Free Market in Its Twenties: Modern Business Decision Making in Central and Eastern Europe

1.6. Corruption in Central and East Europe: Economics, Politics, and Cultural Values

– 65 – CHAPTER IN BRIEF:   In CEE, middle-to-high level corruption has persisted for many years.   Economic variables such as GDP, size of government expenditure, and the level of foreign direct investment are the greatest predictors of corruption.   Economics alone cannot explain corruption; national cultural values must also be taken into consideration. I nterest in corruption research has grown in importance in recent years in response to several related factors. First, there has been a heightened focus by governments and public policymakers on the negative impact of corruption on economic performance and societal welfare. Corruption is believed to lead to slower economic growth characterized by a more unequal distribution of its associated gains. Second, corporate strategists and executive-level decision makers have made conscious efforts to incorporate corporate social responsibility into their organization’s mission and operations in a systematic and more far-reaching way than in the past. Third, as the global reach of multinational companies from developed countries has intensified in the past twenty-five years in the so-called emerging markets, companies and managers CORRUPTION IN CENTRAL AND EAST EUROPE: ECONOMICS, POLITICS, AND CULTURAL VALUES Yusaf H. Akbar and Vukan Vujic C h a p t e r 1 .6 . i6 FM.indb 65 2014.06.05. 12:20 – 66 – are now operating in market environments that are more likely to be prone to corruption (as illustrated by Transparency International’s Corruption Perceptions Index or the World Bank’s Worldwide Governance Indicators). Recent high-profile scandals involving Siemens Corporation, Pricewaterhouse-­ Coopers and others, have been emblematic of this new reality. Fourth, corruption is believed to lead to a concentration of political power in the hands of a few wealthy people. The key point is that virtually nobody is immune from the impact of corruption today. Trying to identify and disentangle the causes 2012 Corruption Perceptions Index for Selected CEE Countries Score out of 100 (Rank in Parentheses) Figure 1.6.1. 30 35 40 45 50 55 60 S o u r c e : T r a n s p a r e n c y I n t e r n a t i o n a l , C o r r u p t i o n P e r c e p t i o n s I n d e x , 2 0 1 2 Albania 33 (113) Armenia 34 (105) Azerbaijan 27 (139) Belarus 31 (123) Bulgaria 41 (75) Croatia 46 (62) Czech Republic 49 (54) Estonia 64 (32) Georgia 52 (51) Hungary 55 (46) Kazakhstan 28 (133) Latvia 49 (54) Lithuania 54 (48) Poland 58 (41) Romania 44 (66) Russia 28 (133) Serbia 39 (80) Slovakia 46 (62) Slovenia 61 (37) Ukraine 26 (144) i6 FM.indb 66 2014.06.05. 12:20 – 67 – of corruption is therefore an important task for researchers and policymakers around the world. In 1989, when the countries of Central and East Europe (CEE) embarked on a process of economic, political, and social transition away from the varied levels of centralized planning that they experienced prior to 1989, few would have predicted that corruption would become such a source of profound concern for these societies, nor that it would be so prevalent.This is due to two factors. First, there was no serious published research on the nature of corruption that existed in these societies during the socialist period.1 Because there was no official recognition of a corruption problem, the pre-existing nature of corruption has received little attention. Second, once the period of transition began, prominent and influential thinkers in the West made an optimistic assumption that the creation of free markets would lead to an efficient allocation of resources that would root out corruption (since they assumed corruption is, by definition, an inefficient activity). Jeffrey Sachs’s big bang approach to transition became widely accepted by Western policymakers. Looking back, the unbelievably naive nature of this idea is stunning. Thus, we argue that, although officially unrecognized, corruption was widespread before the 1989 revolutions and was further intensified by the transition process itself.The question then becomes: What aspects of the transition process exacerbated the corruption problems in CEE countries? We argue that there are two factors that can help us find the answer: cultural and economic. In this chapter we provide an analysis of both these factors. We also explain what it all means for policymakers and managers. The Nature of...