What is the cost of corruption in Romania? Bribery raises prices, impedes investment, maintains poverty and undermines state’s legitimacy, experts say

Corruption is widespread in Romania, and this means huge economic costs for the second-poorest European Union nation, as bribery affects every single citizen through higher costs, lower investments and implicitly fewer jobs and a misallocation of talent in the country, and finally undermines the state’s legitimacy, experts say.

In the “Corruption and Development” study, published by the International Monetary Fund (IMF), Cheryl HW. Gray and Daniel Kaufmann tried to analyse the principal causes and costs of corruption.

“Bribery usually leads to inefficient economic outcomes. It impedes long-term foreign and domestic investment, misallocates talent to rent-seeking activities, and distorts sectoral priorities and technology choices (by, for example, creating incentives to contract for large defense projects rather than rural health clinics specializing in preventive care),” the study says.

But corruption also raises transaction costs and uncertainty in the economy.

“It pushes firms underground (outside the formal sector), undercuts the state’s ability to raise revenues, and leads to ever-higher tax rates being levied on fewer and fewer taxpayers. This, in turn, reduces the state’s ability to provide essential public goods, including the rule of law,” the authors point out.

The study also indicates that bribery is unfair.

“It imposes a regressive tax that falls particularly heavily on trade and service activities undertaken by small enterprises,” the two researchers say.

Finally, corruption undermines the state’s legitimacy, a picture everyone can see in Romania in these days.

But how corrupt is Romania, really?

According to the Corruption Perception Index (CPI) 2017 released by Transparency International, Romania ranks 59^th in the world – it is the 59th least corrupt country out of 180 countries – with a score of 48, similar to the scores of Jordan and Greece (48), Croatia and Saudi Arabia (49), Cuba and Malaysia (47), but above Hungary (45).

Just three years before, in 2014, Romania had a score of 43 and Hungary 54, and this sudden change shows how fast developing nations can reverse any achievement due to political or other domestic factors.

For the authors of this index, fighting corruption is key to maintain democracy.

“CPI results correlate not only with the attacks on press freedom and the reduction of space for civil society organisations. In fact, what is at stake is the very essence of democracy and freedom,” Delia Ferreira Rubio, chairman of Transparency International, said in the last CPI report.

Some experts calculated that corruption is the single greatest obstacle to economic and social development around the world, and every year USD 1 trillion is paid in bribes, while an estimated USD 2.6 trillion are stolen annually through corruption – a sum equivalent to more than 5 percent of the global GDP.

However, some observers have argued that bribery can have positive effects, under certain circumstances, by giving firms and individuals a means of avoiding burdensome regulations and ineffective legal systems.

“But this argument ignores the enormous discretion that many politicians and bureaucrats have (particularly in corrupt societies) over the creation and interpretation of counterproductive regulations. Instead of corruption being the “grease” that lubricates the “squeaky wheels” of a rigid administration, it fuels the growth of excessive and discretionary regulations,” the “Corruption and Development” study said.

Why is Romania so corrupt?

Lucian Croitoru, a Romanian economist, explains that the roots of present day corruption in Romania can be traced back to the fall of the Communist regime, when ancient political elites transformed their political capital into economic capital.

In order to maintain its power in a poor country like Romania, this new elite blocked property rights reforms and opposes fighting corruption – and Romania still has low property rights and widespread corruption.

“The inappropriate dimensions of these liberties do not allow Romania to develop, but allow rent seeking. Rents are drawn by those who represent the symbiosis of 1989 between the new political class, on one hand, and the new business elite, on the other. (…) It explains the failure of the transition to competitive capitalism in Romania and is the main adversary of welfare,” Croitoru wrote in one of his studies.

According to Croitoru, this new elite is still very strong in political parties, business and state bureaucracy and tries to block any reform that threatens its position.

“Symbiosis is the product of the transformation of political capital into economic capital by Communist leaders. In exchange for the political freedom offered to citizens in 1989, the former nomenclature and its protectors received the businesses of this country. The transaction was possible because they metamorphosed into the “new political class” and “new bureaucracy,” generating from their ranks the new business elite with the state,” Croitoru points out.

But this extractive economy, based on rents, generated benefits for a small elite and decent life for a small fraction of the population, the new “middle class” of large cities.

For the rest of Romanians, leaving their country was the only option to get a better life.

According to a UN International Migration Report, around 3.4 million Romanians have gone abroad between 2007 and 2015 to escape poverty and corruption in their country.

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