U4 Helpdesk Query

U4 helpdesk reply

• to preliminary query
• to follow-up query

The query is subdivided and answered in four parts. Part I summarises the development of the concept of state capture and its present status on the regional agenda. Part II provides recommendations for addressing state capture in the region, as set in some key writings by scholars and practitioners. Part III discusses actual measures for addressing state capture at country and regional levels, with specific examples, where appropriate. Part IV lists a few additional resources (reports) that may be of interest to the enquirer.

The answer is an updated version of the preliminary one.

Reply produced by: U4 Helpdesk research team with input from TI's CEE/Former Soviet Union Regional Director and Transparency International Russia's National Chapter team.

Attachments/Extra links: There are certain documents listed under part IV that can be emailed to the enquirer upon request. For all the rest of the mentioned documents, direct electronic links have been provided throughout the answer.

I. Background: Evolution of the Concept and its Present Status

A concept put on the agenda largely by the World Bank and EBRD, state capture has evolved from being contested as the lead factor in corruption in the Former Soviet Union in its early days of the discussion, to increasingly being re-examined with more scepticism as to its actual prevalence and its status as the leading type of corruption in the region. Nevertheless, it is still high on the agenda throughout the region, although with significant variations from country to country.

The early discussions and findings can be traced in:
- The first Business Environment and Enterprise Performance Survey (BEEPS) for Transition Economies developed and conducted jointly by the World Bank/EBRD in 1999. A tool that has been used to measure and analyze state capture.
- The Anti-corruption in Transition: A Contribution to the Policy Debate of the World Bank in 2000.
- And a flood of articles by Joel Hellman and Daniel Kuafmann of the World Bank between 1998-2001(many to be found at the World Bank Institute's web site for governance).

It is also interesting to note, that the later reports indicate that State Capture in transition economies has diminished. Of interest in this later series are:
- The second (2002) Business Environment and Enterprise Performance Survey (BEEPS), reporting a significant decline between 1998 and 2002.
- A paper presented at the ACN Meeting in Istanbul, September 10, 2003: "Corruption and Anti-Corruption Programming in the Transition Countries" by Alan Rousso, Senior Political Counsellor of EBRD.

At the same time, other recent reports and writings continue positioning state capture as one of the key corruption issues in parts of the region and generally:
- Study: State Capture is the Main Form of Corruption in Latvia, by Kristine Plamse, November 2002 and Corruption Perception Restraint, by Andrejs Vilks, November 2002.

II. Summary of Measures to address State Capture Recommended in Key Writings

A number of key writings on the topic suggest the roots of state capture extend from partial civil liberties, lack of transparency, competition and insecurity of property rights. They subsequently advocate as remedies measures aimed at addressing those root causes. Summary of recommendations from some of the major writings are presented below:

1) Seize the State, Seize the Day: State Capture, Corruption, and Influence in Transition, Hellman, Joel S., Geraint Jones and Daniel Kaufmann, the World Bank 2000

The authors suggest that the focus of reform should be shifted toward channelling firms' strategies in the direction of more legitimate forms of influence, involving economic competition, societal "voice", transparency reform, and political accountability. These recommendations are consistent with the empirical findings in the paper on the origins of state capture: improving civil liberties from partial to fuller liberalisation can reduce the extent of the capture economy by 15-30 percentage points.

2) Confronting the Challenge of State Capture in Transition Economies, Joel Hellman and Daniel Kaufmann, in Finance and Development, September 2001

The following key recommendations are highlighted by Hellman and Kaufman:

Political and economic reforms matter:
The paper demonstrates that the state-capture index is systematically lower in countries that have pursued more comprehensive economic reform. Furthermore, at any given pace of economic reform, there is a dramatic decline in state capture in countries with higher degree of political reform - civil liberties, access to information, press freedom, etc. Yet it is clear that the causal links between capture and reform run in both directions, which makes breaking out of the vicious circle so difficult.

Tackling the incentives to engage in grand corruption is important:
The paper discusses the numerous advantages for "captor firms" and suggests that addressing the issue of incentives on the supply side to engage in state corruption is fundamental.

