Operating within a ‘Devil’s Circle’: Tackling corruption in transition and post-conflict economies

Fostering entrepreneurship is often viewed as a key component for generating growth in the transition economies (those which have sought to move from centrally planned to more open, market economies) of Eastern Europe. However, corruption is rife in these locations and is a major challenge in reforming institutions.

In many transition economies, corruption is often systemic and permeates many spheres of everyday life. It ranges from petty bureaucratic corruption (for example, small scale bribery) to larger scale corruption associated with big business and political power (such as extortion and violence), and undermines the productive potential of many enterprises who are stymied by its impacts. For entrepreneurs in the transition economies, corruption has become an aspect of their business activities that needs to be considered and managed if they are to survive, let alone grow.

Since corruption is an everyday feature of the economic landscape, our research in Bulgaria and Romania finds that it is factored into the decision making and business planning of entrepreneurs in much the same way as paying tax. It is regarded as inevitable rather than extraordinary or unusual. In many respects the expectation of corruption enables entrepreneurs to be prepared so that its impacts can be minimised as much as possible.

Beyond being faced with the prospect of petty corruption, the research also found that many entrepreneurs looking to grow their business described how they often came to face a choice. They either become the subject of corruption or engaged in corrupt activities themselves. Often the outcome is that entrepreneurs limit their growth ambition, which serves to constrain the prospect of entrepreneurial-led economic growth.

In our study in Romania and Bulgaria we referred to this phenomenon as the ‘devil’s circle’, where entrepreneurs are unable to entirely escape from corruption, and the impact of corruption or the prospect of corruption, deters entrepreneurs from growing their businesses. The larger the size of the business activity, the bigger the risk entrepreneurs are exposed to. As the business grows, there is also the involvement of a larger variety of actors; especially in Bulgaria, there is a tendency among more established businessmen to bully up-and-coming competitors or to try to overtake their business at a knock-down price, often with the help of complacent government officials.

These dynamics act as an incentive to keep the businesses small, and the whole system is underpinned by an institutional environment which stimulates informalities, often caused by excessively bureaucratic and cumbersome procedures, despite progress being made in both countries with regards to legislative reforms. The perception that such practices are ‘mainstream’ further normalises them and makes them appear as inescapable.

I am currently following up this work on transition economies through research which focused on the post-conflict, recently independent countries of the former Yugoslavia. With fieldwork having been conducted in Bosnia, Kosovo and Montenegro, commonalities with the transition economies are to be found. However, these Balkan states are starting from a different base – rather than being ‘transition economies’ per se, they have had a break from their institutional past and are faced with the challenge of creating new institutional frameworks. 

Like other countries looking to leverage entrepreneurship for economic development, many Balkan governments have embarked on structural reform programmes of regulatory institutions (in part due to EU accession requirements). However the reality has meant that the design of policies and programmes, as well as their implementation, are often not one and the same thing. Coupled with this, the weak enterprise culture across the Balkans, which is symptomatic of former centrally planned economies, still serves to hinder entrepreneurs, and often sees them stereotyped as criminal or deviant. The combination of weak rules and regulations and unsupportive culture has in many cases allowed corrupt activities space to exist.

The former Yugoslavian economies are not devoid of entrepreneurship; however, the environment is not currently conducive for the pursuit of entrepreneurial activity. Consequently, entrepreneurship has not yet proved to be the much needed driver of economic development in the Balkans. It will require more than promoting entrepreneurship for this to change; what is needed is a substantive political commitment to eradicate corruption.              

However the very nature of corruption, often at the highest levels, has meant this commitment has been slow to come. Yet without confronting the corruption that entrepreneurs encounter and societies perceive, the ability of entrepreneurship to lead to economic and social improvements will be limited.