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Corruption has been a chronic problem for the Cuban nation. At crucial historical junctures, corruption became inextricably linked with political, economic, and social developments to set, in a perverse way, the future of the country. The documentary evidence we examine shows the burden a newly independent Cuba inherited from centuries of colonial rule at the dawn of the twentieth century. It also shows how since the early days of the Republic, the promise of democratic governance was undermined by the unethical practices embraced by Cuba's rulers and many of its citizens. Such was the harm produced that it would not be far-fetched to claim that the country's history of corruption was one of the reasons Fidel Castro's 1959 Revolution was able to upset the existing political order with relative ease.
As often happens, a revolution born with the pledge to make corruption a thing of the past failed to live up to its commitments. By the time Fidel Castro declared Cuba a socialist state in 1961, new corruption modalities were emerging along the lines described by Milovan Djilas and other writers about the ruling elites of communist countries. As political power and control of the economy became increasingly concentrated in the hands of the totalitarian state, inevitable consumer-good shortages and inefficiencies in resource allocation led to black-market activities and the unsavory transactions they produce.
After three decades of socialist rule and with the promise of material prosperity dashed by the collapse of the socialist world in the early 1990s, petty corruption became ubiquitous and more and more Cubans became adept at trading on the black market whatever they could steal from the state. As socialist Cuba opened its economy to the outside world as a survival strategy, absent former Soviet subsidies, many among the political and military elite turned into socialist managers and entrepreneurs and began to fathom new ways to protect and in many cases enhance their privileges by entering into shady deals presumably forbidden by socialist morality rules.
There is some evidence that, in anticipation of inevitable changes toward market reforms and a more open political regime likely to follow Castro's eventual death, Cuba's ruling elite has begun to prepare the ground for a wholesale assault on the country's patrimony to safeguard its own economic well-being. And this is likely to be juxtaposed on an environment where petty corruption is widespread, as even the most rudimentary forms of social and administrative controls would be difficult to enforce during a transition. In this regard, what is likely to occur in a Cuba in transition will not be very different from what was observed in most former communist countries: the explosive appearance of grand-scale corruption as former high-ranking political operatives, often in connivance with unscrupulous private-sector interests, managed to bend or fashion emerging marketplace rules (particularly regarding privatization) as laws are somewhat in flux.
These concerns and the potential for corruption to severely compromise Cuba's future, together with our lifelong interest in the country's affairs, led us to undertake this exploration of the impact of corruption on the country's current and future development. We arrived at our joint analytical venture through different but converging paths. As students of the development process, we became increasingly aware of and sensitized to the enormous burden that corruption and mismanagement of resources exact on the development of nations. Our awareness was further enhanced by our international professional activities and by our growing appreciation of the significance of informality in Cuba's socialist economy.
Many colleagues and friends helped us appreciate and understand better many of the issues we discussed in this book. We are grateful to Damián Fernández, Richard Lotspeich, Olga Nazario, Matias Travieso-Díaz, Eduardo Gamarra, Jaime Suchlicki, and Ricardo Puerta for valuable insights and references to relevant literature. We also acknowledge the contributions made by members of the Association for the Study of the Cuban Economy (ASCE), where so many different issues about Cuba are regularly aired and where we had the opportunity to present some of the ideas included in the book. We benefited as well from very thoughtful comments from anonymous readers that led us to strengthen some of the arguments in the book. In addition, Díaz-Briquets would like to express particular gratitude to his colleagues at Casals and Associates with whom he has spent countless days and nights thinking and writing about how best to design and implement anticorruption policies in many countries, always aware that they are uphill battles well worth the fight.
The long-delayed transition in Cuba gives policy makers the opportunity to consider averting corruption an integral part of the overall transition strategy. Corruption imposed a heavy burden on the economic transition of the former Soviet Union and its East European allies, just as it did in post-Sandinista Nicaragua. Expectations for reconstituting these countries into modern nation-states with political and economic structures akin to those of the democratic, market-oriented West were in many cases dashed in no small part because of corruption.
As these former socialist countries started the transition, the priorities of policy makers were macroeconomic stabilization, liberalization of prices in product markets, privatization of state-owned property, creation of an institutional base to support the market, and establishment and nurturing of democratic institutions. As these economic and political transformations were being carried out, the potential for corruption to derail a successful transition was not understood. Only in hindsight have the enormous negative effects of corruption on the transition process been appreciated.