Prioritising the reform agenda is key:
The paper suggests that although the general remedies for such problems-transparency and competition-are, by now, increasingly acknowledged, the specific ways in which reform of state capture can be achieved are less obvious. A recognition of the challenge of state capture should be used not as an opportunity to expand the reform agenda beyond what is feasible for even the most committed reform-minded governments, but rather to prioritise that agenda more effectively by developing a clearer sense of the factors that prevent further institutional reforms. The paper reinstates the crucial importance of:
- transparency (with specific measures aimed at access to information, disclosure of information and public reporting; citizen participation in decision-making processes; transparent political party financing; civil society monitoring of conflict of interest and related provisions)
- competition (with measures aimed at restructuring monopolies to increase competition, encouraging trade, and fostering a more favourable business environment)

III. Concrete Country Measures /Projects

Even though there has been a wealth of writings on the topic between 1998 - 2002, little has been done in terms of actual initiatives and projects. Moreover, as pointed out by some of our field experts, it has been difficult to develop concrete measures on a theory not unanimously interpreted or accepted by anti-corruption practitioners working in the region. Also, often any measures that have been taken in the region, have little to do directly with the theory of state capture as constructed by the international scholars and community.

Moreover, there are no reform packages that go hand-in-hand with the phenomenon of state capture. No such efforts to frame (let alone to test and analyse) comprehensive reforms specifically aimed at addressing state capture have been concluded by either the respective countries or the international community or jointly. Rather, there are certain anti-corruption measures, which if implemented properly and timely, can prevent and/or curb state capture and minimise its impact. Most of these measures were listed in Part II above. In this section, we will bring examples of such measures taken in the respective countries:

Russia

Practitioners in Russia consistently highlight that there are two parallel processes taking place in Russia: state capture and business capture (the latter being used to describe the state unlawfully taking control and exercising undue influence over businesses); or even, as described by some, these two processes have been turned into the fusion of state + business by the elite, with former bureaucrats running businesses and business leaders holding or controlling political office.
Amongst the key measures to address the situation are the introduction of conflict of interest regulations, codes of conduct and wide-ranging transparency reforms. In addition, it has now been acknowledged by many that to galvanize Russia's public debate over corruption, it is vital to remove the sole responsibility for reform from government. By focusing on the supply-side, debate can lead to more direct, immediate and measurable action, particularly in areas like state capture. Thus, the importance of engaging the business community in the process is being increasingly highlighted.

1. Engaging the Business Community: collective action, business self-regulation, etc.
Background: earlier this year, President Putin publicly challenged the leaders of the Union of Industrialists and Entrepreneurs (RSPP) to help "destroy the breeding ground for corruption".
RSPP is a business association that includes the financial-industrial groups that secured control of a majority of Russia's wealth during the past decade of privatization. The association responded by creating a working group that will recommend administrative reform measures to the president, which will include reducing obstacles to business that provide the opportunity and incentive to engage in various forms of corruption, including state capture.

Analysis*: Notwithstanding the fact that civil servants play a role in both state and business capture, the breeding ground can be attacked only if private sector leaders take initiative.
There are numerous market incentives for RSPP and other business leaders to adopt anti-corruption practices. They include enhancing reputation and good will as business assets, reducing the risk and costs associated with capture, strengthening competitive position, increasing shareholder value, and gaining access to capital and credit on better terms. In the long-term, RSPP requires institutions that can govern a market economy built on true competition. To meet Putin's challenge, RSPP should take concrete initiatives that can be implemented largely by the supply side. In particular, RSPP members should form "integrity pacts" with other large businesses, SMEs and non-governmental organizations (NGOs) at the national and regional level designed to institute conditions for transparent and fair business competition.
The most concrete form of an integrity pact is a "no-bribery pledge", under which companies entering a government tender or privatization bid and the officials responsible for choosing the winner commit to a transparent procedure. In particular, they pledge not to offer, pay, accept or seek bribes of any kind during the tender. To show their good faith, they may place funds in escrow that they would relinquish if they did engage in bribery. If a business does not abide by the guidelines, they lose the bid and other participants in the pledge can stop doing business with or blacklist them. Such pacts have been implemented to one degree or another throughout the world. In order to maximize impact on economic growth, RSPP should form integrity pacts that help both large enterprises and SMEs.
RSPP leaders should also take initiative in the regions in which they operate their factories and other outlets. They are in the best position to help institute local programmes to monitor government agencies and budget processes, increase access to information regarding allocation of public resources, and foster independent oversight of public procurement. These are best done through joint coalitions with NGOs and watchdogs.

