Abstract
The Russian Federation is one of 116
countries which have ratified the United Nations
Convention Against Corruption, a document which sets a
tone and specific provisions aimed at reducing bribery
in the public and private sector, unjust enrichment of
officials, embezzlement, and other forms of corruption.
However, based on survey data, government reports, and
the writings of international organizations, Russia has
not been successful in enforcing the provisions of the
UNCAC. This paper will develop a computable general
equilibrium (CGE) model to quantify the macroeconomic
effects of corruption in Russia. Corruption is found to
cost the Russian economy billions of dollars a year. A
conclusion of the paper is that implementing and
enforcing the UNCAC would be of significant economic
benefit to Russia and its people.
Keywords:
Russia, corruption, computable general equilibrium, CGE,
UN Convention against Corruption, UNCAC, Global Trade
Analysis Project, GTAP
Executive Summary
·
The Russian Federation signed the
convention on December 9, 2003, and ratified it on May
6, 2006. In total, 140 countries have signed the
convention, and 116 have ratified it. Russia had a
number of reservations, but none seemed very
significant.
·
According to the Preamble to the
Convention, the purposes of the convention are: (a) to
promote and strengthen measures to prevent and combat
corruption more efficiently and effectively; (b) to
promote, facilitate and support international
cooperation and technical assistance in the prevention
of and fight against corruption, including in asset
recovery; (c) to promote integrity, accountability and
proper management of public affairs and public property.
·
According to the UN, the major
highlights of the convention include an emphasis on (a)
prevention, (b) criminalization, (c) international
cooperation, and (d) asset recovery. Article of the
Convention enjoins each State Party to establish and
promote effective practices aimed at the prevention of
corruption.
·
Several provisions explicitly address
bribery in the public and private sector, unjust enrichment
and payments, and embezzlement of property. These
provisions in particular focus on how corruption can serve
as a major tax on business. These include Articles 15, 16,
20, and 21.
·
Russia has ratified the UNCAC, but
enforcement is a different matter. In September 2006,
Russian President Vladimir Putin declared that an inability
to make much progress in the battle against corruption was
one of his administration’s greatest failures. Several
organizations seem to agree that corruption in Russia
decreased in the early years of Putin’s administration, but
has increased again in the last two years, including
Transparency International, the World Bank, Freedom House,
the IMF, INDEP, Gallup, and others.
·
The experiment in this CGE model is a 5
percent “corruption tax,” applied to all sectors in the
Russian economy. The “corruption tax” is added to each
sector, resulting in the second column of numbers. The goal
of the GGE model will be to track the ripple effects of
these tax increases through the entire Russian economy.
·
According to the model, the taxing effect
of corruption results in a $1.98 billion decrease in Russian
GDP. In other words, assuming a modest 5 percent burden on
Russian business, corruption in Russia is costing the
economy nearly $2 billion each year.
·
Results suggest that corruption causes a
$2.4 billion decrease in consumer welfare. This measure is
made up of three parts. First is the allocative efficiency
loss of $2.98 billion, a loss equivalent to the decrease in
GDP. The second element to welfare loss is the $3.6 billion
loss in Russian terms of trade. A terms of trade loss
represents a drop in global competitiveness caused by
corruption. These welfare losses are only partially offset
by a $3.2 billion gain in savings and investment efficiency.
·
Corruption causes both a decrease in
total output as well as a significant shift of resources
from some sectors to others. Output increases in several
sectors, including oil and gas (3.5 percent), metals and
minerals (9.3 percent), food crops (4.0 percent), and forest
and fisheries (4.3 percent). But this is at the expense of
other sectors in which production decreases, including
electricity production (-0.1 percent), manufacturing (-0.3
percent), and the service industry (-2.7 percent).
·
Possibly the most worrying output result
is the 39.8 percent drop in the output of capital goods as
the rate of return on capital in Russia decreases by 25.5
percent. Capital goods are expenditures by businesses to
increase their future production capacity: factories,
research and development, equipment, infrastructure. A
decrease in this output represents both a current drop in
output and, probably more importantly, a drop in future
output potential.
·
Corruption actually results in a $22.2
billion increase in Russia’s trade balance.
This would not be inconsistent with the large terms of trade
loss Russia experiences. Given Russia’s terms of trade, it
would now take more Russian exports to finance the same
number of imports. This would explain an increase in net
exports. While Russia’s net exports increase, the trade
balances of its trading partners decrease, including those
of the United States (-6.4 billion), the European Union
(-$5.8 billion), South and East Asia (-$4.6 billion), South
America (-$1.0 billion), and the rest of the world (-$3.6
billion).
·
Due to corruption, Russian exports
increase in every sector and Russian imports decrease in
every sector, except in the electricity sector in which the
opposite holds true.
·
The main conclusion of this quantitative
analysis is that Russians themselves would significantly
benefit from closer compliance with its commitments to the
UN under the Convention Against Corruption. While all of
the provisions likely have benefits, this CGE Model would
emphasize the economic benefits of enforcing the general
Article 5 Provisions on Prevention and provisions of
Articles 15, 17, 20, and 21 against bribery in the public
and private sector, unjust enrichment and payments, and
embezzlement of property.
