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Introduction

The release of the Corruption Perception Index 2003^[1] by Transparency International is a good opportunity to talk about corruption. According to the report findings, corruption has reached exorbitant levels in Moldova. The way authorities reacted to the report, in an undue fashion to say at least^[2], determined us to take a closer look at corruption from an economic perspective. By doing so, we hope to spur some pro-active social and political reactions to the corruption phenomenon, which the press alleges penetrated the highest ranks of power in Chisinau.

How does corruption affect economy?

There are a number of publications on the impact corruption has on the economic system. Albeit the variety, or sometimes even paradox^[3] of opinions, a great many of them perceive corruption as a factor undermining economic development. It is known for a fact that the most corrupted countries are also the poorest. On the other hand, corruption is boosted by low level of economic freedom, as well as by such factors as political regime, culture, legal framework, etc.

Let me cite the findings of the most recent researches on the impact corruption has on economy, through various channels^[4]:

1. Macroeconomic effects:

• Widening gap between real and potential economic growth;
• Drop in internal and direct foreign investments;
• Higher risk of financial crisis or financial chaos;
• Higher inflation risk;
• Decrease of fiscal revenues.

2. Structural effects:

• Prevalent shadow economy;
• Negative impact on public investments such as:
  • Wide-scale, though, ineffective investment projects;
  • Insufficient funds allotted for operational expenses;
  • Exaggerated funds allotted for purchasing new equipment;
  • The previous two have lead to the decay of existing infrastructure;
  • Insufficient social funding and wide-scale spending in the fields allowing for embezzlement, as a rule these are sophisticated technical projects.

3. Economic efficiency of the production means:

• Increasing cost of capital;
• Growth of transaction costs and the costs of market entry;
• Inefficient tendering on public procurement contracts;
• Inefficient award of ownership rights (see privatization in transition countries);
• Distorted competition.

4. Inequalities:

• Boosting income inequality;
• Boosting fiscal inequalities;
• Redistribution of property from the public sector to corrupted individuals;
• Insufficient supply of services or public goods (fresh air, drinking water, etc).

Corruption impact on Moldovan economy

No doubt all of the above consequences persist in Moldova, so we would not dwell on them too much. Apart from the negative impact on the economic welfare, corruption in Moldova has developed a rather dangerous trait. Namely, as easy as corruption has spread in the last decade, as hard it would be to combat it.

In a survey of 99 countries, the correlation between the corruption perception index (based on TI assessment in 2000) and two explicit factors, i.e. GDP per capita and economic liberalization (assessed by Heritage Foundation)^[5]. Survey findings are not very encouraging for Moldova. Let's assume that the goal is to improve the corruption index from 2.1 to let's say Estonia's index - 5.6, and that the Government is ready to rapidly improve via its policies the level of economic freedom from the current 3.35 rating to 2. According to our estimations, to reach such a rating the GDP per capita would have to increase from the current 2,400 USD (according to purchasing power parity) to 18,500 USD. At an average annual growth of 7% it would take us 34 years to reach this goal! Therefore, we could expect corruption in our country to flourish for quite a while.

In Moldova, corruption is twice damaging. Firstly, it has undermined the effectiveness and dynamics of an emerging economy at its inception stage. Secondly, corruption has distorted public perception of how a true market economy functions when all the institutional conditions are in place. It needs to be pointed out that corruption of the newly emerged democratic governments was cited by numerous experts as one of the main causes that brought left-wing parties to power in post-Communist countries^[6].

Factors specific to corruption in Moldova

Corruption is correlated to the economic welfare. Although corruption stems out of poverty, it should be noted that there are other factors directly affecting the probity of public officers. In the case of Moldova, non-economic factors that boost corruption may be classified into three categories: related to rent-seeking, related to political system and to institutional climate.