Examples of collective action by businesses: RSPP is not the only institution engaging in the process of private sector-driven initiatives to address corruption and state capture. Disproportionately injured by the extortion practices of officials at all levels, SMEs are already taking local initiatives throughout Russia. Another example of a private sector initiative is the formation by a highly regarded economics professor, Lev Kaplan, and the General Director of the U.S. subsidiary of Otis Elevator, Vladimir Marov, of an "Honest Builders' Club". The coalition dedicated to fair business practices now includes 30 of the largest local construction companies, various NGOs and the city's Vice-Governor for Construction.
The Association of Minority Shareholders' Rights assisted the Kremlin's efforts to expose shady financial deals at Gazprom, 38 percent of which is owned by the state. Minority shareholders claimed that the theft of vast amounts of cash had kept share prices low and reduced profits. In December 2001, Gazprom's new management decided to reclaim the Purgaz gas field, a valuable asset that was previously 'pawned'. Since the new management arrived, Gazprom shares have risen 44 percent. (source: TI GCR 2003)

Examples of self-regulation through codes of conduct: The Corporate Behavioural Code is one example of Russia's determination to improve corporate governance and the investment climate. More than 150 Russian companies were consulted in the course of developing the code. It includes amendments to the joint stock company law, securities market law, the criminal law and provisions of criminal liability in cases of non-disclosure, as well as measures for enforcement. While some are sceptical as to the genuine intentions, it is widely expected to seal major loopholes in existing corporate governance structures. (source: TI GCR 2003)

*Source: How to root out Russian corruption, April 2003, Transparency International Russia

2. Transparency Measures
Among recent concrete measures and/or developments aimed at improving transparency are:

On Elections, Party Finance and Lobbying Regulations :
Russia passed a law on the election of deputies to the State Duma in November, 2002. While the basis provisions of the law remain the same as in the 1999 version, it contains some new provisions concerned with finance, namely the introduction of spending caps and a stricter regulation of funding sources and size of acceptable donations. A law on the presidential election was passed in December 2002 with the intention to streamline a hitherto complicated process. (Source: GCR 2004)

Party financing and regulations remain major issues for Russia in the context of state capture. Informal political actors - financial groups and political "oligarchs" dominate the political spectrum. Political parties are included into the structure of an "oligarchy" to act as legitimate vehicle for engagement in public policy and lobbying. They are supported by their own controlled mass media and key industries.

On Access to Information :
Russia's federal access to information law has not yet passed the stage of parliamentary debate and is under review by the Duma since 1996. Some regions and local entities (including Kaliningrad, Greater Novgorod) have, however, engaged in reform with the goal of making information held by government bodies available to the general public. Generally speaking, access to information is not considered a great priority by politicians and civil society alike in a context in which the state is still largely perceived to be a ruler, rather than a provider of public services.

Ukraine

On Elections, Party Finance and Lobbying Regulations :
Ukraine has adopted a number of laws to regulate this area, among them the 2001 Law on Political Parties, the 1999 Presidential Election Law and the 2001 Parliamentary Election Law. The latter is considered to be an improvement compared to the previous (1998/94) legislation.

Ukraine has introduced some specific measures on public disclosure of political finances, such as for example, the information on the size and sources of contributions to the fund of a candidate, as well as the financial statements on the use of these funds are published by the CEC (the central electoral body) in two national newspapers within seven days of the day of elections.

One of the most severe problems in the area of elections, campaign financing and regulation that has direct impact on the dynamics of state capture remains the issue of funding sources for political parties. Ukrainian fragmented and non-institutionalised party system keeps encouraging big business to form client circles and run their own parties to directly control decision-making processes.