A.
Russia and the UN Convention Against Corruption
In its resolution 55/61 of December 4,
2000, the U.N. General Assembly decided to establish an ad
hoc committee for the negotiation of such an instrument in
Vienna at the headquarters of the United Nations Office on
Drugs and Crime. The text of the U.N. Convention against
Corruption was negotiated during seven sessions of the Ad
Hoc Committee for the Negotiation of the Convention against
Corruption, held between January 2002 and October 2003. This
agreement was adopted by the General Assembly by resolution
58/4 in October 2003. The Convention needed 30 ratifications
to come into force. In accordance with article 68 (1) of
the resolution, the United Nations Convention Against
Corruption entered into force on December 14, 2005.
The Russian
Federation signed the convention on December 9, 2003, and
ratified it on May 6, 2006.
In total, 140 countries have signed the convention, and 116
have ratified it. Russia had a number of reservations, but
none seemed very significant:
|
Table 1:
Russian Federation Reservations to the UN Convention
Against Corruption |
|
Reservation |
Content
|
|
1 |
The
Russian Federation declares, in accordance with
article 44, paragraph 6, subparagraph (a) of the
Convention, that it will take the Convention as the
legal basis for cooperation on extradition with
other States Parties to the Convention, on a
foundation of reciprocity. |
|
2 |
The
Russian Federation declares, on the basis of the
last sentence of article 46, paragraph 13, of the
Convention, that it will, on a foundation of
reciprocity and in urgent circumstances, accept
requests for mutual legal assistance and
communications through the International Criminal
Police Organization, provided that the documents
containing such requests and communications are
dispatched without delay in the prescribed manner. |
|
3 |
The
Russian Federation declares, in accordance with
article 46, paragraph 14, of the Convention, that
requests for mutual legal assistance and
communications related thereto addressed to the
Russian Federation must be accompanied by
translations into Russian, unless otherwise
established by an international agreement of the
Russian Federation or unless otherwise arranged
between the central authority of the Russian
Federation and the central authority of the other
State Party to the Convention. |
|
Source:
United
Nations |
Given these
insignificant reservations, it would appear the Russian
Federation was has signed on whole-heartedly to the
convention (see Table 1). Given the transition history of
the former Soviet Union, Russia committed itself to major
improvements in its regulation of corruption. According to
the Preamble to the Convention, the purposes of the
convention are: (a) to promote and strengthen measures to
prevent and combat corruption more efficiently and
effectively; (b) to promote, facilitate and support
international cooperation and technical assistance in the
prevention of and fight against corruption, including in
asset recovery; (c) to promote integrity, accountability and
proper management of public affairs and public property.
According to the UN, the major highlights
of the convention include an emphasis on (a) prevention, (b)
criminalization, (c) international cooperation, and (d)
asset recovery. Article 5 of the Convention enjoins each
State Party to establish and promote effective practices
aimed at the prevention of corruption. Significant
provisions of Article 5 are presented in Table 2.
|
Table 2:
UN Convention Against Corruption: Article 5
Provisions Promoting Prevention |
|
Provision |
Content |
|
1 |
Each
State Party shall, in accordance with the
fundamental principles of its legal system, develop
and implement or maintain effective, coordinated
anticorruption policies that promote the
participation of society and reflect the principles
of the rule of law, proper management of public
affairs and public property, integrity, transparency
and accountability. |
|
2 |
Each
State Party shall endeavor to establish and promote
effective practices aimed at the prevention of
corruption. |
|
3 |
Each
State Party shall endeavor to periodically evaluate
relevant legal instruments and administrative
measures with a view to determining their adequacy
to prevent and fight corruption. |
|
4 |
States
Parties shall, as appropriate and in accordance with
the fundamental principles of their legal system,
collaborate with each other and with relevant
international and regional organizations in
promoting and developing the measures referred to in
this article. That collaboration may include
participation in international programs and projects
aimed at the prevention of corruption. |
|
Source:
Article 5
of UN Convention Against Corruption |
Russia has also
committed itself to criminalizing corruption. The Convention
requires countries to establish criminal and other offences
to cover a wide range of acts of corruption, if these are
not already crimes under domestic law. In some cases, States
are legally obliged to establish offences; in other cases,
in order to take into account differences in domestic law,
they are required to consider doing so. According to the UN
Office of Drugs and Crime, the Convention goes beyond
previous instruments of this kind, criminalizing not only
basic forms of corruption such as bribery and the
embezzlement of public funds but also trading in influence
and the concealment and laundering of the proceeds of
corruption.
Several provisions are aimed at criminalizing bribery or
unjust enrichment of individuals. Table 3 presents selected
provisions.
The UN Convention
also commits Russia to cooperate with other signatories in
every aspect of the fight against corruption, including
prevention, investigation, and the prosecution of offenders.
Countries are “bound by the Convention to render specific
forms of mutual legal assistance in gathering and
transferring evidence for use in court, to extradite
offenders. Countries are also required to undertake measures
which will support the tracing, freezing, seizure and
confiscation of the proceeds of corruption.”
