The example of Ukraine, and of other countries typically labeled as corrupt, has long suggested that the definition of corruption should be either completely changed or at least significantly clarified. This is evidenced, at the very least, by the Corruption Perceptions Index published annually by Transparency International. For Ukraine in 2010, it showed improvement over 2009, even though in 2010, business experienced an unprecedented and destructive onslaught from officials. That is, something is wrong with these indices.
It seems that we are dealing not with one, but with several phenomena of different natures and mechanisms1. One cannot call fundamentally different phenomena by the same word. This disorients both society and the authorities—if they suddenly really want to fight corruption.
Let me try, in this brief note, at least to outline what we are dealing with and consider what will actually pose a threat in the near future.
The Ukrainian experience allows us to distinguish three different types of activity that are called “corruption.” And while all types of corruption stem from state activity, each has its own peculiarities and mechanisms.
The first is classical corruption. This is what Transparency International calls corruption—officials’ activities in search of “profit” extracted from violating the law. This corruption usually either directly violates the law or exploits various “loopholes in legislation.” As a rule, corruption of this type centers on government expenditures—various procurements, tenders, and so on. This corruption is shown on television, denounced in the media, and so on. Corruption of this type is associated with risk, but brings substantial profits. Such corruption is accessible to very few and therefore is the envy of the broad masses. Fighting such corruption is possible with classical measures—increasing transparency, raising the risks for officials, and, of course, first and foremost, reducing the number of platforms on which such corruption arises.
The second type of corruption is folk or legal corruption. Of course, from the standpoint of formal law, it is illegal, but it constitutes a significant part of customary law—the rules of behavior we actually follow, which are stronger than any law. It is here that we observe classical bribes, “gifts,” and “protection.”
This type of corruption contains a remarkable phenomenon that professional anti-corruption fighters somehow ignore. This phenomenon is “free” corruption, when services are provided in anticipation of reciprocal services. Therefore, such corruption is actually a real economy, and can only be called corruption because of the marasmus of state-issued laws. Let me emphasize: such corruption is indeed legitimate, since its legitimacy is created by the daily practice of tens of millions of people. It does not matter what they think or say while doing it—law is created by people’s actions, not their words. Folk corruption clearly shows (to whoever wants to see, of course) the places where the state is completely unnecessary. Education, medicine, and “regulation” of small business, for example. The only way to fight this kind of corruption is to make compliance with formal law simpler, cheaper, and faster than violation. Generally, this is simply withdrawing certain activities from formal regulation.
The third type is illegal corruption. It may involve both ignoring laws and their literal observance. Unlike folk corruption, in which the entire population of the country is involved, illegal corruption is the lot of low- and middle-ranking officials. In some particularly dangerous cases, these people are directly incited against peaceful citizens by high-ranking officials.
I call this corruption illegal because it is condemned by our customary law. For example, when officials suddenly start paying attention to “violations” they’ve ignored for years, this is actually illegal by customary standards.
Illegal corruption is part of the game that officials play with entrepreneurs within the framework of folk corruption. The balance that constantly arises and is revised during this game actually determines the course of economic events.
In our history, moments have arisen when illegal corruption went on the offensive against legal corruption. The Maidan was caused by this: entrepreneurs who, over many years, had laid convenient paths through bureaucratic depths could not accept that all this laborious activity had suddenly been in vain. These same reasons are bringing people to the Maidan today. Formal legality bears only an indirect relationship to real law.
Now a few words about how each type of corruption affects the economy. Let us note immediately that we are interested in the process of creating wealth, not redistributing it—the influence of corruption on the processes that ensure the growth of national wealth. It is from this perspective that we will evaluate the threats it poses.
Classical corruption under our conditions is not a serious economic problem. The real problem is government expenditures, around which it flourishes. The fact that officials skim off part of these expenditures is secondary. Here I must clarify: what is truly socially dangerous is often not the corrupt actions themselves, but the consequences of the government decisions within which they are carried out. Let me give an example. Several years ago, a corruption scandal arose when officials achieved sharp restrictions on insulin imports, motivating this decision with concern for domestic producers. The domestic insulin looked like the real thing, only it did not treat. Then it turned out that someone had “profited” from this decision, a scandal erupted, and so on. So, truly criminal in this story is the imposition of domestic insulin, not the fact of “profiteering.” With or without corruption, such a decision causes direct harm to citizens who need insulin.
Folk corruption is, in essence, the only possible economic practice under our conditions. It undoubtedly ensures the creation and growth of national wealth. Let me repeat: such corruption exists because conducting business through it is significantly cheaper than operating within the “law.” In other words, if everything happened “by law,” it would mean a sharp reduction in the production of national wealth. This by no means implies that we should not strive for economic relations that don’t contradict formal laws; one just needs to understand that this can be achieved only by a very, very significant reduction of state power and simplification of doing business.
Illegal corruption is undoubtedly the greatest economic evil, a threat not only to the growth of national wealth but to the very existence of the country. Illegal corruption paralyzes economic activity and often simply destroys enterprises. At the same time, one must understand that the administrative destruction of even one enterprise harms the entire economy.
The danger of illegal corruption lies primarily in the fact that its mechanisms differ greatly from those of any other type. The basis of this corruption is not so much “greed for profit” as “reporting.” Unlike a racketeer who parasitizes on this or that activity but has absolutely no interest in its disappearance, officials have no such interest either—unlike a racketeer, however, they don’t depend on their victims. They will “negotiate” with entrepreneurs as long as the motivation for profit is stronger than the motivation for “reporting.” But as soon as considerations of loyalty or any other considerations dictated by the official’s place in the hierarchy prevail, he will stop at nothing. Let me repeat: unlike racketeers, officials do not depend on their victims in any way.
Today, the world has a good illustration of where bureaucratic logic leads. This is North Korea. Hyperinflated bureaucracy (note—completely honest and uncorrupt) destroyed the country, brought it to mass famine in the mid-1990s. As a result, honest bureaucrats died out, and today North Korea—where everything is still forbidden—survives only thanks to mass folk corruption.
It is unknown how much our government may change in the future. But for now, the tendency expressed in the adoption of the Tax Code looks extremely threatening.
The danger of the new tax code is that it completely frees the hands of illegal corruption, essentially releasing a horde of officials “to feed.”
The danger of “Donetsk” power lies in the fact that it does not understand the boundaries of customary law. The maidans in 2004 and today were caused by the fact that these people crossed invisible boundaries of the social contract. They do not understand the country in which they live at all, and this is the main danger that threatens us in the near future.
Rothbard, as it turned out later, spoke of “protective” and “aggressive” corruption. Essentially, this is the same thing discussed here, only I am adding the characteristic actions for our latitudes of “cutting up” the budget, which are also called corruption. ↩︎