1. Europe and Central Asia Region
Growth and Corruption: What are the stylized facts in ECA’s transition countries?
Pradeep Mitra
Chief Economist
Europe and Central Asia Region
Prepared for a Panel Discussion on “The Growth-Corruption Paradox”, in a Core Course on Public Sector Governance & Anti-Corruption, February 14-16, 2006
I thank Jim Anderson and Alexander Murevyev for helping put this presentation together. Views expressed are mine and do not necessarily represent those of the World Bank.

2. Growth in GDP per capita from 1998 to 2003 owes more to productivity growth than improved labor utilization (Growth in GDP/POP) = (Growth in GDP/EMPL) + (Growth in EMPL/POP)

3. Firm entry and exit are comparatively more important for productivity growth in transition countries

4. While the business environment has been improving steadily in the transition countries, it is in general more difficult in 2005 than in the cohesion countries of Western Europe
Note: 1 represents no obstacle; 4 represents a major obstacle

5. Unbundling by ownership category reveals that de novo firms find the business environment in 2005 to be more difficult than privatized and state firms in areas such as regulation, taxation and institutions and property rights

6. particularly with respect to regulatory constraints such as customs and trade regulations and business licensing and permits, but note this is true in the cohesion countries too

7. . . . . as well as institutional constraints such as the judiciary and corruption

8. Moving from entrant firms to potential exiters, while the fraction of firms with arrears and subsidies has been falling in the transition countries, indeed lower than the cohesion countries for subsidies . . .

9. . . . . subsidies to a higher fraction of state and privatized firms retard their exit

10. and arrears by state and privatized firms on utility payments and taxes as well as to employees and suppliers also retard exit

11. Unsurprisingly, various measures of administrative corruption are related to changes in the business environment and show improvement, e.g. bribes as a proportion of sales, the more rapid the improvement where corruption was higher
Source for this and next two slides: Anticorruption in Transition 3 (forthcoming)

12. but progress is more mixed when corruption is unbundled, although the deterioration for courts and public procurement is not statistically significant. 0% 5%
10%
15%
20%
Influence Laws
Utilities
Env. Insp.
Occ. Health and
Safety Insp.
Fire and Blg Insp.
Courts
Customs
Bus. Licenses
Taxes
Gov. Contracts
average percent of firms indicating type of bribery is frequent
Source: BEEPS 2002, BEEPS 2005
Transition Countries:
decrease between
2002 and 2005
increase between 2002 and
2005
level in 2005
Comparator Countries:
level in 2005/2004

13. Frequency of bribes in dealing with courts is increasing in all sub-regions but not significantly so. But the gap is significant between EU-8 and cohesion countries

14. Conclusions
Rapid growth in the ECA transition countries since 1998 owes more to productivity growth than improved labor utilization.
Firm entry and exit play a more important role in productivity growth in the transition countries compared to other emerging and OECD countries.
Notwithstanding improvements in the business environment throughout the region, de novo firms in transition and cohesion countries confront a tilted playing field in areas such as regulation, taxation, the judiciary and corruption, while exit is retarded by softer budget constraints for state and privatized firms compared to de novo firms.

15. Conclusions
While aggregate measures of corruption show improvement, unbundling confirms the same trend for most measures but no significant improvement in the frequency of bribery in government procurement and in dealing with courts.
An operationally-oriented discussion of growth and corruption requires both to be unbundled, e.g. (i) what are the sources of productivity growth, and (ii) along which dimensions is corruption the most serious, so as to guide policy.