Finally, Russia’s ratification of the convention commits it
to significant provisions on asset-recovery. Article 51
provides for the return of assets to countries of origin as
a fundamental principle of this Convention.
Article 43 obliges state parties to extend the widest
possible cooperation to each other in the investigation and
prosecution of offences defined in the Convention.
|
Table 3:
Selected Criminalization Provisions of the UN
Convention Against Corruption |
|
Article |
Provision |
|
Article
15 |
Bribery
of national public officials
Each
State Party shall adopt such legislative and other
measures as may be necessary to establish as
criminal offences, when committed intentionally:
(a) The
promise, offering or giving, to a public official,
directly or indirectly, of an undue advantage, for
the official himself or herself or another person or
entity, in order that the official act or refrain
from acting in the exercise of his or her official
duties;
(b) The
solicitation or acceptance by a public official,
directly or indirectly, of an undue advantage, for
the official himself or herself or another person or
entity, in order that the official act or refrain
from acting in the exercise of his or her official
duties. |
|
Article
17 |
Embezzlement, misappropriation or other diversion of
property by a public official
Each
State Party shall adopt such legislative and other
measures as may be necessary to establish as
criminal offences, when committed intentionally, the
embezzlement, misappropriation or other diversion by
a public official for his or her benefit or for the
benefit of another person or entity, of any
property, public or private funds or securities or
any other thing of value entrusted to the public
official by virtue of his or her position. |
|
Article
20 |
Illicit
enrichment
Subject
to its constitution and the fundamental principles
of its legal system, each State Party shall consider
adopting such legislative and other measures as may
be necessary to establish as a criminal offence,
when committed intentionally, illicit enrichment,
that is, a significant increase in the assets of a
public official that he or she cannot reasonably
explain in relation to his or her lawful income. |
|
Article
21 |
Bribery
in the private sector
Each
State Party shall consider adopting such legislative
and other measures as may be necessary to establish
as criminal offences, when committed intentionally
in the course of economic, financial or commercial
activities:
(a) The
promise, offering or giving, directly or indirectly,
of an undue advantage to any person who directs or
works, in any capacity, for a private sector entity,
for the person himself or herself or for another
person, in order that he or she, in breach of his or
her duties, act or refrain from acting;
(b) The
solicitation or acceptance, directly or indirectly,
of an undue advantage by any person who directs or
works, in any capacity, for a private sector entity,
for the person himself or herself or for another
person, in order that he or she, in breach of his or
her duties, act or refrain from acting. |
|
Source:
UN Convention Against Corruption |
B. Russia’s Record on
Corruption
Russia has
ratified the UNCAC, but enforcement is a different matter.
As suggested by Robert Orttung, in September 2006, Russian
President Vladimir Putin declared that an inability to make
much progress in the battle against corruption was one of
his administration’s greatest failures. In fact, rising
corruption has been a direct consequence of Putin’s policies
to strengthen the state and to crack down on many elements
of Russia’s civil society.
Several organizations seem to agree that corruption in
Russia decreased in the early years of Putin’s
administration, but has increased again
in the last couple years. These organizations include
Transparency International, the World Bank, and Freedom
House. While the overall number of bribes may be shrinking,
the size of the bribes is growing.
One study of
corruption in the Russian Federation questioned 1,502 people
on their views of corruption. Forty-three percent of
respondents said that corruption did not affect their
families’ lives, and 29% said that it “affected it to a
small degree.” But 36% of the respondents held that there
was a “medium” degree of influence of corruption in the
business environment, and 32% described it as “strong.” More
than half the respondents (54%) said that corruption
influences Russian political life “very strongly.”
A Gallup Poll
from Russia suggests the problem is even more widespread. In
answering the question “Is corruption widespread throughout
the government in your country?”, 80% of respondents gave an
affirmative reply. Similarly, 79% replied affirmatively to
the question “Is corruption widespread within businesses
located in your country?”
Only seven percent of Russians say they are satisfied with
efforts to control crime and corruption in the country. In
comparison, more than three times as high a percentage (23%)
claim satisfaction in Italy, Turkey, and Mexico.
The percentages in the United States (47%), Canada (47%),
and France (50%) who say they are satisfied with control of
crime and corruption are about seven times as high as that
in Russia.
Georgiy Satarov, the president
of the INDEM Fund and a leading expert on corruption in
Russia, argues that the country is seeing the most
voluminous blossoming of bribery in its entire history. The
total sum of bribes annually meted out by Russians has
reached $30 billion, Satarov claims, with the market of
“everyday corruption” in which ordinary consumers pay
bribes—for example, in the public health services, in the
education system, on the roads, in institutions of higher
learning, in Housing Management Agencies, and in child care
centers—comprising about $3 billion of that.
Transparency
International placed Russia at 121 out of 163 countries in
its Corruption Perceptions Index for 2006. Moscow has been
placed 28th out of 30 in the 2005 rating of which cities are
desirable places in which to do business.
But in 2005, A.T. Kearney placed Russia in sixth place in
its rating of attractiveness for investors. Russia’s country
risk ranking, according to Euromoney in March 2005, moved up
to 61 out of 185 countries surveyed, while Institutional
Investor for the same month placed Russia at 58 out of 173
countries.
