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Toni Schönfelder
A lifetime of innovation

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Toni Schönfelder
A lifetime of innovation

Stealing the State, and Everything Else A Survey of Corruption in the Postcommunist World Marek Hessel[1] and Ken Murphy[2] "Behind every great fortune," said Balzac, "is a crime." Examine many of todays postcommunist elites and you might think that great French writer more prophet than novelist. Systemic corruption, say friends and foes of reforms alike, perverts the postcommunist transition from within as it undermines its legitimacy from without. So potent are charges of corruption as a political weapon, whether justified or not, and so linked is the reform process to the idea of corruption in the minds of so many of the public, that even Vaclav Klaus and Anatoli Chubais, perhaps the most successful postcommunist reformers, were both nearly undone by them last year. But corruption is not limited to those countries where reforms have radically reshaped economic and political life. Even the most hidebound of ex-communist regimes, indeed, toys with the politics of anti-corruption. Uzbekistan, where privatization and free markets scarcely exist, nonetheless fosters powerful bureaus within its Ministry of Internal Affairs to conduct a Lenin-like "Struggle with Corruption and Economic Crimes." Fears that the undoubted corruptions of the transition process have somehow imbedded themselves deep within society and state are rampant throughout the former Soviet empire. Whether real or unreal, such widespread, sometimes even paranoid, anxieties raise important questions. Is corruption merely a waste product of economic liberalization, a transitory phenomenon that will recede as the transition winds down? Or is it something more sinister, a paralyzing threat to economic growth and social progress at work? Is corruption "merely" the fast track to getting rich? Or is it the means used by the old elites to recapture the state and retain political control (and the special material privileges that went with it) by other means? The shapes and forms of postcommunist iniquity are myriad. Theft endures in the public sector, fraud survives in dealings within the private sphere, and bribery and extortion are common where the two sectors meet. It is the latter -- gross abuse of public office for private gain -- that this survey focuses upon. It examines the persistence of corruption in transition countries and dissects its causes to assess the extent to which corruption may permanently deform these states and societies. Mirror, mirror on the wall... ...who is the sleaziest of them all? Transparency International, an anti-corruption organization based in Berlin, compiles an annual "corruption perceptions index," which shows how corrupt a country is in the eyes of businessmen and the general public. Chart I shows the 1998 scores of several countries. To no ones surprise, misery and corruption appear to go together, and the high-corruption end of the scale is crowded by the poorest countries. Absence of dependable market institutions hurts, too: emerging-market economies tend to be more corrupt than developed ones. And the legacy of communism doesnt help, either: Russia, Latvia, Bulgaria, and Ukraine are at the very bottom-end of the scale, with Romania not far behind. Russians certainly would not be surprised: according to polls by the Public Opinion Foundation, fully 88% of them see "connections" and 76% "dishonesty" as the essential tools for getting ahead in business in their country. Were it that simple. Wealth itself doesnt do the trick. Germany and the US are not "cleaner" than much poorer Ireland; formerly Soviet Estonia is practically even with Japan; France and Spain trail Chile, Italy and Greece lag Malaysia. Nor is the legacy of communism the sole culprit: Estonia is among the least corrupt of the rated countries but Latvia among the worst; Hungary is in the "clean" half of the scale, Ukraine among the leaders of the "dirty" half. What Chart I makes clear is that corrupt behavior can be found everywhere, "pristine" Denmark notwithstanding. In general, academics see the roots of corruption in what is called the separation of "rights to control business from the rights to the cash generated by business." Granting politicians and their minions in state bureaucracies the former creates a powerful temptation to secure shards of the latter, allowing them to exercise exaggerated sway over business. To be sure, states have some control over business in all countries, be it regulatory oversight of private firms and international trade and foreign exchange transactions; or the power to inspect and shut down businesses; or control over the use of land and real estate property occupied by private enterprises; or the determination of what taxes are to be paid, by who, and how they are collected. Control rights have considerable economic value, and all countries face the problem of thwarting those entrusted with them from "cashing in" on them illicitly. State failures here are not hard to spot. This past summer, Yuri Yukov, the head of Russias government statistical service, his deputy, and the chief of the services data processing center were all arrested. Over $1 million in cash was found in Yukovs flat. Scenes of heavily armed and hooded tax collectors barging through doors are not all that unusual in todays Russia. What was unusual was the crime itself: the "systematic distortion of statistical data on big companies which allowed them to evade taxes." Economic data was fiddled so that firms could mask their real output and profits and thus shrink their tax liabilities. Yukovs crimes are probably no worse than thousands of others committed within