Transcript СТРАТЕГИИ РЕФОРМ: ТЕОРИЯ И ОПЫТ КИТАЯ И Р

CORRUPTION TRAP: HOW TO GET
OUT?
Victor Polterovich
CEMI RAS, Moscow
September 2010
1
Norms and Transformation Costs
• A norm is a rule that large groups of people obey, or can or must
obey. In any area of life and at each moment in time, a multitude of
alternative norms is available, and every agent has to make her
choice. For example, an official may choose either corruption or
honest service.
•
Each agent who interacts with partners within the framework of a
certain behavioral norm has to bear the corresponding transaction
costs. For example, the possibility of being caught while taking a
bribe would cause a transaction cost component for an official who
has chosen corruption as the norm.
•
The costs of transition from one norm to another are called
transformation costs. Transformation costs may be incurred by an
individual, by a firm or by the state. If a firm decides to refuse from
black market operation then it has to search for new partners.
Searching expenditure is a part of transformation cost.
2
Norm-Fixing Mechanisms-A
• For a behavioral norm to be stable, individuals should feel that it
would be unprofitable or disadvantageous for them to deviate from
it. The main type of stabilizing mechanism is based on the so-called
coordination effect. According to this effect, the more consistently a
norm is observed in society, the greater the costs incurred by each
individual deviating from it. For example, the coordination effect
takes place if a personal probability to be punished for a rulebreaking activity depends negatively on the number of people
involved in the activity.
•
With time, the transaction costs of a norm's observance decrease
due to learning effect since the agents learn how to operate more
efficiently. If the payment of taxes is considered the norm within a
society, the taxpaying technology will improve. If, on the contrary,
tax evasion is the norm, then the relevant techniques will develop. A
decrease of the transaction costs fixes the norm.
3
Norm-Fixing Mechanisms-B
• Another phenomenon, referred to as the linkage effect, is also
important. With time, an established norm finds itself linked with a
multitude of other rules, and becomes part of a system of other
norms. Therefore, non-observance of this norm would trigger a
chain of other transformations and, consequently, lead to high
(linked) transformation costs. By increasing transformation costs,
the linkage effect, too, contributes to a norm's fixation.
•
There is yet another norm-fixing mechanism, cultural inertia,
which denotes agents' reluctance to review those behavioral
stereotypes that have already proven viable. Inertia effects may be
supported by a formal or informal system of punishments and
awards for past behavior. For example, a person with a good
reputation tries to save it by following the respectable norms of
conduct.
4
Institutional Trap-A
• In cases where two or more different norms are not equivalent, a
norm may be Pareto dominated or deliver less social utility than
another one.
•
We refer to an inefficient stable norm (inefficient institution) as an
institutional trap. As with any other norm, an institutional trap's
stability means that a system absorbing a small external impact will
remain in the institutional trap, having perhaps slightly changed its
parameters, and will return to the former equilibrium state once
the source of destabilizing pressure is removed.
•
An individual or a small group of people loses if it deviates from
an institutional trap. However, the simultaneous adoption by all
agents of an alternative norm may be Pareto improving. Thus the
lack of coordination is the main cause of the institutional trap
stability.
• Arthur and North use the term "lock-in".
5
Institutional Trap-B
• The emergence of institutional traps is an important source of risk
associated with any reform process. The universal norm-fixing
mechanisms described above, the coordination, learning and linkage
effects, as well as cultural inertia, are responsible for institutional
trap formation.
•
A system with a prevalent efficient norm, if strongly disturbed
(with the set of equilibria, however, remaining structurally
unchanged), may fall into an institutional trap in which it will
remain even after the disturbing factor is removed. This is the socalled "hysteresis effect" which is a form of a system's dependence
on its former path of development (path dependence).
•
A number of unexpected phenomena observed during wide-scale
reforms of ninetieth, including peak-wise raise of arrears,
corruption, black market activity, and barter exchange, may be
considered as institutional traps. These important examples will be
used in our discussion below.
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Getting out of Institutional Traps
• There are reasons to believe that some institutional traps are stable
in medium run only and that an economy could gradually develop
mechanisms conducive to its exit out of institutional traps. The
theory outlined above gives us a framework for systematic
considerations and classifications of different mechanisms that may
facilitate this transformation.
•
One has to reach at least one of the following goals: a) to
increase transaction costs of the prevalent inefficient norm; b) to
decrease transaction costs of an alternative efficient norm;
• c) to bring down transformation costs of the transition to the
efficient norm. The coordination, linkage, or/and inertia
mechanisms have to be influenced for these purposes.
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Penalty and Penalty Costs
• The simplest recipe is introduction of a high penalty for deviating
behavior, for example, a strong punishment for corruption or a
special tax on the barter exchange. The case of China shows that the
death penalty for corruption may be effective in a sense (see Table
2).
• However, high penalties are very costly.