In its 2006 corporate governance ratings, the World Bank
placed Russia at 151 out of 208 countries, behind Zambia,
Uganda, and Swaziland,
while its Doing Business survey put Russia at 96 out of 175
countries.
In the Transparency International’s Bribe Payers Index for
2006, Russia was placed 28th out of 30 countries.
And in the 2007 International Property Rights ranking,
Russia came in at 63rd out of 70 countries.
In conclusion, while Russia has signed
and ratified the UN Convention Against Corruption, survey
and other data suggest that Russia has yet to enforce the
provisions of that convention. The question for this paper
is this: how much does a failure to enforce the UNCAC cost
Russia? Answering this question will require some
assumptions and the use of a large mathematical model.
C. A CGE
Model for Corruption in Russia
This section will develop a computable
general equilibrium model to quantify the macroeconomic
effects of corruption in Russia and on its trading
partners. The section is broken into several parts,
including, (a) a background of CGE models; (b) the Global
Trade Analysis Project (GTAP); (c) the structure of this
paper’s model, (d) model results; (e) model limitations and
future research.
a.
Background of General Equilibrium Models
As explained by the Purdue University
Global Trade Analysis Project (GTAP) website, general
equilibrium, a concept which dates back to Leon Walras
(1834-1910), is a pillar of modern economic thought.
“General
equilibrium recognizes that there are many markets in an
economy, and that these markets all interact in complex ways
with each other. In rough terms, everything depends on
everything else. Demand for any one good depends on the
prices of all other goods and on income. Income, in turn,
depends on wages, profits, and rents, which depend on
technology, factor supplies and production, the last of
which, in its turn, depends on sales (i.e. demand). Prices
depend on wages and profits, and vice versa.”
CGE modeling techniques attempt to
summarize all economic markets (supply curves and demand
curves) in a large, integrated system of simultaneous
equations. All micro markets are aggregated into a macro
system, which allows for discussion of economy-wide
variables, such as national price level, national output,
total factor productivity, sectoral output, and sectoral
trade.
As in Adam
Smith’s discussion of the “invisible hand,” every sectoral
market must clear: supply will equal demand. In the
aggregate, “general equilibrium” occurs when supply equals
demand in all individual markets (for goods, services,
labor, exchange, resources, capital, and all).
A CGE model is a closed system. This
means that no production or financial flow escapes the
system and none are created outside of the system. As in
basic GTAP modeling, the model means that,
“We assume output
will equal income. Households, businesses, the government,
the financial sector, and the foreign sector are all
connected by real flows and financial flows. Intuitively,
the idea of a “general” equilibrium is captured; any given
market is connected to all of the other markets for the
system.”
b.
Structure of this Paper’s Model
The model employed in this paper is that
of the GTAP project. While the core database has 57 sectors
and 66 regions, I have aggregated the matrices to simplify
the world into just eight sectors, eight regions, and five
factors of production. This aggregation is described in
Table 4.
The data is first, “calibrated,” meaning
the model is solved for its original equilibrium prices and
volumes in all markets. This baseline is meant to represent
the economy as is, before any shock takes place. Thousands
of equations are created, each representing supply and
demand conditions in markets inside each region, including
markets for goods, services, factors of production, savings,
government expenditure, and more. Equations are also
generated for trade of all goods between each of the
regions, separately created for each industry. The
calibrated result is a large set of simultaneous equations,
of which the solution matches the existing prices and
quantity levels of the economy.
|
Table
4: Aggregation used in the Model |
|
Regions |
Sectors |
Factors |
|
|
Russia |
Oil
and Gas |
Land |
|
|
Rest
of Former USSR |
Electricity |
Unskilled Labor |
|
|
United States |
Metals and Minerals |
Skilled Labor |
|
|
European Union |
Food
Crops |
Capital |
|
|
China |
Meat
and Animals |
Natural Resources |
|
|
SE
Asia |
Forest and Fisheries |
|
|
|
South
America |
Manufacturing |
|
|
|
Rest
of the World |
Services |
|
|
|
Source:
Generated by Author |
|
A “shock” is then introduced to system.
Mathematically, a “shock” is the alteration of a single
parameter or variable in the giant system. That change acts
like a stone thrown in a pond, with waves created throughout
every one of the thousands of equations in the system. The
model is re-solved with the one autonomous change, and the
effects on the system are then measured.
The “shock” in this model is the
introduction of a tax on business, an income tax. In this
sense, corruption is modeled as a cost of doing business (or
participating in the economy). The revenues of this tax are
not accrued to the government, but to other individuals in
the economy. From a businessperson’s perspective, paying
for corruption is just another cost of doing business, like
a tax.
Theoretically,
any tax on markets is thought to distort economic decisions
and interfere with efficiency. From the producers’ side, a
tax changes relative incomes. Producers change the amount
of production, the type of production, and the method of
production (inputs). On the consumers’ side, the tax
changes the relative prices of goods. Income and
substitution effects push the consumer to change the amount
of his or her consumption and the choice of which goods to
consume. Together these changes in production and
consumption are thought to result in an efficiency loss.