More than a decade into the transitions of the former Soviet Union and the socialist countries of Eastern Europe, a body of literature has emerged that assesses the strategies and outcomes of such transitions (e.g., Aslund 2002; Svejnar 2002; World Bank 2002). The consensus is that the transitions have been painful—more so than was initially envisioned—and resulted in deeper reductions in output than anticipated. Initial conditions (among them geography and natural resources, years spent under central planning, specific nature of socialist development) had a very significant influence on performance, particularly in the early stages of the transition. It is clear that politicians and economists underestimated the difficulty of the transition and that in some instances questionable policy choices were made. Although growth performance has varied greatly across reforming countries, those nations that made the most concentrated reform efforts recovered soonest and positioned themselves to make sustained economic gains and improve the standard of living of their citizens.
Svejnar (2002) concludes that differences across former socialist countries in the ability to carry out economic reforms successfully turned on two factors: the ability to collect taxes with which to finance public programs and the ability to minimize corruption and rent-seeking behavior.1 Aslund (2002, 441) goes further, arguing that the main determinant of success in the transition was the extent to which a state was able to avoid the harmful effects of rent seeking on economic performance: states undergoing transition that succumbed to rent seeking got stuck in partial reform traps and lagged in economic performance.
A related insight is that the lack of a market-oriented legal structure was the Achilles' heel of the first dozen years of the transitions. Policy makers underestimated the importance of a well-functioning legal system or believed too readily that free markets would take care of any major problems (Svejnar 2002, 7). In the "no man's land" between a centrally planned economy and a market economy—as the "old" national institutions of totalitarianism were being torn down and decentralization, privatization, and the opening of these economies to international participation were taking place, while new institutions promoting good governance had not yet taken hold—uncertainty about property rights during privatization often allowed managers to tunnel assets from state-owned enterprises into spin-offs they controlled and to benefit from monopoly rents in a partially reformed economy.
In theory, these gains should have been short-term because as the transition progressed, the distortions that gave rise to them would disappear. The reality was that the short-term winners of reform—the so-called oligarchs—in many instances converted their gains into political influence to preserve the very distortions that generated the rents (World Bank 2002, 92). Architects of reforms seem not to have accounted adequately for the behavior of those in transition economies who did not desire a strong legal system because it was not in their interest and who contributed to the corruption of public officials (Svejnar 2002, 7).
The Nature and Determinants of Corruption
What Is Corruption?
Social scientists define public-sector corruption as "the use of public office for private gain, when an official (the agent) entrusted with carrying out a task by the public (the principal) engages in some sort of malfeasance for private enrichment which is difficult to monitor by the principal" (Bardhan 2002, 1321). Corruption among private parties is equally pernicious, although the regulatory power of the state plays a significant role in limiting its incidence. Our focus in this book is public-sector corruption, as this is more relevant to policy in a Cuba in transition. However, throughout the book we will make reference to the private sector as an indispensable partner in many forms of public-sector corruption.
The potential for corruption exists whenever a public official has discretionary power over distribution to the private sector of a benefit or a cost (Rose-Ackerman 1997, 31). Private individuals or firms are willing to pay bribes to obtain benefits or avoid costs. Under certain circumstances, public officials—sometimes in collusion with private parties—bend the rules for their own enrichment.
Corruption is as old as government itself. Kautilya, chief minister to the king in ancient India, wrote in the fourth century BCE in his Arthasastra:
Just as it is impossible not to take the honey (or the poison) that finds itself at the tip of the tongue, so it is impossible for a government servant not to eat up at least a bit of the King's revenue. Just as fish moving under water cannot possibly be found out either as drinking or not drinking water, so government servants employed in the government cannot be found out (while) taking money (for themselves). (Quoted in Bardhan 2002, 1320)
Moreover, corruption is not the province of countries with certain forms of governance structures or at certain levels of development. Virtually all countries have laws that proscribe corruption, and yet the practice exists everywhere. In developing and transition countries, private individuals or firms take advantage of fragmented rule of law and weak legal enforcement institutions to corrupt government officials in order to advance their interests. In developed countries, implementation of tax codes and government procurement practices often lend themselves to corruption (Schloss 2002, 18).
The ubiquitousness of government and the desire of individuals or firms to advance their own interests create the conditions for corruption to exist.
- National, state, and local governments buy and sell goods, distribute subsidies, organize privatization of firms, and provide concessions. Individuals or firms may choose to pay off government officials to have their names included on lists of bidders for projects, to be selected as winners of bidding competitions, to charge higher prices for delivering goods or services, or to deliver goods or services of a lower quality than paid for. Privatization of government-owned enterprises is conceptually similar to tendering for a large infrastructure project and therefore creates the same opportunities for corruption. Individuals or firms may also pay bribes to obtain goods sold by the state at lower prices or subject to more convenient delivery schedules, to gain access to credit or to foreign exchange, or to obtain a subsidy.
