The literature is rich in describing the impact of corruption. Power is shifted to a few, be that an aristocracy, plutocracy, or other authoritarian institution. In its most political application, government extracts payments from individuals or groups by awarding certain swathes of a society’s economy in exchange for what might be considered taxes negotiated between the two. It may be described as contract oligarchy. It is a retardation of the social contract. It is a contract with a few rather than with society. In political economy, this is called rent seeking.
Corruption is manifested in anti-democratic decision making practices enriching special interests. We speak here largely of the mix of politics and economics. Unfortunately, corruption extends elsewhere as well. It may permeate educational systems (requiring payment for university entrance, good grades plus graduation); it may affect payments for medical care, public or private; it may determine contract awards; it can influence legislative voting for or against prospective laws; and, it can affect judgments by a society’s highest courts. It is based on whom you know rather than what you know. Second, it is heavily influenced by moral hazard. Unfortunately, it can gain normative acceptance: “this is the system and therefore, we will follow it in order to gain a benefit.”
It is clear that in certain societies, corruption can metastasize throughout the system. Allegedly, Soviet citizens commented: “We pretend to work and they pretend to pay us;” or, “If you don’t cheat the state, you cheat your family.” Thus, responsibility may become severed from system goals as it becomes transformed to employee gain who then rationalizes that the state owes material gains to its employees. Adam Smith warned that without competition, capitalism will not work. Yet, market share may lead to a monopoly/oligopoly. The typical government response is to seek regulation of business. The government in China seeks to regulate by chastising local government officials (bureaucracy) lacking, at present, much of the market power (competition). Xi Jinping’s early attacks have been on local district municipal managers, many of whom are Communist Party appointments.
Effect of Metastasizing
While much corruption occurs in developing states, developed states are not immune. Mancur Olson observed the penetration of special interests on U.S. politics. C. Wright Mills attacked the ‘power elite’ controlling U.S. institutions. Teddy Roosevelt mounted an attack on American trusts and freewheeling monopolistic practices. This paper concerns itself with post-Soviet states in view of their continuing difficulty in breaking normative behavior that originated during Soviet times. One may refer to blat, the Russian practice of conviviality of Soviet managers toward trade in barter fashion with other cooperative managers willing to acquire missing commodities or simply refer to oligarchs during post-Soviet times that now contain economic control of significant swathes of state economies. Yet the metastasizing effect can permeate lower levels as well. Street policemen may stop autos for presumably errant behavior and expect a gratuity for releasing the driver. Customs officials may presume that their task is to tax anything and everything according to an unwritten rule of “protecting” the state. Graduating university students may assume that jobs are available to them on the basis of family status, particularly that of the father.
Many graduating university students prefer to find positions in international organizations or the NGO sector to receive a salary commensurate with their education and acquire experience not possible in the state apparatus. Sometimes, leaving the country was the only alternative.
Cheating the state became accepted practice in many post-Soviet societies. At some universities, students, especially those not having the willingness to study, must and can bribe their way through to graduation. Parents seeking to enroll their offspring in a quality university may conclude that the best are those that try to limit internal corruption. Fees are published and any professor accepting a bribe may well be finished in any Western oriented university from then on.
The Primary Problem
While the literature is replete with examples of corruption, the solution toward eliminating it is less available. Can one assume that Western Europe is immune to corruption? Not necessarily, though that is not the subject of this paper. The question remains: How can a country such as Armenia, or any other post-Soviet state, extricate itself from corruption? Barriers include normative behavior, competition for education and jobs; depth of oligarchic economic control; rent seeking governments; and, poor preparation of human capital, particularly among small states without significant exportable commodities, to lead the country toward innovation and productivity. We do not deal with states rich in commodities such as gas and oil. This resource curse creates future problems as such reserves become exhausted. However, their motivation to change is not yet evident. Further, small states must engage in foreign trade since their primary comparative advantage must be in the development of human capital. Israel and the Netherlands have followed such a path. While the Netherlands has access to some oil and gas, its comparative advantage is clearly human capital, as it is in Israel.
Small states have a particular problem: their economies are small. This amplifies the challenge of developing human capital in societies inured in corruption. There is, perhaps, one recent trend in Estonia and Slovakia (both small states). They are experiencing the return of expatriates - citizens working abroad now seeking to return to the ‘home‘ country. In Estonia those returning home now exceed those emigrating. When asked why they are returning, the comment has been, we miss the home country. While true that many citizens find the ‘old’ country to be alluring, the economic aspect might be that they can now obtain a job with ‘richer’ working opportunities since they bring with them overseas experience and skills. In a world of technology, post-Soviet states must consider digital and stem technologies as well as finance and artificial intelligence in designing curricula.
