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Which Type of Corruption Most Harmful to Economy?

Decentralised bribery, where individual bureaucrats or groups act in isolation, is the most harmful type.
Study authors*:

Leonid Polischuk, Professor, HSE Department of Applied Economics.

Alexander Rubin, Doctoral Student, HSE Department of Applied Economics.

Roman Kochnev, Graduate of HSE/NES Bachelor's Programme in Economics.

 
  

When bureaucrats collect bribes independently of each other, the impact of corruption on business and investment in public goods is particularly detrimental. This is the main conclusion from a study by Kochnev, Polishchuk and Rubin who examined corruption in Russian regions and presented their findings in the paper 'One-stop-shop Corruption: Implications for Regional Development'.

Different Types of Corruption

Corruption can be centralised – where business owners only have to bribe a central autocrat to remove the various administrative barriers that stand in their way – or decentralised, where many autocrats extort bribes independently of each other. The existence of multiple autonomous 'centres of corruption' creates an excessive corruption burden on business and limits the resources available to finance public goods and services – in particular, those required for doing business.

The authors used data from BEEPS (Business Environment and Enterprise Performance Survey) implemented by the European Bank for Reconstruction and Development (EBRD) and presenting the findings from 22,000 interviews with firm managers and owners in 39 countries in Eastern Europe, including 4,220 interviews with representatives of businesses in 37 Russian regions.

Kochnev, Polishchuk and Rubin’s study used the Russian data from BEEPS to construct indicators for measuring the extent of decentralised corruption in Russian regions; they also assessed the impact of corruption on the private sector and examined the local infrastructure. The latter’s quality served as a proxy for the amount of public goods provided by the regional authorities.

Which Bandit Less Evil

The authors put forward two hypotheses to explain the negative impact of decentralised corruption on economy. The first hypothesis explains the cumulative pressure of corruption by reference to the 'tragedy of the commons' – a situation where a multitude of individual actors each exploit a shared resource according to their own self-interest for maximum benefit, without any coordination among actors, causing the resource to collapse from overuse. In this case, the resource in question is the business environment adversely affected by administrative arbitrariness.

According to the authors' second hypothesis, the amount of public goods available can be diminished due to the 'free rider problem'. Each bureaucrat causing corruption pressure on business seeks to gain the maximum possible benefit by increasing the payments collected and minimising the public goods and services provided.

The authors refer to Mancur Olson's 'stationary and roaming bandit' concept. A corrupt bureaucrat whose position is stable is more likely to invest in public goods in the hope of increasing the amount of bribes they might collect in the future. In contrast, a 'roaming bandit' – or bureaucrat – seeks to extract maximum benefit immediately and shift the responsibility for providing public goods to future generations of bureaucrats.

Both hypotheses have been confirmed. The authors conclude that, "all other things being equal, 'one stop shop' corruption may be less damaging to economy than decentralised corruption."

Central Regions Suffer Most

According to the authors, decentralised corruption has a stronger negative impact in central Russia compared to remote regions such as Siberia and the Far East, because public infrastructure in these central regions is more dependent on funding from local authorities. In contrast, local infrastructure in remote areas may be less developed, but it is often resources and maintained by major commodity companies, Rubin notes, referring to the city of Norilsk, where Norilsk Nickel and its subsidiaries play a key role in the local economy.

Author: Marina Selina, June 16, 2017