Jaromír Šindel

ECES

Transformation: Law and Corruption

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Topics• Law and Transition Economies

– Importance, how to get new law, judicial system, enforcement mechanism, ...

– The better protection for investors the higher investment, ...

• Corruption– And economy development, causality, ...

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Law for Economic Prosperity ?

The Quality of Law Environment (vertical axis) nad Economic Level (horizontal axis,

GDP per capita in USD in PPP) in 2000 and 2001

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eSource: Kaufmann, Krsay, Zoido-Lobatón (2002) from Žák, M. (2004)

• Positive relationship between the quality of law environment and the economic level

How to get new Law – different views

• Law and finance theory– Choose the best institutional setting

• Institutional convergence has its limits by existing PATH DEPENDENCY

• Impossible to achieve the best results in CEE countries due to the path dependency and the political economy

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How to get new Law during Transition• Translation of EU´ law x evolution

– Institutional view

• Path dependency– Bureaucrats, judges, ...

• Law Hyperthophy– Interest groups who benefit from the imperfect laws– Ex-post regulations reacting on particular problems at a

particular time– No complexity

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How to get new Law during Transition- the Case of Czech republic

• Designed legal tradition went bact to the Austria-Hungarian Empire and to the system before 1948

• In Czech rep. was the worst position against Hungary and Poland– They started implement laws relating private bussiness by the end

of 1980´s

• Why in Czech rep. wasn´t effort to get American/English Law model?– Inadequacy of underlying institutions– Russian example (next)

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eSource: Hanousek, Kočenda, Lízal (Eds.), CERGE 2004, www.cerge-ei.cz

Law and Czech rep. ... ?

Source: CERGE: Czech Republic 2005: Year After. www.cerge-ei.cz

Number of Phrases „with exception of“ and Total Number of Words in the Czech Income Tax Law

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Quality of Law and Inefficient Enforcement Mechanism

• Dysfunctional judicial system and enforcement mechanism– Incompetence –> high ratio of incorrect decisions

– Long duration of the procedure

– Imprerfect laws

– Lack of adequate equipment, low salaries, low social status (corruption) – compare with private sector

– Example: Russia• „US-like bankruptcy law was enacted, including the reorganization

chapter. As the independence of Russian judges is questionable, ... The reorganization serve as a means of management entrenchment laeding to violations of creditors´ rights“

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eSource: Hanousek, Kočenda, Lízal (Eds.), CERGE 2004, p. 49, www.cerge-ei.cz

Quality of Law

Source: CERGE: Czech Republic 2005: Year After. www.cerge-ei.cz

Duration of Bankruptcy Proceedings

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Corruption, Law and Economic Level

Source: WEF from Žák, M. (2004)

The Relationship between Public Institution Index (vertical axis) and Economic Level (GDP per capita in USD in PPP, horizontal axis) in 2000 and 2001

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Note: Public Institution Index consists of Contracts and Law Subindex (50 %) and Corruption Subindex (50 %)

Corruption• Question about causality

– Corruption leads to lower economic level or high economic level brings lower corruption ?

• Question of the relationship of the level of democracy and rent-seeking– Country shifting from autocracy to democratic

regime has higher economic growth than democratic countries – U-shape curve

– Inverse U-shape curve – relationship between corruption and the level of democracy

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Corruption and Level of DemocracyT

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The Relationship between Corruption (rent-seeking) (vertical axis) and the level of democracy (horizontal axis)

autocracy democracy

corruption

Corruption and Level of LivingT

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The Relationship between Economic Growth (left vertical axis, average growth in 1980-1995),Economic Level (right vertical axis, GDP per capita in USD in PPP) and Corruption Perception Index (horizontal axis) in 1998-2000

Source: Červenka, M., Frait, J. (2002)

Corruption and CEE• Importance for Foreign Investors

– See next table. Where are the investor´s preferences? Foreign investors look at corruption indexes before investing into the country (two possibilities of explanation)

• Gradual vs. Rapid transformation– Question of interest group forming. (Olson,

Marcur: The Rise and the Decline of Nations. 1982.)

• Bad instituions – speed up corruption

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Corruption and CEE

Source: Transparency International, www.transparency.org

Corruption Perception Index in 2005

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1. Iceland 9,7

2. Finland and New Zealand 9,6

11. Netherlands and U.K. 8,6

16. Germany 8,2

17. U.S.A. 7,6

18. France 7,5

27. Estonia 6,4

31. Slovenia 6,1

32. Botswana, Qatar, Uruguay, Taiwan 5,9

40. Hungary, Italy, South Korea 4.8

47. Czech rep., Slovakia, Greece, Namibia 4,3

76. Poland 3,4

126. Russia 2,4

Corruption and CEE

Source: CERGE: Czech Republic 2005: Year After. www.cerge-ei.cz

Corruption Perception Index Development in Czech republic, Poland

and Hungary

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Corruption and CEE

• Gradual vs. Rapid Trasformation– Question of interest group forming. (Olson,

Marcur: The Rise and the Decline of Nations. 1982.)

– Gradual• Time for adaptation of old interest groups and rent-

seekers

– Rapid• New interest groups are established.

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Corruption and CEET

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wealth and influence

time

+

-

OLD

NEW

ready for

not ready for

instructed

Speed up Corruption• „good“ and „bad“ corruption

– More than half of Czech citizens believe that corruption is a serious problem that needs to be taken care of.

– But 20 % of them admitted to giving a bride to SPEED UP procedures at their local office.

• Bad insitutions. Theory of bureaucrat – its importance - official stamp.

• Solutions – to simplify procedures– Pay for public services (question: Why not private services

or lower taxes?)

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Special Case: Mafia• From history

– Mafia was the name of group for the creation of Czechoslovakia during the WW I.

• Slovakia – Mečiar´s political regime (1993-1998)

• connections of politicans and business

– Russia Influence– New government

• Restricted area near the capitol - Bratislava– Special Public Prosecution– Special Law-Court

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Lessons for future. T

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• Make a project for law transformation at Cuba and Iraq.

• Goals, solutions, reasons.

„Institutional“ websites T

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• www.worldbank.org/data/wdi2004/index.htm (world development indicators)

• www.imf.org/external/pubs/pubs/statpack.htm (government finance statistics)

• www.imf.org/external/np/sta/bop/bop.htm (balance of payments)

• http://rru.worldbank.org/DoingBusiness/default.aspx (doing business)

• www.heritage.org (the index of economic freedom)

• www.fraseinstitute.ca (economic freedom in the world)

•www.transparency.org (corruption perception index – CPI)

• www.worldbank.org/wbi/governance/pubs/govmatters3.htm (governance indicators)

• http://info.worldbank.org/governance/beeps (the business environ., performance)

• www.opacity-index.com (opacity index, PWCoopers)

• http://hdr.undp.org/reports (human development index)

• http://www02.imd.ch/wcy (world competitiveness yearbook - IMD)

• www.weforum.org (global competitiveness report – global economic forum)

• www.freedomhouse.org (freedom in the world)

• www.icrgonline.com/icrgMethods.asp (international country risk guide)

• www.beri.com (business environmental risk intelligence)Source: Žák (2005, s. 559)