Rather than operate in the formal economy, abide by legal rules, and pay taxes, business people who rely on corruption operate in the informal economy, break legal rules, and pay few taxes. As people pay fewer taxes, the state is less able to provide public goods necessary for economic growth. By 1995, the informal economy had grown far larger in Russia and Ukraine than in Poland. The dramatic expansion of the informal economy in Russia and Ukraine is somewhat surprising. Prior to 1989, the underground economy to the total economy was much larger in Poland than in the former Soviet countries.
Some scholars argue that certain national cultures are more conducive to corruption.
However, we often see levels of corruption change in particular countries, even while the culture remains constant. Moreover, corrupt practices are strikingly similar across very different national cultures. To reduce corruption, we should not look to national culture but to the incentives facing bureaucratic agents engaged in it. The most common solution for reducing corruption is to curtail the discretionary power of state agents. But this can provide only a partial solution since many important social functions cannot be left to the market.