At Large

Big Government, Corrupt Government

Unreformed East-Central Europe remains a showcase of political instability and resentments.

By 8.24.07

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The governing parties in the Czech Republic, Poland and Slovakia came to power promising to end corruption. The Hungarian opposition, which lost last year's election by the narrowest of margins, promises to do the same. The collapse of the Polish government shows that in addition to better policing and steeper sentences, the fight against corruption should include the reduction of the size and scope of the state.

Two years ago, when populist parties made electoral advances throughout Central Europe, most commentators saw it as a rebuke to the liberal parties and the market reforms they had implemented. In a Cato Institute study, I argued that such explanations ignored the resentment that the people in the region harbored against their corrupt incumbent political elites.

Corruption in Central Europe is rampant. According to Transparency International's Corruption Perception Index, which measures corruption on a scale from 0 (highest) to 10 (lowest), Poland slumped to 3.4 in 2005 from 4.6 in 1998. The Czech Republic fell to 4.3 from 4.8, Hungary's remained at 5, and Slovakia's rose to 4.3 from 3.9. Though all four countries made small improvements in their CPI scores in 2006, they fell far short of the OECD's average of 7.2.

Corruption in Central Europe persists for two main reasons. First, despite much economic liberalization over the past 17 years, governments continue to spend, on average, over 40 percent of the region's GDP. Unlike in Western Europe where government spending is also high, however, parliamentary oversight, judicial independence and the strength of civil society in Central Europe remain relatively underdeveloped. Government procurement programs lack transparency and are often used as vehicles for self-enrichment by corrupt officials.

Second, the Central European business environment remains overregulated. The World Bank's Doing Business report, for example, found that businesses in Slovakia, the Czech Republic, Hungary and Poland were more heavily regulated than businesses in most developed economies, including most EU members. The armies of bureaucrats in Central Europe have ample opportunities to extract bribes from private firms.

The populists in the region, including the Law and Justice party in Poland and SMER in Slovakia, tapped into the popular feeling of disgust at the conspicuous spending of the governing elites and their ill-begotten wealth, and won. But corruption in Central Europe is systemic -- it cannot be eradicated through better procurement controls as is currently being done. Instead, corruption has to be tackled by reducing the size and the scope of the state, and with it the opportunities for self-enrichment among the political elites.

As Oleh Havrylyshyn, the former deputy finance minister of Ukraine, shows in his book Divergent Paths in Post-Communist Transformation: Capitalism for All or Capitalism for the Few?, countries that implemented more radical economic reforms after the collapse of communism experienced less corruption than countries that opted for more gradual reforms. The transition from communism to capitalism was marked by corruption not because of too much liberalization, but too little. Perhaps that explains why Estonia, which is the most economically free of all ex-communist countries, also has the highest CPI score.

By contrast, the governing parties in Poland and Slovakia postponed further economic reforms, thus effectively ensuring that corruption in the region continues. It should come as no surprise, therefore, that the latest crisis of the Polish government started with the firing of Andrzej Lepper, the leader of a small coalition party, from the posts of deputy prime minister and minister of agriculture. Lepper is accused of accepting bribes in exchange for agreeing to change the designation of cheap agricultural land for lucrative building projects. Similarly, the Slovak government's most recent troubles are a result of the corruption allegations surrounding the minister of labor and social affairs Viera Tomanova, who is accused of awarding a state subsidy to a firm that she used to manage, even though the company in question has not paid taxes in three years and was thus ineligible for subsidy under Slovak law.

According to opinion polls, the winner of the early election in Poland in October 2007 will be the liberal Civic Platform, which leads the Law and Justice party by some 14 points. A liberal victory could mark the beginning of the end for Central European populism and, hopefully, a return to a reform agenda in the region. Once in power, the liberals should address the source of corruption in Poland -- the overextended state. The same goes for aspiring reformers in the rest of the region.

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About the Author

Marian L. Tupy is assistant director of the Project on Global Economic Liberty at the Cato Institute specializing in the study of Europe and sub-Saharan Africa.