Intervention, Corruption and Capture: The Nexus between Enterprises and the State

Abstract

We study the nexus between enterprises and the state in transition countries, using new enterprise survey data. We examine the quality of governance, state intervention in enterprise decision-making, state benefits to firms, and corruption payments. The quality of governance varies both across countries and across different dimensions of governance within countries. Economic reform improves governance in countries with a low degree of 'state capture' by vested interests, but not in high-capture countries. Despite reform, state intervention in firm decisions continues, but it varies substantially across firms. At the micro level (within a country), there is clear substitution between the degree of state intervention, state benefits to firms, and corruption payments, which is consistent with a bargaining model of politicians and firms. But at the macro level (across countries) these elements are complementary, suggesting that politicians, perhaps under pressure from captor firms, have some control over the scope of regulation and intervention.

Potential of the state to control privatized firms

“…They also strived to establish market-oriented institutions and a legal system that would improve the role of the state in providing infrastructure vital to the newly emerging market economy (state governance). Despite the considerable achievements during the first decade of transition, Hellman and Schankerman (2000) showed that good state governance was not established across many transformation economies by 1999.…”

Hierarchy of governance institutions and the pecking order of privatisation: Central–Eastern Europe and Central Asia reconsidered

“…Ill-designed, rapid transfer of rent-generating assets could create powerful private players interested in protecting their interests at the cost of potential competition. Resulting structures of political capitalism could be at least as dangerous in their political influence on the reform process as a large residual state sector (Hellman and Schankerman, 2000).…”

“…Most recent evidence indicates that the rapid privatisation methods, in particular the mass privatisation programmes, were associated with good macro performance, contrary to earlier criticism (Bennett et al, 2007) 7 . The underlying reason may be that mass privatisation severed the links between the companies and the state early on, which was a critical factor cutting flows of state funds to failing firms and triggering restructuring (Hellman and Schankerman, 2000;Estrin, 2002). In addition, mass privatisation initiated the subsequent evolution in ownership structures.…”

The Corruption of Transition

“…Hellman and Schankerman (2000) showed that within a country, economic reforms improve governance in countries with interest groups that lack the ability or will to influence government policies.…”