STATE CAPTURE

This session was opened by Joel Hellman, Governance Specialist in the Europe and Central Asia Vice
Presidency of the World Bank.

Defining State Capture as the efforts of a small number of firms (or such groups as the military, ethnic
groups and kleptocratic politicians) to shape the rules of the game to their advantage through illicit,
non-transparent provision of private gains to public officials, he noted that examples of such behaviour
include the private purchase of legislative votes, executive decrees, court decisions and illicit political
party funding.. This concept links the problem of corruption with vested economic, social and political
interests – which in turn form key obstacles to economic reform

The unbundling of the concept of corruption is important – in order to recognize that different forms of
corruption have different causes, costs and consequences. Using empirical data to measure and
compare state capture across countries, it is possible to develop a systematic understanding of the
origins and persistence of state capture and to quantify the private gains and the social costs of state
capture.

Citing the BEEPS data, which was gathered in a survey of over 3,600 firms in transition countries
conducted by the World Bank and the EBRD, Mr. Hellman noted that :

- that the degree of state capture varies tremendously across Eastern Europe and Central Asia, from
a low in countries like Hungary and Estonia to a high in Russia and Azerbaijan
- on average, in high-capture countries - about 1/3 of firm’s profit margins are diverted through
bribery
- overall, that bribery does not pay – that firms with a low propensity to bribe have higher sales and
investments than those that do
- but that in countries with high state capture, - a limited number of firms engaging in such behavior
(which tend to be foreign multinationals with local subsidiaries) gain substantially in terms of
more secure property rights but at a high social cost
- moreover, transnational restraints – like America’s Foreign Corrupt Practices Act or OECD’s
Convention – have little impact on State capture

He concluded by noting that while the pace of economic reform in countries in transition does have an
impact on the degree of state capture in a country – with those countries with advanced stages of
reform having a lower degree of state capture, the degree of political reform – civil liberties, access to
information, press freedom – was a more potent explanation. He further concluded that collective
action was important – highlighting the role that the business community can play in helping reduce
state capture.

The second speaker, Steven Haber, Professor of Political Science at Stanford University and Research
Fellow at the Hoover Institution), highlighted the similarities between the phenomenon of state capture
in Eastern Europe and “crony capitalism” – which he argued represent a case of vertical political
integration.

At the heart of the problem is the commitment problem – that any government with the power to
enforce property rights also has the power to abrogate such rights for their own purposes. In very few
countries is there “limited government”, where systems of checks and balances help restrain arbitrary
actions by government. Elsewhere there are just two alternatives:

- “stationary bandits” (such as Mobuto in Zaire) whose only restraint is that they cannot tax
tomorrow what they steal today
- crony capitalism – or state capture – where businesses need the protection of their property rights
(and seek the creation of entitlements – such as protective tariffs or exemption to excise taxes) ,
where governments need revenues and where the third parties (the military, labor unions, political
party cronies) provide enforcement.
- This coalition, or unholy alliance, then creates rents and divides these between them.
While this system is better than anarchy, and more efficient that stationary bandits, it has negative
consequences for income distribution, leads to an inefficient allocation of resources, and is bad for
democratic development.

Mr Haber then outlined the political/economic history of Mexico for the past 200 years, showing that –
until recently – it was a good example of State Capture. It was not until the economic crisis of the
1980s, which necessitated economic reforms, were the coalitions broken, allowing meaningful political
reforms.

Luis Moreno Ocampo, former Public Prosecutor of Argentina and head of Transparency Internal,
Argentina, noted that, given the widespread nature of corruption and State Capture, on the one hand,
and the weakening of the nation state in the face of globalization, on the other, the State alone cannot
solve the problem.

Rather, he argued, global networks of champions of reform – or “saints” as he called them - need to
be developed, supported and encouraged, as do in-country coalitions to undertake collective actions. In
addition, there needs to be appropriate incentives for the “honest but sinful” and systems of control of
the “demons”.

Elena Panfilova, head of Transparency International in Russia, provided an on-the-ground perspective

of State Capture in Russia. She noted that the slow pace of reforms, an inefficient public service, the
relative absence of small + medium sized businesses and the too-speedy privatizations all contributed
to a situation of “cumulative State Capture”.

The problem, she argued, was not so much “State Capture” by business, but rather the fusion of state +
business by the elite, with former bureaucrats running businesses and business leaders holding political
office.

The solution, she argued, involved “getting on with it” – introducing notions of conflict of interest,
codes of conduct and transparency, even when such notions are not understtod by most people.

Donals Bowser, formerly of TI and now an independent consultant, concurred with Elena’s diagnosis –
that the business/political elites, or clans, where self-perpetuating and that the mafia rose in power
because, in the terms of earlier discussions, it had the power to enforce contracts.

In conclusion, there was widespread agreement on the conceptual notion and framework of state
capture; it had wide manifestations – from eastern and Central Europe today, to Mexico over the period
1800-2000, even to Florida and the example of the sugar industry, where firms have essentially bought
government protection.

It was further agreed that this recognition brings to the fore the issue of the political roots of corruption
and that the State alone is powerless to remedy the situation. Rather, national coalitions like the Ghana
Anti-Corruption Coalition and international networks like the International Chamber of Commerce and
the African Parliamentarians Network Against Corruption, need to be developed and supported, .

It is recognized that more work is required to more fully develop the parameters of national action
programs to curb State Capture – each country is different and will require a different set of actions.

And finally, it is recommended that Ministers tomorrow, and the international community today,
endorse the notion that issues of State Capture, political reform and collective action, be firmly placed
on the international agenda for curbing corruption.