Economic Policy Review ISSN 1313 - 0544

An Overview of the World Bank's annual report: "Anti-Corruption in Transition 3: Who is succeeding… and Why?"

Author: Metodi V. Metodiev / 29.01.2007
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In the 16 years since the start of transition in the former socialist economies of Europe and Central Asia, few issues have risen as rapidly in visibility as corruption. Reforms in the early 1990s were focused on macroeconomic stabilization, price and trade liberalization, privatization, and establishment of the legal foundations of a market economy.

Institutionalreforms to ensure accountability, transparency, and public sector effectiveness often took a back seat. Corruption has been an important issue in the discussions surrounding EU enlargement, has figured prominently in political campaigns, and has been a key concern of citizens, businesses, and international organizations alike. Leading reformers have in turn paid greater attention to governance issues generally and corruption in particular in recent years.

This week was introduced the World Bank’s report – “Anti-Corruption in Transition 3: Who is succeeding… and Why”. This report was the third in a series of studies, since 2000 that examines patterns and trends in corruption in business-government interactions in Europe and Central Asia and the progress achieved by countries in addressing it. All three studies have drawn on data from a large-scale survey of enterprises undertaken jointly by the European Bank for Reconstruction and Development and the World Bank—the EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS).

We attempt to represent an overview of the key findings of this report:

1) Corruption does not affect all firms equally. New, private, domestically owned firms are likely to pay the most in bribes (as a share of revenues) and pay bribes the most frequently. Foreign-owned firms pay less in bribes, as do larger or older firms, state-owned firms, and firms in smaller towns or rural areas. This uneven incidence of bribery threatens to undermine the growth of small and medium enterprises, which are the engines of economic growth, diversification, and private-sector development throughout the region.

2) A few of the transition countries of Europe and Central Asia, firms reported a smaller incidence of corruption in 2005 than they had three years earlier. Among countries showing the most dramatic improvements are Georgia and the Slovak Republic, where committed leaders are implementing strong programs of economic and institutional reform and firm-level bribery has fallen substantially. Likewise, Romania and Bulgaria are also seeing some success, which bodes well for their entry into the European Union, and improvements are evident along some dimensions in Moldova, Tajikistan, Ukraine, and Latvia (an early leader in tackling corruption), as well as several other countries.

3) Taxation has been one of the most visible areas of reform in recent years. Chronic tax evasion in the 1990s was driven in part by high and steeply progressive rate structures, and several countries in Europe and Central Asia took the lead world-wide in moving to low- or flat-rate income taxes in the late 1990s and early 2000s. These tend to be the same countries that have seen the largest declines in both corruption in tax administration and tax evasion. In the Slovak Republic, for example, a comprehensive tax and benefit reform did not result in significantly lower collections despite a decrease in rates.

4) Two other areas where reforms are leading to lower levels of corruption in some transition countries are customs and business regulation. Cross-country evidence shows that countries with less burdensome regulatory systems tend to have lower levels of corruption.

5) One area that has not seen overall improvement in firms’ assessment is the courts. Only a handful of countries saw significant reductions in corruption in the judiciary from 2002 to 2005, and a similar number saw increases. Judicial reforms tended to take a back seat in the 1990s to other areas of institutional reform, although this is now changing, particularly in EU candidate countries.

6) Progress is also lagging, according to firms, in the area of government procurement. Improving procurement systems—focusing on transparency, competition, and standardization—must be a key priority for governance reforms in the coming years.

7) Corruption continues to be higher in countries where policies and institutions are weak. While richer countries tend to have better institutions and lower corruption, there is no evidence that faster economic growth reduces corruption in the short run.

From the exported data, we can lay down several areas in which Bulgaria needs quick and considerable reforms:

1) The area which causes major problems for Bulgaria is court and legislation. It is in this direction, the base issues of problems is the fairness of the courts and the independence of the court. The index of Economic Freedom of The World is published by the Fraser Institute and measures the degree to which the policies and institutions of countries are supportive of economic freedom. They measure the degree of five major areas: 1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labour, and business.) In the annual report, the experts of Fraser Institute have concluded that in Bulgaria there is no progress in the section consisting of the legal structure and security of property rights. There is neither an institution nor practice to conduct a regulatory impact assessment in the pre-adoption phase of the legislation process.

2) In second place it is correct to mark the situation with the tax burden. The heaviest burden is applied to the labor and in 2006 the rate is between 29% to 43% for gross wage of EUR 81.8 and EUR 715.8 respectively while in 2005 the rates were 33% and 46%. As a result of the progressive personal income tax and regressive payroll tax, the average income persons pay the highest rates while low and high income persons pay relatively less. Corporate income taxed was (in 2006) kept unchanged at 15% while taxation on dividends was 7%. Currently, there are at least 7 countries taxing the corporate profit with lower rates. The VAT rate is one of the highest all over the Europe and 15 countries have lower rate. The excise duties rates are still relatively low but are increased every year.

3) The third important component is the trouble of the state administration and the conditioning of business. Bulgaria faces great challenges to achieve the necessary quality of administration and administrative services and at the same time, to find its place in the common European process of applying the principles of effectiveness, transparency and accountability of governance. On the verge of the accession of Bulgaria to the European Union (EU), the pace of the reforms in the state administration is still unsatisfactory.

The major areas where optimization and development are a considerable necessity are: 1) achieve not a larger, but better organized and effective state administration 2) avoid overlapping structures and functions 3) merge or remove structures where is possible and appropriate 4) develop of a user-friendly e-government 5) enhance transparency and integrity in the state administration 6) Implement effective and efficient training programs.

4) Bulgaria registered almost zero progress in public procurement procedures. There are several major problem areas including: 1) lack of transparency 2) lack of accurate rules 3) too many different modes of public procedures.