Eastern Europe's economic reforms have let bribery flourish, says EBRD

TEN YEARS of reform in Eastern Europe has brought with it one of the more unwelcome aspects of capitalism, namely corruption, according to the European Bank for Reconstruction and Development.

The EBRD's annual Transition Report, which assesses how far the economies of the region have come since the fall of the Berlin Wall, said a survey of 3,000 investors in 20 transition countries in Eastern Europe and the former Soviet Union showed that bribery had emerged as one of the successors of direct state control of the economy. Georgia extracted the largest amount of bribes as a percentage of annual company revenues at 8.1 per cent, while companies operating in oil-rich Azerbaijan paid bribes the most often with 59.3 per cent saying they did so "frequently".

Bribes tend to be heavier in the countries of the Commonwealth of Independent States at 5.7 per cent of revenues than in central and Eastern Europe, where they represented 3.3 per cent of revenues.

Croatia had the least bribes in terms of revenues, at 2 per cent, while in Slovenia just 7.7 per cent of the firms surveyed said they paid bribes frequently.

Bribes also hit small firms disproportionately hard, averaging 5.4 per cent of annual revenues compared with 2.8 per cent for large firms.

The EBRD said that the high incidence of bribery showed the shift from intrusive forms of state control of the economy to other forms of intervention.

"In other words, firms might be paying bribes to state officials to prevent the state from intervening in company decisions and from wasting management time," the report said.

Surprisingly, privatised firms pay a level of bribe tax similar to that paid by state firms and the EBRD noted privatisation does not appear to have a significant influence on the propensity for private firms to pay bribes, despite the allegations of corruption in the privatisation process, especially in the CIS.

States which have weak central governments such as Armenia, Azerbaijan and Georgia have bribe levels which are among the highest in the region, the report noted.

However, some of the most advanced countries in central Europe also figure prominently, with 32.7 per cent of firms in Poland saying they bribed frequently, 31.3 per cent in Hungary and 26.3 percent in the Czech Republic.

"There is no simple relationship between the extent of market-oriented reforms and the nature of the interaction between the state and enterprises. But the process of "depoliticising enterprises remains incomplete in all transition economies," the report said.

Firms in the most advanced reform economies such as those in central Europe and in the least advanced, such as Belarus, where state intervention remains high, have the most favourable assessment of corporate governance.

"The initial hopes that economic reforms would largely eliminate the state's role in the operations of enterprises -a process that has been referred to as "depoliticising" firms - has not been realised in most transition economies, the EBRD said.