various corrupt and noncorrupt means by which firms exert influence over the state. We took a multidimensional approach to corruption, governance, and influence, unbundling these concepts into specific subcomponents. Specifically, we analyzed the corporate behavior of foreign investors relating to legitimate influence (such as lobbying) as well as corrupt ways of exerting influence. Corrupting Influence Our study examined three types of corruption: administrative corruption (bribes to bureaucrats to alter the implementation of rules and regulations), state capture (the “purchase” of laws and policies by corporations), and public procurement kickbacks (payments made to secure

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(public laws, rules, and regulations). The evidence suggests that state capture is particularly prevalent when firms face insecure property rights, insufficient economic liberalization and competition, and only a partial liberalization in civil society and media activities, impairing their ability to effectively monitor the activities of the state.

Figure 1. Bribes as a Percentage of Firm Revenues in Transition Economies, by Subregion 6% 5% 4% 3% 2% 1% 0% Domestic firms

Firms with Firms with FDI with FDI with HQ domestic HQ abroad

Domestic firms

Central and Eastern Europe and Baltic States

Firms with Firms with FDI with FDI with HQ domestic HQ abroad

Commonwealth of Independent States

Source: the authors. procurement contracts). We also examined legal methods of affecting policy (such as lobbying). We found that transnational firms are just as likely to pay administrative bribes and to try to capture the state as other firms and that transnational firms headquartered abroad are more likely than other firms to pay public procurement kickbacks. FDI and Administrative Corruption. In a companion paper (“Seize the State, Seize the Day: An Empirical Analysis of State Capture and Corruption in Transition,” summarized in Transition , Vol.11, No. 2, April 2000, p. 8 ), we found that administrative corruption does not pay: on average all types of firms (with or without FDI) that engaged in administrative bribery experienced lower sales and investment growth than those that did not. The fact that the majority of firms in most countries still engage in such practices may reflect the fact that local bureaucrats exert extortionary pressure on them. On average transnational firms pay just as high a percentage of their revenues in administrative bribe payments as do domestic firms without FDI. There are, however, 6

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Despite the more stringent regulations governing their behavior, firms with FDI are involved in state capture just as frequently as domestic firms without FDI. Transnational firms with headquarters in the host country are more likely to engaging in state capture than firms headquartered abroad (figure 2).

important differences across subregions (figure 1). Administrative bribery by FDI firms is less prevalent in Central and Eastern Europe and the Baltic than in the CIS. Bribery in the CIS is particularly prevalent in firms with foreign ownership headquarters are located in the host country rather than abroad. FDI and State Capture. State capture, a pernicious form of corruption prevalent in many transition economies, refers to attempts to extract benefits from the state by corruptly influencing the formulation of policy

FDI and Public Procurement Kickbacks. Firms with FDI whose headquarters are located abroad are most likely to pay public procurement kickbacks (figure 3). Such firms are more likely to pay procurement kickbacks than domestic firms with no FDI or transnational firms headquartered in the host country. At least for transition economies, these results challenge the efficacy of transnational anti-bribery conventions and laws or self-imposed codes of conduct to reduce corruption by themselves. The data—admittedly based on a small sample for each country of FDI origin and thus subject to a high margin of statistical error—do not support the notion

Figure 2. Percentage of Firms in Transition Economies that Engage in State Capture 14% 12% 10% 8% 6% 4% 2% 0% Domestic firms

Source: the authors.

Firms with FDI with domestic HQ

Firms with FDI with HQ abroad

The World Bank/The William Davidson Institute/Stockholm Institute for Transition Economies © 2000

Reduced levels of FDI can thus indirectly exert pressure to improve governance within a country.

Figure 3. Percentage of Firms in Transition Economies that Pay Kickbacks for Public Procurement 40% 35%

FDI and Influence. In contrast to the prevalence of corrupt practices by many firms with FDI in the CIS, exertion of influence is more prevalent in Central and Eastern Europe and the Baltics, particularly among foreign firms with local headquarters (figure 5). The evidence shows that firms that exert influence enjoy higher sales and greater investment growth than those that do not.

30% 25% 20% 15% 10% 5% 0% Domestic firms

Firms with FDI with domestic HQ

Firms with FDI with HQ abroad

Reducing Grand Corruption

Source: the authors. that transnational anti-bribery laws (such as those that have been in effect in the United States for decades) have led to higher standards of probity in overseas public procurement. True, the implementation of the OECD convention is just underway, and it is thus too early to evaluate its impact. Yet it is suggestive that FDI originating in the United States—which has been governed by the Foreign Corrupt Practices Act for more than 20 years— does not appear to be characterized by higher standards of corporate ethics than

domestic firms or FDI originating in other countries (figure 4). The impact of coordinated multilateral action under the OECD convention may or may not end up being more potent if and when countries fully implement, monitor, and enforce the recent agreement. A positive benefit of transnational bribery laws concerns the behavior of potential investors. Transnational firms and foreign investors may avoid investing in countries with poor governance and high corruption.