In terms of Civil Society led concrete initiatives in this area, TI national chapter in Ukraine (and "Freedom of Choice Coalition) had implemented a project on Public Monitoring of Parliamentary Electoral Campaign Financing 2002 in Ukraine. The results and finding of the project are can be found here.

Central Asia

On Party Finance and Lobbying Regulations
Kazakhstan adopted a Law on Political Parties on 26 June 2002, which introduced fundamental changes to the financial activities of political parties, including their sources of funding. Potential transparency and accountability gains are, however, contravened by the inclusion of clauses in the law, that directly affect the formation and operation of political parties, e.g. the requirement of a minimum 50000 membership for a party to register, and the introduction of mechanisms designed to enable the state to interfere in the internal affairs of political parties. (Source: GCR 2004)

On Access to Information
In Kazakhstan, the Constitution of the Republic of Kazakhstan (Adopted 1995) guarantees access to information as a constitutional right: Everyone shall have the right to freely receive and disseminate information by any means not prohibited by law. The list of items constituting state secrets of the Republic of Kazakhstan shall be determined by the law. The subsequent law, however, "On protection of state secrets of the republic of Kazakhstan", which "determines legal principles and the single system of protection of state secrets in all types of activity of state executive and management agencies, enterprises, institutions, associations and organizations, irrespective of the form of property, as well as of military units and citizens of the Republic of Kazakhstan on the territory of the state and outside of it", is rather extensive.

The Kyrgyz Republic adopted a Law on the Fight against Corruption on 6 March 2003. Other than establishing the legal and organisational foundations for the fight against corruption in Kyrgyzstan, the law explicitly mentions the role of the media in investigation corruption offences and disseminating information regarding the latter. It also establishes provisions for government agencies to publicise information relating to internal corruption matters. (Source: GCR 2004)

On Conflicts of Interest and Disclosure
The term "conflicts of interest" did for the first time become a provision of Kazakhstan's law on control over execution of national an d local budgets enacted in 2002. It is provided for as the any activity of relations which are capable to limit the objectivity and the independence of the state body employees in terms of either internal or external control.

A Kazakh governmental decree of 2000 establishes that all civil servants within a month of assuming office are obliged for the duration of their public service to transfer to confidential management any shares of participation in authorised capital of commercial organisations and other conflicting property and assets.

Kygyzstan does not have any specific conflict of interest legislation, but interestingly it is regulated as an aspect of corruption by the standards of the Criminal code.

Finally, an interesting governmental body is under discussion for establishment in Kyrgyzstan - the National Council on Faithful Management. Its main tasks are inter alia to include: taking steps to eliminate the unwarranted and needless interference of the state structures into the economy and commercial entities.
[source: forthcoming GCR 2004]

IV. Additional Country Resources (full documents can be emailed upon request)

"State Capture in Russian Regions", Draft (provided by TI Russia), I. Slinko, Y. Yakovlev and E. Zhuravskaya, November 14, 2002

"Capture or Exchange? Business Lobbying in Russia", Timothy Fry, for Europe Asia Studies, April 2002 (provided by TI Russia)

"Explaining State Capture and State Capture Modes: the Cases of Russia and Ukraine", Oleksiy Omelyanchuk, CEU, Budapest, 2001 (provided by TI Russia)

U4 helpdesk reply to follow-up query

Please find below answers to points 1 and 2 above. The reply to the preliminary query can be found after the two points.

1. On point one, the Helpdesk has contacted Alan Rousso, Senior Political Counsellor at EBRD and the author of the forthcoming paper indicating a decline in state capture. We are happy to summarise his reply to us below:

The results of the BEEPS 2002 do indeed show that there has been a decline in state capture -- a significant decline in some cases -- across the transition countries. The countries where capture was most pronounced -- Russia, Ukraine, Azerbaijan, Moldova -- have seen the sharpest decline, while countries with more modest capture levels, for example in some southeastern European countries, have remained more or less constant or experienced an increase in levels of capture.

