Rigged
legislation are endogenous rather than
nally liberal politicians in Latin America in
exogenous. We knew, therefore, that
the 1990s.
privatization
they would have to evolve gradually. We
deals have
recognized that the faster that hap-
Transition Was Imperfect,
undermined the
pened, the better, but we also recog-
but Necessary
nized that institutions and the rule of
values that form
law cannot be created in the offices of a
the moral
few reformers.65
Corruption has long been one of the
region's characteristics. As a rule of thumb, cor-
underpinning of
ruption increases and government transparen-
Because there is no easy fix to a weak rule of
capitalism,
cy declines the further east and south in
law, future reformers should focus on tackling
including hard
Europe one travels. Nineteenth century com-
the underlying causes of corruption, such as
mentators, for example, saw the quality of gov-
the size and scope of the state. Empirical evi-
work and entre-
ernment in the Austro-Hungarian Empire as
dence suggests that corruption and economic
preneurship.
inferior to that of Germany, and Russia's as
freedom are inversely related. For example, the
thoroughly hopeless. Unfortunately, four
Fraser Institute's Economic Freedom of the World:
decades of communism have exacerbated that
2005 Annual Report found that "with fewer reg-
problem. The famous Czech saying, "If you
ulations, taxes, and tariffs, economic freedom
don't steal from the state, you steal from your
reduces the opportunities for corruption on
family," existed for a reason.62
the part of the public officials."66 Indeed, as
Figure 5 shows, countries with the highest
The lack of the rule of law, which facilitates
degree of economic freedom experienced the
corruption, is now recognized as a major barri-
lowest levels of corruption, whereas countries
er to a speedy and successful economic transi-
with the least economic freedom experienced
tion. With the benefit of hindsight, some econ-
the highest levels of corruption.
omists have argued that liberalization should
Other researchers have come to similar
have been slowed down, because of institution-
conclusions. For example, the World Bank's
al weaknesses in post-communist countries. As
Doing Business report found that lighter busi-
the Nobel Prizewinning economist Joseph
ness regulation and lower levels of corruption
Stiglitz wrote in 1999:
were related.67 Vito Tanzi from the Carnegie
Privatization is no great achievement--it
Endowment for International Peace found
can occur whenever one wants--if only
that growth in the size of the public sector
by giving away property to one's friends.
provides public officials with more discretion
Achieving a private, competitive market
in the allocation of goods and services. That,
economy, on the other hand, is a great
in turn, increases the likelihood of corrup-
tion.68 Alberto Ades from Goldman Sachs and
achievement, but this requires an insti-
tutional framework, a set of credible
Rafael Di Tella from the Harvard Business
and enforced laws and regulations.63
School found that increased competition
reduces corruption. Consequently, they found
that more open economies are less corrupt.69
The trouble is that there is no simple way
to "promote" the rule of law.64 As Vaclav Klaus,
Shang-Jin Wei from the Brookings Institution
the economic reformer and now the president
and Yi Wu from the International Monetary
of the Czech Republic, has written:
Fund found that countries with capital con-
trols have higher corruption.70
Calls to postpone the beginning of
Evidence points to a general link between
transformation until the economic
big government and higher rates of corrup-
institutions and the rule of law were per-
tion, but there are (partial) exceptions to the
fect (and they never are) were . . . wrong-
rule. Sweden, for example, is famous for high
headed. We knew that institutions and
government spending and a low level of cor-
15