How to Switch from a Corrupt to a non-Corrupt Society
There are few guidelines to changing those norms of society that hinder economic and political development. The causation seems linked to the reduction of monopolies and oligopolies; competitive industry allowing openness of new economic entrants; governmental regulation of industry utilizing economic penalties; rule of law; independent judiciary; research and development. Various indexes exist that track specific components of business activity: Transparency Index; United Nations Democracy Index; Pugh Research; OECD, World Bank, Freedom House, World Values Survey, and others. Naturally, economic indicators including growth of domestic product and GDP per capita, gini coefficients, and educational achievements may signal important changes or lack thereof. Foreign direct investment can indicate inflow of external funds though such funds can signal spending by the recipient for debt purposes rather than development and creation of jobs.
Much of the literature emphasizes competent institutions. Such institutions include the aforementioned rule of law plus elements of democracy such as separation of power, regulation of the economy and an independent judiciary. In post-Soviet states, the bureaucracy seems transfixed toward protecting the state rather than society. In most cases, service is a foreign concept. Sluzhba is perhaps the last concept many bureaucrats might consider. Government service seldom appeals to young job seekers. However, such reticence may lie in skepticism toward duties to perform and innovation of the bureaucracy. For most post-Soviet bureaucrats, the nomenklatura served as the modus operandi. The fact remains that party affiliation can be a factor in one’s appointment and retention. Only time can solve this problem. Armenia’s new revolutionary government will be watched for evidence of competent innovation and justice. Of particular importance will be the appointment of ministers and deputy ministers.
Teddy Roosevelt, Franklin Roosevelt and Progressiveness
One can hope that tinkering with the post-Soviet system will change society. Gorbachev had very little success with that concept. Progressiveness as practiced by both Teddy and Franklin Roosevelt sought a different approach. Each in his own time, (they acted at different times) affected the pre-depression era (Teddy) and the post-depression era (Franklin). It was clear to Teddy that the U.S. economy was in the hands of powerful trusts (oligarchies) controlling the country. This included the railroads, banks, the petroleum industry as well as steel. Teddy acted to interfere in the activities of such industries in order to regulate their profits in addition to their monopoly positions. Further, he set aside several federal lands for park development first initiated by Abraham Lincoln (to protect against exploitation of wilderness areas). While Teddy’s activities brought regulation to the U.S. economy, the Great Depression of the 1930s vitiated his efforts as Herbert Hoover announced the glorious condition of the U.S. economy (soon to collapse). It remained for Franklin Roosevelt to pick up the pieces following the Great Depression.
Both Teddy and Franklin Roosevelt came from elite families that understood the eccentricities of money. However, each contributed in changing the U.S. economy visualizing that monopoly had little to offer a country of diversity. Franklin came down hard on the bankers; he split up Standard Oil, an oil monopoly, and he avoided the Smoot-Hawley Act that had raised tariff barriers to those states trading with the U.S., as a Democratic Congress passed the Reciprocal Trade Agreements Act in 1934, granting presidential authority to negotiate tariffs on a bilateral basis. He recognized that protective barriers mounted by the U.S. would generate opposing tariffs among its trading partners (unlike President Trump’s recent activities). Further he mounted a huge public works program that employed many unemployed workers working to clear land and enhance the development of water, irrigation and electricity. Eventually, the U.S. became a beacon for investment and source of jobs for immigrants from Europe experiencing unemployment in the aftermath of a global depression.
The above is not to suggest that the solution for post-Soviet states is to proceed with massive public works programs. It is to suggest that progressivism can involve changing a regime to address incipient political/economic problems thus, dividing the private and public sectors into those parts that each can efficiently pursue. One could argue that each Roosevelt took on corruption directly. Institutions needed to be provided with rule of law power creating trust and hope among the population. While the scale of endeavor was larger in the U.S. than a small post-Soviet state, the regulatory approach created a more level playing field attracting immigrants and public investment. Eventually, it would take Nixon’s departure from the gold standard to strengthen world monetary policy. In the process, the U.S. would lose its monopoly position but achieve economic stability that had been lacking. In 2008, however, the banking system that had eliminated most regulatory controls earmarked by Franklin Roosevelt, plunged the U.S. and Europe into a recession in 2008, that is only now emerging from low productivity and significant burdens of debt.
We have seen that corruption can hinder economic and political development; reduce competitiveness; enhance monopoly and oligopoly; retard education; reduce trust and faith in institutions; hobble investment, particularly from foreign sources; hinder gross domestic product and GDP per capita; raise the gini coefficient (reduce the dispersal of income to a lower percent of the population); and increase collusion and moral hazard. It is an evil ingredient. Government needs to restore trust in institutions and among its elected officials.