USIS Washington 

25 November 1998


(Poland's experience may have lesson for Russia)  (1500)

Washington -- Bureaucratic reform appears to have played a beneficial
role in Poland's conversion from a centrally planned economy to a
market-based one, says a scholar on corruption in the former Soviet

Timothy Frye, an assistant professor of political science at Ohio
State University, says Russia also needs bureaucratic reforms.

"To reduce corruption in Russia, an environment must be fostered where
separate agencies no longer have the power to arbitrarily set the
price for doing business. Indeed, looking within Russia, we find that
cities that have streamlined the granting of business permits have
lower rates of corruption," Frye says.

Frye has reached that conclusion after surveying shopkeepers in Russia
and Poland.

Frye's article appears in the current issue of USIA's Economic
Perspectives, which can be found on the Internet at

(Following is the text of the Frye article:)

(begin text)

Corruption: The Polish and Russian Experiences

By Timothy Frye, Assistant Professor, Department of Political Science,
Ohio State University

Stabilization, privatization, and liberalization dominated early
discussions of post-Communist transformation. But somewhat
surprisingly, corruption has recently emerged as perhaps the most
important obstacle to economic reform. While the experiences of Russia
and Poland drive home this point, they also reveal very different
stories about the development and implications of corruption for their
respective economies. The lessons of post-communist societies suggest
that practical steps can be taken to minimize the corrosive effects of
corruption on the development of market economies.

Analysis of corruption in Russia and Poland, as well as elsewhere in
most of Eastern Europe and the new independent states of the former
Soviet Union, should begin with an understanding of how state
bureaucracies are organized. This is necessary because corruption
undertaken by so-called "disorganized" bureaucracies causes greater
economic damage than corruption undertaken by "organized"

Think of a business person who needs 10 different permits from the
state to make her product. Under a scenario of disorganized
corruption, 10 different bureaucratic agencies have the power to issue
permits needed to produce the good and therefore each agency behaves
like a monopolist. Each agency sets the price (read bribe) for its
permits to maximize its individual revenue. Due to the number of
independent agencies issuing different permits, they cannot coordinate
their actions, creating a situation in which each charges a high
price. As the price for permit 1 increases, however, demand for permit
2 falls. This drop in demand for permits 2 through 10 reduces overall
demand, and, in turn, reduces each bureaucrat's revenue. The business
person also suffers under disorganized corruption because she cannot
pay all the bribes asked of her, does not produce the good, and
receives no revenue.

Under a scenario of organized corruption, one agency has the power to
issue all 10 permits needed by the business person. In this case, the
agency behaves like a joint monopolist and sets the price for permit 1
lower than under the previous scenario because it does not want to
reduce demand for permit 2. In turn, the agency sets the price for
permit 3 low so as not to reduce demand for permit 4, and so on. The
key notion here is that raising the price for permit 1 reduces demand
for other permits. While organized corruption still leads to a
misallocation of resources, it is less disruptive for the economy than
disorganized corruption because the business is able to obtain the
permit and produce the good.


I tested the scenarios described above by conducting surveys of about
250 shopkeepers in three cities in Russia and one city in Poland in
1996 and 1998 on a variety of issues related to bureaucratic
organization and corruption. We found that bureaucracies were far more
disorganized in Moscow than in Warsaw. On average, shopkeepers in
Moscow were inspected by almost four different agencies whose
officials came to the average shop 19 times per year. Shopkeepers in
Warsaw were inspected by 2.6 agencies whose officials came to the shop
only 9 times per year. In addition, the average shopkeeper in Moscow
had to visit 6.6 different bureaucracies to open his business, versus
only 4.3 for Warsaw. Also, the shop registration process lasted 10
weeks in Moscow and less than four weeks in Warsaw.

As the numbers suggest, levels of corruption were higher in Moscow
than in Warsaw. We asked shopkeepers somewhat discretely: "How often
do you think that the average shopkeeper in your city has to pay
bribes, on a scale of 1 to 5 (1, almost never; 2, rarely; 3,
sometimes; 4, often; 5, almost always)?" The answer for Moscow was 2.9
and was 2.2 for Warsaw -- a difference that is statistically
significant. We also asked shopkeepers to rate their biggest problems
on a scale of 1 to 10 (1, small problem; 10, major problem). Moscow
shopkeepers rated corruption at 7.4, while Warsaw shopkeepers gave it
a 3.1.

To reduce corruption in Russia, an environment must be fostered where
separate agencies no longer have the power to arbitrarily set the
price for doing business. Indeed, looking within Russia, we find that
cities that have streamlined the granting of business permits have
lower rates of corruption. For example, bureaucracies were more
disorganized in Ulyanovsk than in Smolensk. The average shopkeeper in
Ulyanovsk had to receive permits from 6.1 different agencies to stay
in business versus 4.4 for shopkeepers in Smolensk. Moreover, the
average shopkeeper in Ulyanovsk had to receive 8.8 permits to open his
store versus 6.2 in Smolensk.

As expected, corruption is a bigger problem for shopkeepers in
Ulyanovsk than in Smolensk. Respondents noted that the average
shopkeeper had to pay bribes more frequently in Ulyanovsk than in
Smolensk (3.2 versus 2.6, using the five-point scale described above).
Shopkeepers in Ulyanovsk rated the problem of corruption 6.3, but
shopkeepers in Smolensk rated it 5.4 (using the 10-point scale
described above). Again, we find that disorganized bureaucracies tend
to produce disorganized corruption that inflicts significant costs on
society. This suggests that reductions in corruption in Russia are
possible and can be addressed through reform of the public sector.


The evidence from Poland and Russia suggests that corruption, whether
organized or disorganized, can levy devastating costs on an economy.
It reduces investment due to the potential for arbitrary actions by
state officials. It also reduces competition by rationing permits to
the highest bidder rather than to the most efficient user.

Corruption, however, also has a more subtle effect on economic reform
through its impact on the informal economy. Corruption tends to swell
the informal economy because business deals involving corrupt
officials cannot be enforced in state courts and are rarely subject to
official rates of taxation. Rather than operate in the formal economy,
abide by legal rules, and pay taxes, business people who rely on
corruption operate in the informal economy, break legal rules, and pay
few taxes. As people pay fewer taxes, the state is less able to
provide public goods necessary for economic growth.

By 1995, the informal economy had grown far larger in Russia and
Ukraine than in Poland. Relying on rates of the use of electricity in
different countries, one study estimates that the underground economy
made up 42 percent of the GDP (gross domestic product) in Russia, 49
percent in Ukraine, and only 13 percent in Poland. The dramatic
expansion of the informal economy in Russia and Ukraine is somewhat
surprising. Prior to 1989, the underground economy to the total
economy was much larger in Poland than in the former Soviet countries.


Some scholars argue that certain national cultures are more conducive
to corruption. However, we often see levels of corruption change in
particular countries, even while the culture remains constant.
Moreover, corrupt practices are strikingly similar across very
different national cultures. Regardless of its culture, what country
does not know corrupt customs agents? To reduce corruption, we should
not look to national culture but to the incentives facing bureaucratic
agents engaged in it.

The most common solution for reducing corruption is to curtail the
discretionary power of state agents. For example, rather than let a
bureaucrat grant a license to export a product (and allow him to
accept a bribe for doing so), states should abolish export licenses
and thereby allow economic factors to decide whether or not to export.

But this can provide only a partial solution since many important
social functions cannot be left to the market. Moreover, it is often
not politically feasible to assign some functions to the market rather
than the state. Thus, if corruption is to be kept in check, public
sector reform that makes the state more organized must operate in
tandem with economic reform.

(end text)