More inputs are used to produce the same outputs, and the
economy consumes a different mix of goods.
c.
Model Results
The experiment in
this model is a 5 percent “corruption tax,” applied to all
sectors in the Russian economy. The pre-shock tax rates of
each sector are presented in the first column of Table 5.
The “corruption tax” is added to each sector, resulting in
the second column of numbers. The goal of the GGE model
will be to trade the ripple effects of these tax increases
through the entire Russian economy.
|
Table
5: Russian Output tax by Sector (Percent) |
|
|
Initial |
With
Shock |
|
RTO
|
rTO |
rTO |
|
1
Land |
6.8 |
11.8 |
|
2
UnSkLab |
21.5 |
26.5 |
|
3
SkLab |
21.5 |
26.5 |
|
4
Capital |
6.8 |
11.8 |
|
5
Nat. Resources |
6.8 |
11.8 |
|
6 Oil
& Gas |
18.7 |
23.7 |
|
7
Electricity |
2.8 |
7.8 |
|
8
Metals & Min. |
3.3 |
8.3 |
|
9
Food Crops |
1.5 |
6.5 |
|
10
Meat Animals |
-0.5 |
4.5 |
|
11
Forest & Fish |
2.9 |
7.9 |
|
12
Mnfcs |
2.5 |
7.5 |
|
13
Services |
2.6 |
7.6 |
|
14
CGDS |
0 |
5 |
|
Source:
Generated by Author |
Gross Domestic Product (GDP) is a measure
of the final value of all production of goods and services
within the borders of the Russian Federation. As shown in
Table 6, according to the model, the taxing effect of
corruption results in a $1.98 billion decrease in Russian
GDP. In other words, assuming a modest 5 percent burden on
Russian business, corruption in Russia is costing the
economy nearly $2 billion each year.
|
Table
6: Change in Russian GDP
(Millions of Dollars) |
|
Qgdp |
(Sim) |
Pre
|
Post
|
Change |
|
Russia |
-0.64 |
309,948 |
307,963 |
-1,984.9 |
|
Rest
of USSR |
-0.03 |
104,328 |
104,296 |
-32.6 |
|
USA |
0 |
10,082,155 |
10,082,199 |
44.0 |
|
EU |
0.01 |
7,929,525 |
7,930,110 |
585.0 |
|
China |
0 |
1,321,825 |
1,321,828 |
3.5 |
|
SEAsia |
0 |
5,531,997 |
5,532,130 |
133.5 |
|
SAmerica |
0.01 |
1,345,630 |
1,345,704 |
74.0 |
|
ROW |
0.01 |
4,653,195 |
4,653,461 |
266.0 |
|
Source:
Generated by Author |
While GDP measures the amount of
production in the Russian economy, a slightly different
question is what effect corruption has on consumer
welfare—the utility consumers in Russia enjoy from consuming
goods. As shown in Table 7, according to the model,
corruption causes a $2.4 billion decrease in consumer
welfare. This measure is made up of three parts. First is
the allocative efficiency loss of $2.98 billion. This loss
is equivalent to the decrease in GDP and represents a loss
in efficiency—that the same inputs produce less output in
the presence of corruption. The second element to welfare
loss is the $3.6 billion loss in Russian terms of trade. A
terms of trade loss represents a drop in global
competitiveness caused by corruption. A country exports
goods in order to earn foreign exchange needed to purchase
imports. With corruption, Russia will receive fewer imports
in exchange for its exports.
These welfare losses are partially offset
by a gain in savings and investment efficiency. While
corruption and rent-seeking is a distorting cost of doing
business, there are individuals who are the recipients of
the bribes and payoffs. These individuals have a source of
extra funds now—available for savings, investment, or more
consumption. This welfare gain, however, is not enough to
make up for the loss in allocative efficiency and terms of
trade. The total effect of corruption, according the model,
remains a negative $2.4 billion.
|
Table 7:
Welfare Effects
(Millions of Dollars) |
|
WELFARE |
Allocative Efficiency |
Endowments |
Technology |
Population |
Terms
of Trade |
Savings and Investment |
Total |
|
1 Russia |
-1,984.9 |
0.0 |
0.0 |
0.0 |
-3,570.6 |
3,165.5 |
-2,389.9 |
|
2RestofUSSR |
-32.6 |
0.0 |
0.0 |
0.0 |
68.6 |
-8.2 |
27.8 |
|
3 USA |
44.4 |
0.0 |
0.0 |
0.0 |
1,524.5 |
-100.3 |
1,468.6 |
|
4 EU |
584.8 |
0.0 |
0.0 |
0.0 |
1,793.6 |
-759.3 |
1,619.0 |
|
5 China |
3.5 |
0.0 |
0.0 |
0.0 |
345.6 |
-529.5 |
-180.5 |
|
6 SEAsia |
133.6 |
0.0 |
0.0 |
0.0 |
1,642.0 |
-1,116.7 |
658.9 |
|
7
SAmerica |
74.0 |
0.0 |
0.0 |
0.0 |
-70.2 |
-91.5 |
-87.7 |
|
8 ROW |
266.0 |
0.0 |
0.0 |
0.0 |
-1,733.4 |
-559.9 |
-2,027.3 |
|
Total |
-911.1 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
-911.1 |
|
Source:
Generated by Author |
These losses can
be traced to individual sectors of the Russian economy. As
shown in Table 8, the corruption tax causes both a decrease
in total output, as well as a significant shift of resources
from some sectors to others. Output increases in several
sectors, including oil and gas (3.5 percent), metals and
minerals (9.3 percent), food crops (4.0 percent), and forest
and fisheries (4.3 percent). But this is at the expense of
other sectors in which production decreases, including
electricity production (-0.1 percent), manufacturing (-0.3
percent), and the service industry (-2.7 percent).
