Privatization: Corruption’s Curse or Cure? Revisiting Some Notions and Evidence Daniel Kaufmann, WBI The World Bank Portal: Biblio: and, Workshop Session, October 10 th, th IACC, Prague, Czech Republic Note: Some of the empirical work presented here is preliminary, and subject to a margin of error. Caution in interpretation is needed, and no precise ranking of countries is warranted.

2 Privatization: Corruption’s Curse or Cure?: Some Concrete Implications 1.Type/Modalities of Privatization Matters 2.At least as important: overall policy environment 3.Key Specific Initial Condition -- what type of Economy: Well Governed Competitive Market Economy or Misgoverned Capture Economy? 4.Implications – not the typical ones: Actions to Mitigate Capture, Transparency, Political Competition, collective responsibility( FDI as well), incentive-based schemes to engage the enterprise sector in pro-governance fashion

3 Corruption Potential in Typical Privatization Transaction Structures* SpeedAdmin. Discretion Transparency/ Information Independent Administration Voucher-Based Mass Privatization –––- Liquidation --–– Capital Market-Based Privatization Tenders and Trade Sales Management-Employee Buy-Out (MEBOs) Spontaneous Privatization +++ * Note: “-” and “-” equal low and very low corruption potential, respectively. “+” and “++” equal high and very high corruption potential, respectively.

4 The Impact of Privatization Structures on Corruption in the Post-Privatization Environment* Scope of Program Residual State Ownership Residual Purchase Obligations “New” Owners Transaction Corruption Liquidation ++–––– Voucher-Based Mass Privatization –++–-– Initial Public Offerings +++––- Tenders and Trade Sales -–++–+ Spontaneous Privatization –––+++ Management-Employee Buy-Out (MEBOs) -–++ * Note: “-” and “-” equal low and very low corruption potential, respectively. “+” and “++” equal high and very high corruption potential, respectively.

5 (Average for 16 Transition Economies – ’ 96 Expert Survey Results, N=50) The Privatization Process and Impact on Corruption (Average for 16 Transition Economies – ’ 96 Expert Survey Results, N=50) Incidence on Corruption Privatization Program Characteristics GOODPOOR

6 Private Firms Engage in State Capture in Misgoverned Settings (illustrative countries, BEEPS,’99)

7 Excessive Influence on the State: Main Source of state capture and grand corruption? [Peru] %

Ineffectiveness of Antitrust/Anti-Monopoly Policies: The Firm's Perspective, GCS/WEF %20%40%60%80% UNITED STATES CHILE HUNGARY BRAZIL MALAYSIA RUSSIA INDONESIA Firms that say antitrust policies are ineffective EFFECTIVE POLICIES INEFFECTIVE POLICIES

Monopolies and Corruption

10 Towards a Solution: Improve Institutional Quality to protect property rights– e.g. Courts

11 Towards a Solution: Improved Security of Property Rights Share of Firms with Secure Property Rights

12 Small and Medium - Sized Firms Are More Affected By Tax/Regulatory Burden (Source: Worldwide Enterprise Survey WBES '99/'00)

13 Towards a Solution: Collective Action by Firms

14 Towards a Solution: More Political Competition (and Economic Reform) Pace of Econ Reform Political Reforms

15 Privatization: Corruption’s Curse or Cure?: Some Concrete Implications 1.Type/Modalities of Privatization Matters --…but… 2.At least as important: overall policy environment 3.Key Specific Initial Condition -- what type of Economy: Well Governed Competitive Market Economy or Misgoverned Capture Economy? 4.Actions to Mitigate Capture: i) Major Information Offensive/Transparency; ii) Business Associations; iii) Property Rights, and, iv) Political Competition 5. Collective responsibility: FDI as well 6. Incentives for ‘good governance’ enterprise involvement in privatization and post-privatization: Alignment of Incentives