Seize the State , Seize the Day : State Capture , Corruption and Influence in Transition

The main challenge of the transition has been to redefine the way in which the state interacts with firms. However, little attention has been paid to the flipside of this relationship, namely the way in which firms exert influence on the state. In only a decade, the fear of the leviathan state has given way to an increasing focus on oligarchs with the power to “capture the state” and shape the policy making, regulatory and legal environments to their own advantage, generating concentrated rents at the expense of the rest of the economy. We unbundle the notion of corruption and in particular examine empirically the phenomenon of state capture on the basis of data from the 1999 Business Environment and Enterprise Performance Survey (BEEPS). We contrast state capture with two other types of relationships between firms and the state – influence and administrative corruption. Whereas state capture refers to the capacity of firms to shape and affect the formation of the basic rules of the game (i.e., laws, regulations, and decrees) through private payments to public officials and politicians, influence refers to the same capacity without recourse to such payments. Administrative corruption refers to so-called “petty” forms of bribery in connection with the implementation of existing laws, rules and regulations. Economy-wide measures are developed for these phenomena, showing that in many transition countries a capture economy has emerged, where rent-generating advantages in the form of policies, laws and regulations are sold by public officials and politicians on an ‘a la carte’ to private firms. We find that state capture, administrative corruption and influence all have distinct causes and consequences. Influence tends to be inherited as a legacy of the past by large, incumbent firms with existing formal ties to the state. These influential firms enjoy advantages in terms of greater security of property and contract rights and superior firm performance. By contrast, state capture is a strategic choice made primarily by de novo firms trying to compete against influential incumbents. “Captor” firms seek to purchase advantages directly from the state -such as individualized protection of their property rights -in environments where the state under-provides the public goods necessary for effective entry and competition. Captor firms derive private benefits such as higher sales growth from their actions but only where the extent of the capture economy overall is high. Administrative corruption, in contrast to both capture and influence, is not associated with any specific benefits for the firm. Despite the private gains to captor firms there are very large social costs associated with pervasive state capture. The capture economy --whose origins are shown to lie in the incomplete process of political liberalization-is characterized by a much higher degree of insecurity of property rights and weaker firm performance. This points to the need to develop new mechanisms for transparent, competitive and legitimate channels of voice and influence for enterprises, complemented with de-monopolization, political competition and greater political accountability to redress the the roots of state capture.