- National, state, and local governments also enforce rules and regulations, levy taxes, and enforce criminal laws. In performing these functions, governments can impose costs selectively and therefore affect the competitive positions of individuals or firms in an economy. Certain individuals or firms may be willing to pay bribes to get favorable interpretations of rules and regulations, pay lower taxes (e.g., through lower tax assessments), pay lower import duties (e.g., through undervaluation or deliberate misclassification of imports), or avoid application of criminal law (e.g., through bribes paid to inspectors to overlook violations).
- Government officials often have information that is very valuable to outsiders. Private individuals or firms may pay government officials to obtain information on bids tendered by competitors, on the locations of highways or other public works projects to be built in the future, or on the economic conditions of state-owned companies that may be candidates for privatization.
- Individuals and firms may also choose to pay bribes to influence the timing of government actions. In most instances, individuals and firms pay bribes to expedite government action, whether to obtain payment from the government more quickly for goods sold or services rendered, provision of services (installation of telephone or Internet service, for example), or issuance of the myriad permits and licenses that are required to operate businesses. In other instances, a bribe may be paid to delay an action that could favor a competitor until the payer of the bribe can bolster his or her bid. In still others, public officials may exact small bribes from individuals in exchange for overlooking alleged or actual law violations (such as a policeman demanding a bribe to overlook a traffic violation).
- Finally, individuals and firms may provide illicit contributions to politicians or political parties with the expectation that if elected to public office, the recipients will provide favorable treatment or even create rules that benefit the contributors.
The Determinants of Corruption
All else being equal, the size and structure of the state determine the demand for corrupt services, i.e., the supply of bribes. Klitgaard (1988, 75) has summarized the "basic ingredients of corruption" using the formula
Corruption = Monopoly + Discretion - Accountability
That is, the level of corruption depends on the degree of monopoly exercised by the state over the supply of a given good or service, the degree of discretion enjoyed by a government agency in making resource-allocation decisions, and the degree of accountability of the government (or its agents) to others.
The size of the government and the types of activity in which it engages are important indicators of potential government monopoly and degree of corruption. A positive correlation exists between the size of a government—as measured by its share of gross domestic product (GDP)—and the level of expected corruption: the larger the share of GDP that government controls, the greater the extent of corruption that will likely emerge. A large government share of GDP is consistent with high levels of regulation, bureaucracy, red tape, and opportunity for malfeasance (LaPalombara 1994, 338).
Types of government activity are as important as size of government: a government that operates monopolistic state-owned enterprises or limits competition through excessive regulation or trade restrictions creates economic rents and thus opportunities for corrupt rent-seeking behavior. Empirical research has shown a positive correlation between corruption and the share of state-owned enterprises in non-agricultural GDP and a negative correlation between corruption and the openness of economies measured by trade shares (Elliott 1997, 182-183).
The greater the discretionary power of government officials, the larger the supply of benefits that may be subject to bribes. For example, government officials may be able to extract payoffs from a contractor by introducing delays in payments (that could be expedited with a bribe) or by adding regulatory hurdles not in the original contract. They could also implement regulations inconsistently, extracting payments for specific outcomes. They could channel public resources to projects that are more prone to corruption (large infrastructure construction projects, military procurement), regardless of the projects' relative contribution to national welfare. In privatization processes or in instances of natural-resource concessions (such as authorization to mine a certain ore or to build a resort hotel on a particular beach), government officials might be able to manipulate decision making to favor a particular bidder who is willing to pay a bribe to obtain the newly privatized firm or concession (Rose-Ackerman 1997, 39).
The accountability of the state and its agents to the public affects the degree of government monopoly and discretion and therefore the potential for corruption. At one extreme, total absence of accountability over the state's actions or inaction means that the state's monopoly power and discretion are unchecked and that the potential for corruption is high. Positive public accountability—in the form of transparency in government operations, including procurement activities, accounting and auditing standards, grievance and appeal procedures, media scrutiny, and disclosure of political party financing—inhibits monopoly, discretion, and corruption.
Corruption and Socialism
One of the key features of socialist centrally planned economies (CPEs) was "the virtually all-encompassing public sector," which included not only the realm of high-level government officials, but also the dealings of shop clerks (Heidenheimer, Johnston, and Levine 1989, 443). Under this system, "there is no distinction between public and private purses, and government officials simply 'appropriate' state assets" (Rose-Ackerman 1997, 33).