A big role in rent-seeking is played by the confusing and complex legal framework in Moldova, leaving it to the discretion of bureaucrats to interpret and enforce the rules. The second factor is the influence bureaucratic elite has over political elite. In Moldova, prevalence of bureaucratic interests on the political ones is striking especially in the customs system and Department of Information Technologies.

As for the political system, first and foremost we should be mention the authoritarian political control over control agencies (including the Center for Fighting Economic Crime and Corruption) as well as judiciary. Under those circumstances, corruption gradually evolves from disorganized to organized and "centralized". The second factor is the political and social indifference of the civil society. In Moldova corruption has become almost a cultural norm, widely accepted by the society. Impeding press access to the decision-making process, especially at the intermediary bureaucratic levels, is another factor boosting corruption. It is worth mentioning the lack of effective checks and balances mechanism over the excessive political power exercised by some central government institutions (such as Presidency), which generate corruption and abuses of power. International pressure is very important too. As was the case of Moldova, the absence of international monitoring over a couple of years, has spurred corruption among public officers responsible for adequate spending of the foreign financial aid.

The third category is represented by institutional variables. To mention just the business culture widely spread in Moldova, characterized by a high public tolerance of corruption, which in the long run directly boosts corruption. In contrast to the West, where there is a long tradition of settling economic disputes and of legal contract enforcement, in Moldova what counts the most are the personal contacts and the position occupied in the social hierarchy. In the West, any allegations of fraud brought to the Prime Minister or to a presidential councilor would immediately result in a public investigation. Also, under the same category stand the meager wages of the public officers. This brings out in them a kind of "predator" instinct when interacting with ordinary citizens, but most importantly with businessmen. The lack of a true organizational culture also plays its role. This refers in particular to nepotism, the main criterion employed in personnel recruitment and promotion through the hierarchic chain of public institutions.

What needs to be done first?

The answer to this far from being rhetoric question resides in the famous corruption formula of Robert Klitgaard^[7]:
CORRUPTION = MONOPOLY + DISCRETION - RESPONSIBILITY.

The wisest thing Government and Parliament can do to stop the proliferation of corruption is not to provide it opportunities to flourish through their own actions. For one thing, they should refrain from passing legal acts granting separate institutions a too higher monopoly over certain aspects of economy or society. For instance, it's far more appropriate for the technical inspection of the vehicles to be provided by private companies selected in open tender, rather than by road police and transport department, which currently hold monopoly thereof.

Although the establishment of control agencies is justifiable, still three things are to be ensured: their independence from government, institutional stability, and transparency of their activity. Whenever at least one of those conditions is missing, problems emerge similar to the one in the energy sector (ongoing conflict between Ministry of Energy and National Agency for Regulations in Energetics) or the one likely to happen in telecommunications (industry of IT services).

Another illustration in this respect is the inspection before expedition. Both Government and business community openly opposed the inspection. One of the reasons is that once SGS entered the market the monopoly has been significantly limited, which in its turn reduced the opportunities to solicit bribes, especially for customs officers. SGS operation in Moldova on a long-term basis threatened to break up the corrupted networks that penetrated customs, which according to domestic media collects considerable illicit revenues.

Limiting the discretion of bureaucrats requires a simple and exhaustive legal framework regulating the activity of public institutions and state bodies. For instance, we believe road police has the highest degree of discretion in this country. Given the huge proportions corruption has reached in the said institution, it might well be that the only way to combat corruption there, is to liquidate the entire institution. As in the West, cameras, which by the way do not solicit bribes, may be used to oversee road traffic safety.

Higher responsibility may be educated and motivated. Education should come from the educational institutions as such, but also from the family. It was already mentioned above that our society suffers a syndrome of indifference to corruption. Indeed, motivation may be achieved firstly through financial incentives - raising the wages of public officers to compensate for their responsibilities and efforts. However, raising wages should not be viewed as the only tool in fighting corruption. If not backed up by other measures, it would only bring out financial costs that would be higher than the economic consequences produced by corruption itself.

 

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