Possibly the most
worrying output result, however, is the 39.8 percent drop in
the output of capital goods. While the GTAP model is not
well equipped to analyze dynamic changes in investment and
future incomes, this decrease in capital good production is
significant. Capital goods are expenditures by businesses
to increase their future production capacity: factories,
research and development, equipment, infrastructure. A
decrease in this output represents both a current drop in
output and, probably more importantly, a drop in future
output potential. Even without corruption, the Russian
Federation would be suffering from extremely low levels of
business investment. That corruption would so strongly
impact what little investment already takes place is
striking. Corruption is hurting the present and the future
of Russia.
|
Table 8:
Change in Output, by sector (Percent) |
|
Qo |
Russia |
Rest
of USSR |
USA |
EU |
China |
SEAsia |
SAmerica |
ROW |
|
Oil &
Gas |
3.5 |
-0.72 |
-0.57 |
-0.66 |
-0.52 |
-0.63 |
-0.6 |
-0.63 |
|
Electricity |
-0.14 |
0.14 |
-0.02 |
0 |
-0.02 |
-0.03 |
-0.02 |
0.03 |
|
Metals &
Min. |
9.31 |
0.01 |
-0.16 |
-0.17 |
-0.09 |
-0.25 |
-0.16 |
-0.15 |
|
Food &
Crops |
4.09 |
-0.21 |
-0.04 |
-0.05 |
-0.01 |
-0.05 |
-0.08 |
-0.05 |
|
MeatAnimals |
1.83 |
-0.1 |
-0.05 |
-0.1 |
0.01 |
-0.02 |
-0.06 |
-0.03 |
|
Forest &
Fish |
4.31 |
-0.04 |
-0.08 |
-0.09 |
-0.08 |
-0.11 |
-0.03 |
-0.02 |
|
Mnfcs |
-0.26 |
-0.04 |
-0.04 |
0 |
0.01 |
-0.08 |
0.16 |
0.29 |
|
Services |
-2.73 |
0.13 |
0.02 |
0.02 |
0.03 |
0.04 |
0.02 |
-0.01 |
|
CGDS |
-39.8 |
0.74 |
0.31 |
0.38 |
0.2 |
0.38 |
0.38 |
0.36 |
|
Source:
Generated by Author |
The significant
drop in production of capital goods is caused by a
significant decrease in returns on business investment. As
shown in Table 9, the rate of return on capital in Russia
decreases by 25.5 percent.
Businesses and individuals in Russia see a much weaker
incentive to take risks on innovation, invention,
entrepreneurship, and investment. Apparently, a corruption
tax disproportionately falls on capital good output. Again,
this is a serious drag on economic growth for the Russian
Federation.
|
Table
9: Rate of Return on Capital (Percent Change) |
|
Rorc |
(Sim) |
|
Russia |
-25.47 |
|
Rest
of USSR |
0.35 |
|
USA |
0.06 |
|
EU |
0.06 |
|
China |
0.06 |
|
SEAsia |
0.07 |
|
SAmerica |
0.07 |
|
ROW |
0.07 |
|
Source:
Generated by Author |
These results are
consistent with economic literature. According to the
International Monetary Fund (IMF), corruption may reduce
investment by adding to its cost and by acting as a tax on
its returns, and by adding to uncertainty. According to John
Roaf of the IMF, high levels of corruption are likely to
have been an especially important factor behind Russia’s
extremely low level of foreign direct investment for several
reasons: (i) the relatively large size of foreign
investments, and the special regulations applying to them,
are particularly conducive to rent-seeking; (ii) local
companies may use corruption to shut foreign competitors
out; and (iii) foreigners lack specific knowledge of how to
operate in a particular corrupt environment.
From a Russian consumer’s perspective,
corruption leads results in decreased consumption. As shown
in Table 10, according to the CGE model, a 5 percent
“corruption tax” results in a 7.2 percent decrease in
Russian private consumption. Corruption leads to lower
personal income, and thus less consumption. It also changes
relative prices, producing substitution effects as consumers
try to change their consumption away from more expensive
goods and towards cheaper ones.
|
Table
10: Private Consumption
(Percent Change) |
|
Yp |
(Sim) |
|
Russia |
-7.15 |
|
Rest
of USSR |
-0.35 |
|
USA |
0.19 |
|
EU |
0.14 |
|
China |
0.13 |
|
SEAsia |
0.21 |
|
SAmerica |
0.13 |
|
ROW |
0.06 |
|
Source:
Generated by Author |
In addition to internal economic impacts,
corruption appears to significantly affect Russia’s trade
with other countries of the world. As shown in Table 11,
according to the CGE model, this five percent “corruption
tax” actually results in a $22.2 billion increase
in Russia’s trade balance. This would not be inconsistent
with the large terms of trade loss Russia experiences.