The causes and consequences of corruption are increasingly well understood; less is known about the reasons for its persistence. The analysis of state capture and kickbacks points to powerful private incentives to engage in these activities. In capture economies, where there is a large market for capture of policies and laws, successful captor firms enjoy strong private gains in terms of performance and improved security of their property rights (from an admittedly very low level). Private gains also appear to accrue to public procurement corruption. The private benefits that domestic firms and firms with FDI derive from state

Figure 4. Percentage of Firms that Pay Public Procurement Kickbacks, by Country of Origin of FDI Average, domestic firms Average, firms with FDI

United Kingdom Germany Japan France Other Russia United States Austria Belgium Greece 0%

10%

20%

30%

40%

50%

60%

70%

Note: Survey question was "How often nowadays do firms like yours need to make extra, unofficial payments to public officials to gain government contracts?" Firms responding "sometimes" or "more frequently" were classified as paying kickbacks. These figures are subject to significant margins of error and should thus be regarded as approximate.

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capture and procurement kickbacks (in contrast with pettier forms of administrative corruption) suggest why addressing these pernicious forms of corruption is a particularly challenging task. It is unrealistic to suppose that firms will not try to influence the policy and regulatory environment within which they operate. Indeed, firms in advanced market economies exercise influence over public policy through a variety of channels. Our research highlights the fact that these strong lobbies are present in transition countries, too, but are directed into illicit channels with highly detrimental social and economic consequences. Policymakers can adopt a variety of measures to reduce grand corruption, in other words, procurement kickbacks. First, they can make the relation between the state and firms with FDI more transparent by: • Monitoring meetings between firms with FDI and elected officials on the Internet (to make lobbying more transparent). • Striving for greater transparency in party financing. • Supporting the establishment of foreign investment advisory councils and foreign business clubs and associations (to give transnational firms a meaningful alterna-

tive channel of influence and create interactive forums among competitors). • Setting up monitoring groups with international business associations and other civil society groups to oversee tenders, privatization deals, and large-scale procurement with FDI participation. • Regularly monitoring and disseminating survey-based data on corporate practices of firms with FDI and disseminating evidence on the socioeconomic costs of firms’ illicit activities. • Improving governance through coalition building and collective action by associations of entrepreneurs, reformist government officials, lawmakers, and the media. The World Bank Institute is already playing a facilitating role in building coalitions and deepening awareness through participatory workshops in which participants discuss the link between corporate responsibility and national governance. Second, policymakers can promote global transparency through collective international actions.These actions include: • Concerted monitoring and enforcement of global initiatives that mobilize national governments, legislative bodies, civil organizations, domestic firms, and the international investment and financial community

Figure 5. Percentage of Firms in Transition Economies That Use Influence to Effect Policy, by Sub-region 25%

to work in tandem. • Expanding the World Bank’s practice of publicly blacklisting firms found to engage in public procurement corruption (visit http://www.worldbank.org/html/opr/ procure/debarr.html). • Supporting the efforts of international NGOs, such as Transparency International and the International Chamber of Commerce, in advising firms on developing codes of corporate conduct that reject bribery. • Widely disseminating information on transnational firms that have taken a proactive stance on corporate responsibility and ethics. Third, policymakers can design anti-corruption programs by: • Tailoring the national anticorruption strategy to the political and economic reality of state capture and other forms of grand corruption and putting particular emphasis on demonopolization, competition, and protection of property rights, as well as complementary public sector reforms. • Paying special attention to the needs of civil society, the competitive media, and legislative bodies. Joel Hellman is senior political counselor at the European Bank for Reconstruction and Development. Geraint Jones is a consultant at the World Bank Institute. Daniel Kaufmann is senior manager of the Governance, Regulation, and Finance Group at the World Bank Institute.

20% 15% 10% 5% 0% Domestic firms

Firms with FDI with domestic HQ

Firms FDI with HQ abroad

Central and Eastern Europe and Baltic States

Source: the authors. 8

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Domestic firms

Firms with Firms with FDI with FDI with HQ domestic HQ abroad Commonwealth of Independent States

This article is based on their article “Far from Home: Do Transnationals Import Better Governance in the Transition Economies?” It is part of a joint research project on governance and corruption by the European Bank for Reconstruction and Development and the World Bank Institute. This work is also an input into the ECA report “Anticorruption in Transition: Confronting the Challenge of State Capture,” which will be published in September. For further details on the research papers, visit http://worldbank.org/wbi/governance.

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TRANSITION is a publication of the World Bank, in collaboration with the William Davidson Institute, and is produced by the Development Research Group. The opinions expressed are those of the authors and should not be attributed in any manner to the World Bank, to its Board of Executive Directors, or to the countries they represent. TRANSITION is published six times per calendar year, in February, April, June, August, October, and December. ©2000 The International Bank for Reconstruction and Development/The World Bank All rights reserved, Manufactured in the United States of America Volume 11, Number 3-4, May-June-July 2000 Printed on recycled paper