the bowels of the postcommunist state. Corruption is often rife at the very top, too. In Belarus, President Aleksander Lukashenka, despite frequent denunciations of the very idea of privatization, now conducts all sales of state assets through his own "Office of Presidential Administration" rather than through a specific privatization agency. The Presidential office has taken over both private and state sector foreign trade in many profitable goods (including energy supplies) through a company which it owns, Belvneshtorginvest. The money fills the presidents coffers without ever getting reported in national accounts. Like President Lukashenka, many in the postcommunist elite find themselves immune from prosecution, as those who have been elected or appointed to create new standards for the transition societies often happen to benefit from the old ways of doing things. In Belarus, when V. Kuznetsov, head of the parliaments Committee for Land dialed up a newspaper advertisement offering land for sale, he was quickly informed of the precise dollar figure for the bribe that would be necessary to secure the plot he desired. On reporting back to parliament, no action was taken, perhaps because ex-agricultural bureaucrats make up the biggest portion of parliament members. Or take the case of "Gala Radio," a small FM station in Ukraine that became a commercial success soon after its launch in 1995. When the company lawfully reported its income, announcing a profit on which it paid taxes, all hell broke loose. Gala was banned from the airwaves, equipment was stolen, another station with the same name and logo appeared on the same radio frequency, with a license issued by the National Council on Radio and Television Broadcasting. The founder of the real "Gala Radio" soon discovered that members of the council had a financial interest in the substitute station. A court even ordered that the original station return to the air -- to no avail. Admittedly, places like Russia, Belarus, and Ukraine provide extreme cases of exploiting political power for private gains: as the financier George Soros noted, first "the assets of the state were stolen, and then when the state itself became valuable as a source of legitimacy, it too was stolen." But in all postcommunist societies, the intrusive powers of the state are used, to greater and lesser degrees, to sustain the politicization of economic life which was the very life spring of socialism. The persistence of the corruption that results incites a severe governance failure, akin to the market failures that advocates of the state use to justify more intervention of the state as a remedy. Not all privatizations are created equal A primary objective of all market reforms in postcommunist countries was to provide a governance mechanism that would rejuvenate moribund economies and separate them from the oppressive politics of the state. Privatization was intended to replace former insiders with genuine economic agents and political reforms were meant to insulate these new decision-makers from the malevolent reach of the government. Annulling the inherited marriage of economics and politics was to provide a powerful cure against corruption -- but perhaps no other subject has been more inflammatory to charges of corruption than privatization itself. Stories about corruption in the privatization process are relatively old hat nowadays, and few people dispute that, no matter the type of privatization method used (vouchers, sales, auctions), where there was a will to corrupt the process, politicians and businessmen found the way. "Privatization as it was conducted in the Czech Republic over the last five years," thundered Milos Zeman, before assuming his post as the countrys new prime minister, "was corruption, nothing more. It created an environment in which the idea that you got something for nothing became the norm." Not all privatizations, however, are created equal. In countries in which reforms brought outsiders to the forefront of political and economic life, corruption is by no means perceived as a major affliction. Estonia, Hungary, Czech Republic and Poland are far from perfect, to be sure, but in none of them corruption appears to have undermined economic fundamentals (Zemans concerns notwithstanding). In fact, all of them are on par with southern members of the European Union -- Greece, Italy, Spain and Portugal -- arguably a quite "respectable" company. In other transition countries it is right to ask which state powers have, in fact, disappeared, and whether or not retained powers should have resided with the state in the first place. What some countries lauded as "privatization," and the process of privatization, may have begun with above-board intentions. In the end, many amounted to giveaways to political cronies, a parasitism that continued long after the actual delivery of ownership. Indeed, what some call "ownership changes" often merely shifted ownership rights within the government itself. Ivan Miklos, Slovakias first privatization minister, has in a series of books painstakingly studied the distorted afterlife of his program that began with enormous hopes and early signs of success. Persistent corruption allowed many a "buyer" to default on their contracts with the National Property Fund (NPF). In 1995, for example, the NPF reported overdue accounts receivable totalling Sk 1.2 billion with 141 delinquent buyers. This came after the government of Vladimir Meciar government, on returning to power the year before, ordered the NPF to reschedule many contracts and postpone payments. The most conspicuous example of this gambit was that of Mr Konárik, a member of parliament for HZDS (Meciars party) who was on a summer 1994 list of defaulting buyers, with his arrears amounting to