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created a small but powerful constituency for selective privatization, but not necessarily one that would support generalized property rights.

Corruption is perhaps the most troubling legacy of the pretransition period, and it threatens the dynamic stability of the transition process. Corruption occurs at the juncture where public and private sectors meet. When public officials are granted authority to licence, prohibit, tax, or subsidize economic activities; allocate favorable exchange rates; enforce trade restrictions or price controls; and distribute valuable property rights and natural resource endowments—monopoly powers are created in the public domain. Thus, corruption, which involves noncompliance with the rules governing appropriate conduct in public office, is a form of government failure that occurs when public officials, acting as the agents of the state, exploit the state's monopoly powers for their personal advantage.

The extent of noncompliance will depend upon the size of the expected gains and penalties. According to Klitgaard (1988), these will be determined by the monopoly power to be exploited, the extent of discretion granted the agent(s) of the government, and the degree to which the agent is held accountable. However, the economic cost of corruption depends not only on its extent, but also on its nature. Shleifer and Vishny (1993) present an industrial organization model of corruption that shows that corruption is less costly when it is controlled by an effective cartel, like that of the Communist Party during the Soviet period. In this case, the payment of a bribe is sufficient to assure the predictable transfer of scarce property right(s) and the bribe price is kept in check. The most costly form of corruption occurs when independent monopolists vie for bribes. This model best describes the current situation in the New Independent States, where corruption is omnipresent, yet property right transfers remain uncertain and unpredictable even after the bribes are paid. With vast, highly prized property rights remaining in the public domain, controlled by independent monopolists whose actions are unconstrained by accountability and the rule of law, predation dominates over production with devastating economic consequences.

Building a Constituency for the Rule of Law

The legacy of noncompliance with formal rules and the concomitant distrust of all public policy have resulted in great resistance to the necessary establishment of the rule of law to support and complement the still fragile property rights and market institutions of the transforming economies. The earliest privatization schemes proposed to transition governments attempted to build a powerful constituency for reform institutions by creating a massive class of private shareholders (Feige, 1990b, 1990c). It was hoped that the creation of a new egalitarian base of holders of residual property rights would produce a political lobby for protection of property rights and create political



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