It is important to distinguish here between the perceived impact of capture on firms and the number of firms that report engaging in attempts to influence laws, court judgments, decrees, etc (i.e., the number of 'captor firms'). The positive trends noted above refer to the perceived impact of capture on other firms' business and general climate. If you look at the number of captor firms, by contrast, you see that the share of captor firms is either constant or increasing across all transition countries from 1999 to 2002. What this suggests is that, in general, capture in 1999 was a strategy employed by a relatively small number of powerful firms which had significant impact on other firms' business and general climate, while in 2002 capture was attempted/employed by a larger number of firms but with less damaging or drastic effects.

The causes for this are very difficult to disentangle. A new World Bank publication, due out this fall, looks into the main potential causal factors influencing levels of corruption - economic growth, political systems, policy and institutional variables, and managerial attitudes (optimism vs. pessimism about the business environment) -- but the results are not clear cut.

One thing we can say, based on some research that a colleague and I have done here at EBRD, is that there is not a close correlation between changes in levels of capture and the introduction of high-profile anti-corruption programmes. The same can be said for administrative corruption. However, we acknowledge that anti-corruption programmes may take a while to have an impact, and that our time series and overall number of observations in the transition region is too limited to reach any firm conclusions.

Relevant Resources: Alan Rousso's paper detailing the issues should be available by early November and can be arranged to be sent to you by the Helpdesk, if you are interested.

2. The scepticism in the background of the original reply was related more to the level and prevalence of state capture in the region rather than the use of state capture analysis or the concept as such (it was meant to indicate that the trend does not seem to be one of static prevalence throughout the region any longer but rather that state capture seems to change its levels and forms of prevalence). As to the use of state capture analysis, it was addressed later in Part III. The argument was that in the context of designing concrete measures state capture analysis has not yet proven to be successfully translated into a platform for practical measures to address it.

As to the question of which alternative views are most prevalent, there do not seem to be alternative views that prevail (at least as yet) over the concept and state capture does remain on the agenda as indicated in the reply, but there are alternative approaches that seem to emerge and co-exist (rather than prevail) with the state capture one.

So, for example, there are suggestions that a form of "elite exchange" rather than capture may best characterise business-state relations for the majority of firms in Russia (sources include Timothy Frye: 2002; TI Russia: 2002, 2003, etc.)

Similar observations have been made by other experts with regards not only to Russia but most of the FSU. We are summarising below the reply on this matter from one of our former TI-S colleagues, D. Bowser, who now works in the region independently:

"While the paradigm presented by Mssrs Hellman and Kaufmann of the actions of individuals, groups, or firms both in the public and private sectors to influence the formation of laws, regulations, decrees, and other government policies to their own advantage as a result of the illicit and non-transparent provision of private benefits to public officials certainly has validity in defining the behaviour of political/economic actors in many countries of the world, it does require a degree of refinement if it is to be applied to the entire FSU region. While there exists rampant corruption in the countries of the FSU and oligarchs in many countries have seized the lion's shares of State assets, the question arises as to who is capturing who. Is it a case of the State being captured by the private sector or a fusion of the State and the private sector?

The concept of the State capture in most of the FSU needs modification since there exists no truly independent private sector to capture the State but a fused group of economic/political actors organised in vertical networks dominating the distribution of resources and power. Social networks and "clans" remain the and being the very fabric of the State have no need to capture it. Laws and regulations are necessary only for those that seek to secure their ill-gotten gains or to sustain unfair advantages. There is no need to use State Capture to establish or change the 'rules of the game' since the rules of the game are the same as in Soviet times. Different social networks operate as fractions within society to maximize their dominance and engage in rent-seeking. The losers of the game are those that don't have a 'krysha' or roof that is able to distribute patronage. In Mr. Hellman's earlier works he makes this very point.

State Capture does provide a framework for examining the corruption issue in the Former Soviet Union but its reliance on the models presented by modern States needs refinement if it is to be used in analysing anti-modern States. The behaviour of firms within their environment and their methods of coping with and co-opting the State are dependent on the societies in which they live. The business 'rules of the game' are formed by and work within the general framework of how society is organized. The dominance of competing social networks and the fusion of private and public sectors allows the State to capture business as well as allowing the State to be captured by the private sector."

Relevant Resources:

Papers discussing the state / business fusion in Russia as well as the complete text of the brief by Mr Bowser (summarised above) are available and can be sent to you by the Helpdesk, should you be interested.