about Sk 90 million. When a new list was published in February 1995, Mr Konariks name had strangely disappeared. So brazen where Meciars perversions of privatization that the stench from them contributed mightily to his defeat in recent parliament elections. Not infrequently, ownership "change" merely allocated property rights to lower levels of government. Take what happened recently in Minsk, where city planners ordered that multistory apartment blocs be built on farmland close to a highway leading to the city of Moguilev. But the law mandated that the local authorities consent to the plan and they did not, claiming that the farms remained essential. When city planners went to inspected the parcels, they found many new dachas had sprouted on what was supposed to be open fields. Local officials, who would not get a "piece of the action" from a big construction site, had nimbly accepted bribes to build houses on the land. The dangers of such practices are real. Government can not only direct property sales to its allies in the private sector, but can keep them loyal through its discretionary ability to forgive debts or its power to destroy competitors. In countries in which privatization was highly politicized corruption lingers untamed, providing a key mechanism for the state and politicians to maintain their grip on the economy, and thus shape it to their will. This is not to say that market governance frees the economy from corruption. Market failures that allow for some corruption are not merely common, but universal. What really matters is that imperfect markets work far, far better than imperfect governments in stimulating growth and harnessing corruption. It may be difficult to nail the precise reason -- is it because government officials make fewer decisions? Is because competition does not leave room for big rents? -- but the case for the superiority of market governance over state discretion may be argued on empirical grounds. In practice, competition, transparency, incentives to initiative, and survival of the fittest in the marketplace -- however flawed all may be -- work better than bureaucrats who, in supposedly pursuing the public interest, find themselves advantaged to pursue their own. Greasing the wheels? Collectively, businessmen, politicians, bureaucrats and individual citizens may realize the advantages of market arrangements and understand that an overweening government produces more and more corruption. But in countries in which effective market mechanisms are yet to emerge, they often view corruption as the lubricant necessary to grease the wheels of business activity. No one, of course, disputes that great ethical failings and social demoralization are linked to corruption. Strange to say, not only crooked bureaucrats shrug and say "so what?" Not a few economists and businessmen, too, claim that bribery, rigged privatizations, cronyism and all the other crimes that go under the rubric of corruption dont matter that much. This "grease-the-wheels" school argues that corruption sometimes provides the only way for businessmen to skirt heavy-handed regulations and an inept legal system. By allowing businesses to maneuver around a grasping state, the proponents of this thought claim, corruption may be neither inconsistent with, nor antagonistic to, the goal of development. More than that, the grease-the wheels faction says, corruption may even foster growth. Bribery may be good because bribes act as incentives to low-paid and inadequately monitored officials to speed up the processing of paperwork. In an inefficient legal framework, payoffs to avoid numerous regulations and taxes may also lower costs for those who pay them. No small matter, either of these. At a seminar organized by the World Bank in Brest last March, it was reported that a Belarusian businessman who seeks to found, say, a furniture manufacturing company requires no less than 70 officials to sign off on the venture, a process that can take up to 7 months. Bribes, the argument continues, may also clear the market for scarce goods and services which governments often provide below market prices or for free. (In China, for example the 1989 market price of coal was eight times the subsidized price.) Under competitive bidding for a government procurement contract the biggest bribe will win -- and the lowest-cost firm will be in the position to afford the highest bribe. To those who grease the palms of state bureaucrats, such arguments ring the right bell -- but they dont ring true. Bribes are often associated with the lowest quality goods or services, and are frequently paid to permit the most unqualified folk to offer services or secure a benefit. And bribes aimed at winning major contracts and concessions (or at gaining title to privatized companies) are generally the preserve of high level officials and their cronies, who are usually insulated from prosecution. Bribes as "incentive payments" usually work not by speeding things up but by slowing down approvals sought by rivals, and the need to bribe shackles those offering bribes. Daniel Kaufmann of the Harvard Institute for International Development notes that in countries like Chile, El Salvador, and Uruguay (all recently emerged from dictatorships), senior managers spend only 8-12% of their time dealing with officials. In Russia and Ukraine, by contrast, managers give up 30-40% of their time. Russian businessmen are considerably more likely to have to bribe officials than their Polish counterparts, but it takes about 4 times as long to register a business in Russia as in Poland. Even with those bribes, business establishments in Russia will be inspected twice as often as those in Poland, and nearly twice as many of them will be fined. Corruption frequently "works" only for those