•
There are at least three sources of the penalty costs. First,
enforcement of stronger penalties requires larger resources to be
spent. Large fees may result in strong resistance of penalized
persons. Moreover, courts would be unwilling to enforce the fees
which are considered as unfair.
• Second, a penalty directed to decrease the intensity of an inefficient
norm may increase the intensity of its inefficient substitutes. Fee
increasing may shift the system to another institutional trap instead
of shifting it to an efficient equilibrium. For example, strong
punishment for arrears could create additional incentives for firms
to escape into underground economy.
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Penalty is Effective?
• Third, one should take into account a possibility of mistakable
decisions. Social losses from a punishment of an innocent person are
the larger the stronger are punishments.
• The case of China seemingly shows that the death penalty for
corruption may be effective in a sense (?)
• Table 1. PERCENTAGE OF COUNTRIES WITH HIGHER
•
CORRUPTION PERCEPTION INDEX
•
•
1996 1997 1998 2001 2002
• HIGHER THAN RUSSIA 13 6
11 11
27
• HIGHER THAN CHINA
8 11
39 36
42
• Source: Transparency International (Tanzi (1998)),
www.transparency.org/cpi
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Reputation and Amnesty
•
Development of reputation mechanisms presents another
possibility to increase transaction costs of corruption, arrears, or
tax evasion (Tirole 1993).
•
Reputation mechanisms also decrease transaction costs of
efficient norms creating incentives to observe them.
•
Amnesty is an instrument of weakening inertia effects in the
cases of tax evasion, arrears and corruption. Many governments use
this measure. The outcome is mixed, however. To reach a success
the amnesty should be an unexpected event. It shooed be conducted
in an appropriate moment when fundamental causes for a trap are
exhausted, and should be complemented by other measures
weakening also linkage and coordination effects.
•
Rotation of officials may be an effective measure to destroy
unproductive coordination.
10
Spontaneous Exit – Importance of Growth
-A
• If the state does not take special measure to extract transitional rent
then rent seeking turns out to be much more profitable than
production. Increasing number of economic agents find themselves
to be involved into rent seeking activity, increasing volumes of
resources are diverted from productive activities. Rate of
production growth falls, and this makes production even less
attractive for investors. Coordination, learning, linkage, and inertia
mechanisms start to work and form institutional traps.
•
If, however, rate of economic growth substantially increases due
to improvements of technology or term of trade then part of agents
may decide to increase their investment into production. This
supports growth and creates new incentives for the next cohort of
agents to switch their efforts from rent seeking to production. As a
result some institutional traps can disappear.
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Spontaneous Exit – Importance of Growth
-B
•
Growth diminishes the transaction costs of “good
behavior” and facilitates improvement of institutions.
Therefore one may say that growth itself is an important
factor of growth. This conclusion was corroborated by
an econometric calculations (Chong, A. and C. Calderon
(2000) ) as well as theoretical researches ( Polterovich
(2001a, 2002), Balatsky (2002)).
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Evolution of the Civic Culture
•
An exit out of institutional trap is disadvantageous for each
isolated economic agent but is advantageous for the society as a
whole. The root of the problem is the lack of coordination. The
ability of agents to coordinate their efforts depends on the civic
culture prevailed and the civil society development.
• Coordination mechanism makes agents’ decisions interconnected. It
does not mean that they are properly coordinated.
• Most of economic growth studies consider civic culture prevailed as
a fixed and non-changing factor. However, some important
parameters of the civic culture may change drastically during 10-20
years, therefore long-term considerations have to take them into
account. The following table describe evolution of social trust in
Germany after World War II.
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Evolution of social trust in Germany after
World War II.
• Can most people be trusted? (Germany, percentage
“yes”)
•
• 1948 1959 1967 1973 1976
• 9
19
26
32
39
•
• Source: Conradt. 1989, p.254
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Evolution of social trust in Russia
•
•
•
•
•
•
“ I have many intimate reliable friends”.
Russia, percentage “yes”:
1989 – 42%
1999 - 13%
(Levada, 2000).
Consequences: high transaction costs, low
economic activity, lack of investment (Zak
and Knack (2001)).
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Habitual deviationism
•
“Habitual deviationism”: tolerant or even
positive attitudes towards infringement of
official rules and legal norms: towards petty
bribes, participation in black market
operations, towards exam cheating, private use
or even petty pilfering of the state property. A
habitual deviationist does not like law
enforcement institutions and hates those who
cooperate with policemen or investigators.
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Habitual deviationism-A
• Which factor is the most influential for
the personal income, 1997
•
(% of answers)
•
•
Personal
Personal
achievements connections
Poland
48
39
Czech
37
36
Hungary
37
48
Russia
30
34
•
Sourse: Haarland and Nissen, 1999
Skill in
evading laws
13
27
15
37
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Habitual deviationism-A
• “Do you agree that it is not obligatory to
pay taxes?” (“yes”, %). 1999
•
Average
• rather, agree 31
• rather, do
not agree
59
Businessmen
62
Pensioners
21
32
• “it is reprehensible to take something out of an
enterprise” –
56%
• “it is partly reprehensible” –31%
• “nothing reprehensible”- 8%
• (Levada, 2000).
