Publication Type: Conference Paper/Unpublished Manuscript
Review Method: Peer Reviewed
Abstract: Using the BEEPS survey of about 4000 firms in transition economies developed by the World Bank and the EBRD, this paper tests hypotheses concerning the causes of the political behavior of firms in transition economies. The evidence supports the hypothesis that clientelist relations between firms and the state, which have been shown to have detrimental effects on economic growth and income equality elsewhere in the world, exist in many transition economies. The results suggest that the corruption and crony capitalism observed in many transition countries is generated by firms and state officials who find themselves involved in an interdependent political and economic relationship. In a system of political clientelism, firms provide political support to politicians, and in exchange politicians distribute economic benefits to client firms. High-level corruption in transition economies is generated by personalistic, hierarchical, asymmetrical, clientelist links between firms and government officials rather than the lobbying activity of pressure groups acting on a weak state. Ordered logit analysis of the determinants of firm overdue payments, or payment arrears, shows that large, privatized firms hold higher payment arrears in clientelist countries, while these factors have no impact on arrears in countries with low levels of clientelism. The evidence suggests that the extent of political clientelism has a major impact on corruption and economic policy, regardless of the extent of private ownership in the economy. This analysis of the political behavior of firms and the economic policy environment has important policy implications for all countries implementing market-oriented economic reform and attempting to reduce corruption. Questions concerning the treatment of state-owned versus privatized firms in clientelist countries will be pursued in further research.