who receive bribes. They often cannot really deliver; what you pay for today can be easily taken away tomorrow by another official or even the same one. Thus, even if corruption may make the rules a tiny bit less inefficient, on balance the situation is worse than if the officials could not expect bribes to begin with. It becomes much blacker if one recognizes that corruption breeds on itself: it gives the bureaucrats powerful incentives not only to keep inefficient rules in place (so that they can take more bribes and pass them about the office) but to multiply such rules. Nor does corruption offer effective market clearing mechanisms. Corrupt markets are less open than competitive ones because bureaucrats seldom subject their illegal payoffs to competitive bids. Instead, they limit access to trusted insiders and pals. In fact, what is really being sold are shackles on competition: the best way to secure the highest price is to sell a monopoly, rather than allow competition. In Ukraine, for example, a construction firm which submitted a bid of $10/m for a tiling contract was immediately disqualified because the bid was below the "minimum" bid of $30m, which it appears had been pre-arranged with insiders. The extent of government expropriation and regulation and the ability of Russian firms to divert profits to themselves is surely reflected in the fact that Russian oil companies were valued at under 5 cents per barrel of proven oil reserves compared to typical $4 to $5 per barrel for Western firms. In fact, state machinery is not the only one thriving on corruption: organized crime chimes in, too. Five times as many businesses in Russia are "contacted" by the mob as in Poland, and twelve times as many need a protective "roof" to operate. Recognition of the costs of this is spreading, as more and more official businesses take large parts of their activities underground to escape the overreaching state altogether. Shadowlands How massive is this exodus? Chart II relates the size of unofficial economy -- unreported activities of legally registered business entities -- to the spread of corruption in several countries. Ukraine, Russia, Bulgaria and Latvia "lead" the postcommunist pack -- and practically everyone else -- on both counts. In the former Soviet Union, the average share which the unofficial economy claims of GDP is estimated to have increased almost three-fold between 1989 and 1994, from 12% to 33%; in Central and Eastern Europe, the 1994 average still stood at over 20%. Some countries may be turning the corner: in Hungary and Poland the unofficial economy grew by less than 1% over the same period. In many countries, however, the shadows are lengthening, often at an extraordinary pace. Between 1989 and 1994, it increased by about a half in Georgia and Azerbaijan, nearly a third in Ukraine, and Moldova, and by close to a fifth in Kazakhstan, Latvia and Lithuania. The effects of mushrooming levels in the black economy are as predictable as they are devastating. State coffers empty because taxes are unpaid, public finances collapse, and the ability of the government to provide such basic public goods as law and order, effective regulation and efficient public administration dwindles. More corruption follows, pushing even more firms underground and opening a spiral which may eventually bring a total disintegration of the economy. Small wonder that high level officials from emerging economies rate public sector corruption as the number one obstacle to the economic development in their countries. And they seem to have it right: a study of 39 countries by the World Bank shows that when high levels of corruption are accompanied by low reliability of bribes, investment rates may be reduced in half. More "reliable" corruption -- some certainty that bribed bureaucrats keep their corrupt bargains -- may be less costly, but it still hits investment hard. Relatively corrupt countries are likely to enjoy significantly lower investment rates, if for no other reason that investing in them is estimated to impose an additional 20% "corruption" tax. The economic benefits of even a meager squeeze on corruption, on the other hand, are well-recognized. Using a corruption index with a range of from zero to ten, Paulo Mauro of the IMF argues that a mere 2% or so improvement in the index can bring about an over half-a-percent faster annual economic growth. But failure to act as the remorseless tide of corruption rises threatens to throw any number of transition countries into a new crisis -- just look at Russia. The fear is that a de-facto tolerance of corruption will in the end prove so socially catastrophic that infant democracies will be overwhelmed by protest, leaving fascist or other anti-democratic and anti-market regimes in their place. Here Marx may have the last laugh. Too much state or too little state? Almost any discussion about corruption and the transition begins and ends with the role of the state. One argument has it that the state has been so eviscerated by the transition, its powers to regulate and control taken away so effectively, that it is not equal to the challenge of controlling those who seek to plunder society. The state became so weak and acquiescent, some argue, that it can do little more than abet those who steal and bribe, and markets by themselves cannot prevent the pilferage. Those who see todays postcommunist corruption as linked to the sort of state communism bequeathed take the opposite tack. They regard the shrinking of the state as unequivocally a good thing; otherwise, the state would be meddling in even more areas of economic life than it does today. More to the point, they argue, postcommunist states may have lost some levers of economic control but they retain powers of oversight and regulation