Given Russia’s terms of trade, it would now take more
Russian exports to finance the same number of imports. This
would explain an increase in net exports. While Russia’s net
exports increase, the trade balances of its trading partners
decrease, including those of the United States (-6.4
billion), the European Union (-$5.8 billion), South and East
Asia (-$4.6 billion), South America (-$1.0 billion), and the
rest of the world (-$3.6 billion).
|
Table
11: Change in Trade Balances (Millions of
Dollars) |
|
DTBAL |
(Sim) |
|
Russia |
22,224.9 |
|
Rest
of USSR |
-168.0 |
|
USA |
-6,388.6 |
|
EU |
-5,830.2 |
|
China |
-726.4 |
|
SEAsia |
-4,572.2 |
|
SAmerica |
-968.5 |
|
ROW |
-3,571.0 |
|
Source:
Generated by Author |
The change in trade balances can be
broken down by sector, as presented in Table 12. For
Russia, it sees an improved trade balance in every single
sector except electricity. Russian services experience the
greatest trade balance improvement ($7.1 billion), mostly at
the expense of services in the EU (-$2.6 billion), the
United States (-$1.7 billion), and South and East Asia
(-$1.2 billion). Similarly, Russia’s trade balance in
manufactured goods improves by $6.9 billion, mostly at the
expense of the U.S. manufacturing trade balance (-$4.0
billion) and that of the EU (-$1.8 billion). Other major
shifts occur in the trade balances of oil and gas, and that
in metals and minerals.
|
Table
12: Change in Trade Balances by Sector (Millions of
Dollars) |
|
DTBALi |
Russia |
Rest
of USSR |
USA |
EU |
China |
SEAsia |
SAmerica |
ROW |
|
Oil &
Gas |
2513.74 |
-27.28 |
560.3 |
733.17 |
-23.77 |
489.11 |
-430.79 |
-3843.45 |
|
Electricity |
-61.03 |
45.61 |
-9.54 |
3.21 |
-0.3 |
-0.41 |
-3.61 |
26.07 |
|
Metals &
Min |
3839.22 |
23.32 |
-753.25 |
-1100.17 |
-253.82 |
-790.49 |
-177.43 |
-810.39 |
|
Food &
Crops |
1685.77 |
-167.49 |
-315.66 |
-376.29 |
-56.63 |
-316.55 |
-156.49 |
-231.74 |
|
Meat &
animals |
96.7 |
-11.93 |
-8.32 |
-36.72 |
-12.36 |
-9.87 |
-1.35 |
-17.1 |
|
Forest &
Fish |
180.51 |
-0.4 |
-13.62 |
-40.24 |
-24.77 |
-33.7 |
-2.2 |
-60.45 |
|
Mnfcs |
6864.89 |
-136.57 |
-4048.72 |
-2459.41 |
-114.6 |
-2669.8 |
79.98 |
2380.14 |
|
Services |
7105.06 |
106.72 |
-1799.79 |
-2553.7 |
-240.16 |
-1240.46 |
-276.65 |
-1014.06 |
|
Source:
Generated by Author |
Exports and
imports are examined individually in Table 13 and Table 14.
In general, Russian exports increase in every sector and
Russian imports decrease in every sector, except in the
electricity sector. Sectors with the highest percent
increase of exports in Russia include services (25.8
percent), meat and animals (23.6 percent), food crops (17.8
percent), and metals and minerals (15.0 percent). Sectors
with the largest percent decrease in Russian imports include
services (-23.1 percent), meat and animals (-22.1 percent),
manufacturers (-10.8 percent), and forest and fisheries
(-7.4 percent).
