Confronting the Challenge of State Capture in Transition Economies

• Author: Joel Hellman/Daniel Kaufmann
• Position: Specialist in the Public Sector Governance Section of the World/Senior Manager of the World Bank Institute's Governance

"I only want to draw your attention straightaway to the fact that you have yourselves formed this very state, to a large extent through political and quasi-political structures under your control. So perhaps what one should do least of all is blame the mirror."

-Vladimir Putin, in a meeting with Russia's business leaders in July 2000 (Hoffman, 2000).

When we think about corruption, an image quickly comes to mind of a bureaucrat extorting bribes from powerless individuals and defenseless firms simply to enable them to "get things done." Behind this view lies an understanding of the state extracting rents from the economy for the exclusive benefit of politicians and bureaucrats. Such an approach has had a powerful impact on the way corruption has been analyzed and measured in recent years. The resulting policy recommendations have emphasized reducing the discretionary authority of state officials to eliminate their opportunities to extract bribes.

State capture-a form of grand corruption

In transition economies, corruption has taken on a new image-that of so-called oligarchs manipulating policy formation and even shaping the emerging rules of the game to their own, very substantial advantage. We refer to this behavior as state capture. Though this form of grand corruption is increasingly being recognized as the most pernicious and intractable problem in the political economy of reform, few systematic efforts have been made to distinguish its causes and consequences from those of other forms of corruption. Moreover, there have not been any attempts to measure this specific type of corruption and to compare it across countries.

We define state capture as the efforts of firms to shape the laws, policies, and regulations of the state to their own advantage by providing illicit private gains to public officials. We develop a method to measure this form of grand corruption based on the findings and analysis of a survey of nearly 4,000 firms in 22 transition countries.

In recognizing the problem of state capture, we wish to focus attention on the complex interactions between firms and the state. In particular, we emphasize the importance of mechanisms through which firms seek to shape decisions taken by the state to gain specific advantages, often through the imposition of anticompetitive barriers that generate highly concentrated gains to selected powerful firms at a significant social cost. Because such firms use their influence to block any policy reforms that might eliminate these advantages, state capture has become not merely a symptom but also a fundamental cause of poor governance. In this view, the capture economy is trapped in a vicious circle in which the policy and institutional reforms necessary to improve governance are undermined by collusion between powerful firms and state officials who reap substantial private gains from the continuation of weak governance.

Measuring state capture: two worlds

While most types of corruption are directed toward changing how existing laws, rules, or regulations are implemented with respect to the bribe payer, state capture refers to corrupt efforts to influence how those laws, rules, and regulations are formed. Bribes to parliamentarians to "buy" their votes on important pieces of legislation, bribes to government officials to enact favorable regulations or decrees, bribes to judges to influence court decisions-these are the classic examples of grand corruption through which firms can encode advantages for themselves into the basic legal and regulatory structure of the economy.

To measure and analyze state capture, we use data from the specially designed Business Environment and Enterprise Performance Survey (BEEPS) carried out jointly by the World Bank and the European Bank for Reconstruction and Development. Survey data were collected through face-to-face interviews in 22 transition countries conducted in late 1999. In most countries, managers or owners of 125-150 firms were interviewed, though larger samples were used in Poland (250), Russia (550), and Ukraine (250). The sample design was random in order to represent the population of firms in each country, with quotas placed on firms' size and ownership (see Hellman, Jones, and Kaufmann, 2000).

We develop two different proxy measures of...