68
18
Attitudes towards bribe-giver A, bribe –taker B, and
informer C .
Russia and Israel students, 2002,
(Proportion of respondents and average evaluations; N=
84; 25)
•
•
•
•
•
•
•
•
•
•
•
Attitude Towards citizen A Towards official B Towards official C
RUS ISR
RUS ISR
RUS ISR
1. Strongly
Negative
2. Negative
3. Neutral
4. Positive
5. Strongly
positive
Average
Evaluation
6
11
55
26
28
24
32
16
30
25
26
17
56
28
12
4
17
32
17
20
12
16
24
24
2_
0
2
0
_14
24
- 64
-64
-136
7
-18
32
• Average = 2(line 5) + line 4- line 2- 2(line 1).
•
•
A- suggested payment to B; B- agreed to take payment from A
C- reported the case
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Attitudes to cheating
(average evaluations)
•
Country
A (copied)
Russia
-21
• Netherlands
-83
• USA
- 135
B(gave consent) C(reported)
54
- 173
-5
-136
-88
-25
• A (copied answers from B’s paper)
• B (gave her/his consent to A)
• C (reported the case)
• Source: Magnus, Polterovich, Danilov, Savvateev ( 2001).
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Habitual deviationism-B
• Consequenses: an appropriate
environment for corruption, black
market, tax evasion, and criminal
activities. Lack of honest competition.
• A stable inefficient equilibrium.
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Role of Civil Society -1
• If social activity is intensified and the degree of social
trust increases then coordination turns out to be less
costly; there are more chances to get out of institutional
traps.
•
The USA of 19 century is a good illustration of this
statement. The time between 1815 and 1840 was a period
of intensive transformations of political institutions in
the United States. The property ownership requirements
were abandoned to make lower classes eligible to vote.
The privileged position of elites were eliminated by
requiring long list of public officials to be elected. It
seemed that mass –based democratic movement reached
their goals. The reforms had unanticipated
consequences, however.
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Role of Civil Society -2
•
The political party machine turned out to be effective
instrument for party bosses to get rich. They allocated
public service positions (including postmasters, customs
officials, policemen et cetera) among their supporters
did not taken into account competence and skill. They
hired “repeater gangs”, individuals who voted several
times in the name of different registered voters. They
used intimidation to prevent the opposition from voting.
Office workers were forced to pay some proportion of
their wage to the political party that got the job for
them. The police turned out to be a political tool rather
than a law enforcement agency.
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Role of Civil Society -3
•
Corruption flourished. Businessmen paid bribes for
franchises. Low-level policemen took payments for
permission of the local vice operations. The money was
distributed among police hierarchy and political bosses.
Many people understood that the situation had to be
changed but nobody wanted to make a move. This was a
corruption trap.
• (The discussion based on Knott and Miller (1987).
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Role of Civil Society -4
•
The USA civil society developed, however. By the turn
of the century, a powerful Progressive movement had
emerged. The movement combined efforts of several
groups of citizens including middle-class taxpayers,
small businessmen, farmers, and professionals of various
sorts. Their main goal was administrative reform that
would separate politics from administration. They
understood that political party based administration was
not efficient, and were ready to combine the
administrative experience of the more authoritarian
continent countries with the democratic ideals of
America.
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Role of Civil Society -5
•
They required administration by rules, selection of civil
officers by their merit and qualification, standardization
and simplification of procedures, centralization of
administrative authority under a single executive in
accordance to principles of hierarchy. Progressives
created a number of organizations like New York
Municipal Research Bureau, New York Citizen’s Union,
and the Milwaukee Free Press, and occupied leading
positions in both Republican and Democratic Parties.
Republican President Theodore Roosevelt and
Democratic President Woodrow Wilson conducted
reforms in accordance to the Progressive ideas and
constructed new system of governance based on
independent commissions. Getting out of the corruption
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trap was a result of these reforms.
Anti-corruption measures in modern
societees
•
•
•
•
•
•
Personal income declarations has to be opened
(Norway)
Conflict of Interests has to be prevented
Institutional Design (flat tax)
High Salaries of officials
Anti-corruption Analysis of Laws
Anti-Corruption Advisory Centres
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Conclusion
•
Corruption trap is serious obstacles to economic
development. Many countries found themselves in the
trap. Some of them were able to get out. Others are
searching for an exit during long time.
•
The main cause of the corruption trap is the lack of
coordination. Government may try to facilitate getting
out of the trap by stronger penalties , by developing
reputation mechanisms, implementing an amnesty, or
improving administration. In many cases, however, nor
market either government measures are effective in the
short run. Introduction of the political democracy does
not solve the problem as well. Civil society institutions
have to be developed to reach necessary coordination.
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