that go far beyond the needs of their societies. Retreat of the state has not gone far enough, and the main failure of the transition is that it has not been doing its job ruthlessly: the state has been shrinking more slowly than it should, or even not at all. The question of whether too much state or too little state breeds corruption in the postcommunist societies may be wrong-headed. Look at Chart I again. Within the full range of market arrangements of the developed economies, statist France and laissez-faire US are neighbors on the corruption score; Denmark and Sweden (as well as the other tax-and-red tape countries of Scandinavia) are some of the "cleanest" economies on the globe instead of being world beaters in bribery. Generic corruption is not merely a matter of too intrusive a state or too compliant a state -- it is a matter of a poorly functioning state. Even in developed market economies, governments supplement and sustain the market; even in most libertarian of societies, individual rights cannot be protected without the states power to tax and spend. The Russian example of a government incapable of enforcing its own laws suggests that Russians may have as many reasons to worry about the debility of the state as about its power. The transition countries inherited states as bad or worse than the economies. The state handed-down from the communist past was based on discretionary action and arbitrary power rather than the rule of law, it did not know the limits of properly exercised state power, and it certainly did not have any experience with regulating markets. A "good" state can do most things well -- including discretionary exercise of its powers -- and Denmark and Sweden provide telling testimony that neither a substantial government intervention nor high tax rates per se inevitably spawn corruption. Still, high taxes undoubtedly create bigger incentives to evade and call for a better working state apparatus to enforce them. If the apparatus is lacking, high degree of regulation and high levels of taxation tend to make corruption unavoidable. So the weakness of the postcommunist state imposes on the transition countries the necessity that the centuries-old tradition of statism may perhaps avoid: that of running at a relatively low level of discretionary regulation and taxation. A weak state is limited in what it can and cannot do effectively. Far-reaching state intervention is simply not realistic in the postcommunist countries. This is independent of whether such intervention in itself is good or bad, or whether (in Western terms) one is a laissez-faire liberal or a social-democrat: the limits are a matter of capacity rather than desirability. The debility of the state is even more threatening when the overweening state fuses with an impotent legal environment: the combination allows arbitrary exercise of power by state officials from top to bottom of the bureaucratic ladder. Excessive regulations or tax rates threaten to attract corruption but it is leeway in application of regulations and assessment and enforcement of tax liabilities that always brings it about. Chart III shows the extent to which high levels of corruption are associated with high levels of governmental arbitrariness in regulating business. In Russia and Ukraine, bureaucratic "apparatchiks" seem to have replaced the omnipresent party apparatchiks (though, no surprise, many of the faces are the same) in regulating economic activity. The deadweight costs of government in those countries provides an extreme example of why the state fails when it combines an excess of regulatory and oversight powers with high degrees of discretion. The problem, however, persists even in the more successful economies of Central Europe, where discretionary powers of state officials remain near the high end of the spectrum. The problem with legally unregulated governmental discretion in creating and enforcing regulations affecting business is not dissimilar to the problem created by an inefficient and pillaging monopolist. However, a public monopolist may be more dangerous than a private one. Not only may a political monopolist subjugate business goals to political wishes but it has the power to suppresses information that markets and competition would otherwise reveal about the cost of supplying different goods and services and about the values that consumers put on them. Memories are short, it seems, for it was state planning under communism that provided the extreme case of inefficiency and corruption. It is well to remember just how badly bureaucrats can fail if allowed to operate as monopolists over a sufficiently wide range of operations. What is to be done? Many factors contribute to the persistence of corruption in the transition countries. Where reforms put the communist incumbents or their descendants into power, the state and politicians often maintain their grip on the economy, and mold it to their will. In those countries, the emergent "governance" contract can be described, as Stephen Holmes put it, as "an exchange of unaccountable power for untaxable wealth." State oversight power puts a straitjacket on economic freedom of all but a handful of individuals, a self-promoting deal between political and economic insiders. Corruption, yet, remains a problem in countries in which the postcommunist reforms allowed outsiders to enter economic and political life. To be sure, the reforms deprived state bureaucracy of much of its power there; however, although they removed much of a "bad" state, they have not created much of a "good" one yet. The state is too weak to effectively control itself -- much less the economy -- and the unchecked discretionary power of state bureaucrats further facilitates the unavoidable corruption and puts an even greater