|
Table 13:
Value of Exports by Sector (Percent Change) |
|
|
Vxwfob |
Russia |
Rest
of USSR |
USA |
EU |
China |
SEAsia |
SAmerica |
ROW |
|
|
Oil &
Gas |
6.63 |
-2.04 |
-4.91 |
-2.12 |
-4.31 |
-2.48 |
-2.64 |
-1.93 |
|
|
Electricity |
-7.24 |
2.43 |
-0.44 |
0.11 |
0.08 |
-0.01 |
-0.01 |
0.28 |
|
|
Metals &
Min. |
14.95 |
0.75 |
-0.74 |
-0.36 |
-0.32 |
-0.62 |
-0.37 |
-0.27 |
|
|
Food &
Crops |
17.75 |
-2.83 |
-0.3 |
-0.09 |
-0.1 |
-0.16 |
-0.24 |
-0.1 |
|
|
Meat &
Animals |
23.63 |
-3.47 |
-0.11 |
-0.37 |
-0.31 |
-0.13 |
-0.1 |
-0.12 |
|
|
Forest &
Fish |
10.51 |
0 |
-0.75 |
-0.61 |
-0.79 |
-0.85 |
-0.3 |
-0.81 |
|
|
Mnfcs |
9.53 |
-1.39 |
-0.2 |
0 |
0.09 |
-0.13 |
0.36 |
0.47 |
|
|
Svces |
25.81 |
0.53 |
-0.51 |
-0.26 |
-0.12 |
-0.32 |
-0.39 |
-0.25 |
|
|
Source:
Generated by Author |
|
|
Table 14:
Value of Imports by Sector (Percent Change) |
|
Viwcif |
Russia |
Rest of
USSR |
USA |
EU |
China |
SEAsia |
SAmerica |
ROW |
|
OilGas |
-6.3 |
-1.18 |
-0.8 |
-1.14 |
-0.1 |
-1.15 |
-1.03 |
0.21 |
|
Electricity |
4.65 |
-1.23 |
0.39 |
0.06 |
0.14 |
0.25 |
0.15 |
0.01 |
|
MetalsMin |
-5.38 |
1.37 |
0.43 |
0.14 |
0.42 |
0.32 |
0.25 |
0.29 |
|
FoodCrops |
-9.6 |
0.74 |
0.3 |
0.12 |
0.23 |
0.31 |
0.14 |
0.12 |
|
MeatAnimals |
-22.12 |
2.87 |
0.32 |
0.23 |
0.22 |
0.25 |
0.17 |
0.3 |
|
ForestFish |
-7.41 |
1.59 |
0.14 |
0.17 |
0.85 |
0.25 |
0.17 |
0.38 |
|
Mnfcs |
-10.8 |
-0.34 |
0.32 |
0.17 |
0.15 |
0.22 |
0.15 |
0.12 |
|
Svces |
-23.13 |
-0.66 |
0.34 |
0.19 |
0.18 |
0.34 |
0.26 |
0.16 |
|
Source:
Generated by Author |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d.
Model Limitations and Future Research
This experiment raises several
methodological questions. First, the magnitude and
character of corruption costs to businesses are worth
exploring. While this model imposes an
empirically-supported “corruption tax” on businesses (as
provided from survey data), the five percent tax on business
is assumed to be the same across sectors. It would be
reasonable to assume corruption is stronger in some sectors
and weaker in others, so a better experiment would be one
which allowed for these sectoral differences.
Second, this model is a static model. It
does not capture the changes in capital infrastructure and
production capacity over time. While the current effect on
capital goods output is apparent, the long-term effect of
that drop in production capacity is not modeled here. It
would surely increase the final cost of corruption to
society, as measured by a model.
Finally, while this experiment quantifies
economic impacts of corruption, the causal relationship
between anti-corruption laws and lower corruption remains an
assumption of the model. A conclusion of the paper is that
Russia should increase its laws and regulations in the
battle against corruption, but exactly how much that
campaign would change the numbers in this study is not
clear.
D.
Conclusion and Policy Implications
The main conclusion of this quantitative analysis is that
Russians themselves would significantly benefit from closer
compliance with its commitments to the UN under the
Convention Against Corruption. While all of the provisions
likely have benefits, this CGE Model would emphasize the
economic benefits of enforcing the general Article 5
Provisions on Prevention and provisions of Articles 15, 17,
20, and 21 against bribery in the public and private sector,
unjust enrichment and payments, and embezzlement of
property. These provisions in particular focus on how
corruption can serve as a major tax on business. As with
any tax, this “corruption tax” distorts markets and causes
change in producer and consumer behavior. The net result is
a welfare loss to the Russia economy.
According to
Ortung of the CSIS, four components would define an
effective anti-corruption policy in Russia.
The first would be to reduce and reform the current
bureaucracy.
The second would be to allow society to hold its government
accountable through mechanisms such as a free press, an
active and independent civil society, and competitive
elections.
A third feature of an anti-corruption policy would be the
decentralization of power from the federal level to regional
and local levels, providing for a system of checks and
balances between the three levels of government.
Finally, Russia should try to address inequality between
Moscow and St. Petersburg and the rest of the country.
Along the same
lines, economists from the IMF suggest measures which would
reduce opportunities for corruption by eliminating
discretionary elements of government policy. In particular,
a more transparent and well-administered tax-collection
system would reduce bribery and official corruption.
Equally important is government regulation and licensing of
economic activity. According to the IMF, the average new
business applicant must deal with 20-30 registration and
licensing agencies. Simply cataloguing all the regulations
applying to business would be useful in helping expose which
regulations are economically justifiable and which exist
mainly to extort rents.
The list of suggestions goes on and on,
and the problems of corruption seem well appreciated. The
contribution of this paper has been to quantify the impact
of these problems. And in a general way, it emphasized the
importance of adhering to a philosophy that corruption is
detrimental to an economy. Whether it is the UN Convention
Against Corruption, an agreement with the OECD, an internal
campaign to reduce corruption, or a change in the behavior
of Russian citizens themselves, the message is clear:
Corruption comes at a cost. Russia should comply with the
UNCAC.