chokehold on economic activity. Cutting the regulatory powers of the state to match its ability to regulate is perhaps the most effective way to trim back the plums available to be eaten by public officials. Limiting regulation to what the administrative and judicial systems can handle, designing simple, transparent and uniform regulatory and tax regimes, and eliminating special exemptions and exceptions so as to ensure effective and non-discretionary implementation of these rules could go a long way toward reducing discretion-bred corruption. Reducing what the state can regulate and tax not only promises to arrest corruption but may actually boost the financial resources essential to do so. In many postcommunist countries, however, the upward pressure on states to intervene has not relented, as popular demand for collective solutions to social and economic problems remains, if anything, as strong as ever. Governments, particularly those with deeper democratic impulses, may have a hard time in not responding. So the question is not whether corruption can be fought, but whether there is a will to start the fight at all. Where the state regulates, regulations should support the emergence of truly competitive markets. "In general," argues Susan Rose-Ackerman, a Yale University professor of law who has worked on problems of corruption, "any reform that increases the competitiveness of the economy will reduce incentives for corrupt behavior." Macroeconomic reforms should be speeded up, not slowed: with greater deregulation and increased competition, the discretion to hand out subsidies or provide soft credits begins to disappear. Enterprises that survive only on state handout should be liquidated or privatized, with branch ministries and other ex-owners excluded from this process so as to insure that the old control rights and crony ties are truly severed. Because corruption is closely tied to the dominance of state enterprise in an economy, slashing the overreaching powers of the state is possible only through privatization of economic life, and faster privatization of ever more areas of the economy (land and energy industries in particular) should be encouraged. Admittedly, privatization by itself creates as many incentives to corruption as it eliminates, and the dangers of privatization must be recognized and properly handled. In creating constituencies that have an interest in spearheading legal and institutional reforms, a transparent transfer of ownership to the private sector -- not the half-way privatization that keeps the state in the game -- goes hand-in-hand with the need to strip the state of its inordinate regulations. Reform of the civil service is necessary, too. Eliminating redundant ministries and agencies, reducing bloated bureaucracies, and introducing competitive pressures within the government cannot but help to reduce the extent of corruption. Todays low public sector salaries (a ministerial department head in Uzbekistan makes a mere $20.00 per month, a gross incitement to steal) should be raised: countries that reward civil servants with salaries competitive to those in the private sector invariably reduce corruption as they help professionalize the bureaucracy. Carrots should be accompanied by sticks, with much tougher penalties for corruption. Still, dont expect too much from government reform, beyond reducing governmental bloat. To produce competent, honest bureaucrats, especially where competence is in short supply and markets compete fiercely for it by dangling higher salaries, and where the traditions of bureaucratic integrity are weak, requires lots of time. The French began to train their civil service with Colbert, the Germans have been at it since the Prussian kings in the 18 th century at the least, and even the Americans, where some local governments remain quite corrupt, have a century-old tradition of competitive civil service. In many countries, even the basic ways of reforming the system appear outside the realm of the politically possible. Transparency and increased competition violate at least two aspects of postcommunist governance: intervene often, so that the process is taken as normal, and disguise all interventions as necessitated by law, which no one wants to undermine. Follow those rules, and corruption becomes a necessary by-product of practical transition country politics. None of these recommendations are impossible, as relatively successful anti-corruption campaigns in Estonia, Kyrgizstan, and Poland demonstrate. Around the world, a number of countries -- from relatively prosperous ones like Chile, Hong Kong, Portugal, and Singapore to impoverished ones like Bolivia, Botswana, the Philippines, and Uganda -- have made big strides in driving systemic corruption out of their economies. Growth has followed. Indeed, when growth is concerned, there appears little choice. Economists see two very different kinds of equilibria in which economies may find themselves. Where regulations and tax distortions are low, government revenues high and the provision of public goods in the official sector sufficient, then neither corruption nor unofficial economy are significant parts of economic life. If, on the other hand, regulatory standards and tax aberrations are prohibitive, public finances weak and the supply of public services inadequate, then corruption and underground economy threaten to become dominant and enduring feature of economic life. And once corruption becomes all pervasive, economic life is neutered. The stakes are very high indeed. -------------------------------------------------------------------------------- Notes [1] Graduate School of Business, Fordham University and Project Syndicate [2] Project Syndicate

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