In the idealized socialist CPE, the totality of production facilities of the nation would be under state ownership. In practice, the degree of state ownership across CPEs varied, but a common feature of each was state control over the preponderance of productive facilities, with the exception of agriculture.
Public ownership of productive facilities resulted in a lack of identifiable ownership and widespread misuse and theft of state resources. An analyst's assessment of the Soviet system applies to other CPEs as well: "most reliable sources agreed that theft of socialist (state) property is as widespread as state property itself" (Feldbrugge 1989, 318). Individuals in these societies tended to use state property as their own, with very little stigma attached to such practice.
The high degree of state ownership also meant that relatively little private activity was allowed. CPEs had myriad state regulations waiting to be broken by enterprising individuals with the connivance of corrupt government officials. The sheer size of the public sector, in combination with the web of regulations that circumscribed private activity, created opportunities for illegal behavior and for the use of state property for private gain.
Socialist systems such as the ones that were in power in the former Soviet Union and Eastern Europe and that remain in China, Vietnam, North Korea, and Cuba present a complex interplay of governmental and economic institutions, ideologies, and traditional political cultures that make them particularly prone to corruption (Heidenheimer, Johnston, and Levine 1989, 443-444). The overwhelming size of the public sector meant that the state employed an inordinately large number of workers. Therefore, the potential for corruption of government employees was very large. Central planning of hundreds of production enterprises, thousands of retail outlets, and tens of thousands of individual products and services required a huge bureaucratic apparatus. At every turn, production and distribution decisions were regulated by inflexible plans and allocation procedures; enterprise managers often had little choice but to use illicit influence to get around planning strictures to obtain labor or raw materials. And the ruling party itself was often the locus of corruption, as the top leadership was normally immune to exposés and reprisals from below and could engage in self-serving behavior.
In a study of corruption in communist societies, Holmes (1993, 77) gave the following definition of corruption:
Actions or non-actions—by an individual or a small group of individuals occupying (an) official (party and/or state and/or legal and/or military and/or socially responsible) elected or appointed position(s)—that are perceived, at least by some criteria, to be improper or illegitimate in the particular sense of being seen simultaneously against the collective (societal) interest and in the official's (officials') individual (self-regarding) interests.
Based on this definition, Holmes developed a taxonomy of twenty forms of corruption in communist countries (Table 1.1). It should be noted that two or more forms of corruption may be involved in a single act; for example, an official may forge a document in return for a bribe, or an official may refuse to investigate criminal activity carried out by a crony.
The very extensive and personalized power in the hands of government officials in socialist societies translated into wide discretion to act in a corrupt manner: taking bribes, getting cuts or kickbacks, extorting graft. Exploitation of the power of an office for personal gain was enhanced by the dictatorial and secretive nature of the regime and mutual solidarity of members of the political elite (Grossman 1979, 845).
One form of corruption that reached exceptionally high levels in CPEs was the system of perquisites and favors attendant to the ruling class or political elite, what one analyst called the "new class" (Djilas 1957) and others the nomenklatura (e.g., Voslensky 1984). Djilas (1957, 152) described the "new class" of rulers of the Soviet Union as "those who have special privileges and economic preferences because of the administrative monopoly they hold." According to Voslensky (1984, 75), the nomenklatura was: a list of key positions with the government, appointments to which were made by the higher authority of the Communist Party; and a list of persons appointed to these positions or waiting to be placed in them. This group of government officials was fiercely protective of its status and privileges and suspicious of actions that might erode its position. Djilas (1957, 65) further explains:
The new class instinctively feels that national goods are, in fact, its property, and that even the terms "socialist," "social" and "state" property denote a general fiction. The new class also feels that any breach of its totalitarian authority might imperil its ownership. Consequently, the new class opposes any type of freedom, ostensibly for the purpose of preserving "socialist" ownership. Criticism of the new class's monopolistic administration of property generates the fear of a possible loss of power. The new class is sensitive to those criticisms and demands depending on the extent to which they expose the manner in which it rules and holds power.
The privileged class of the former Soviet Union was able to draw on the resources of the state and to treat socialist property as its own: salary supplements; the best housing; special food allocations; access to restaurants, stores, and other facilities; vacation country villas (dachas). It also participated heavily in the system of taking bribes in return for doing favors such as appointing persons to prestigious posts, protection, promoting people up the bureaucratic ladder, and using influence to stop the government from taking actions (Simis 1982; Voslensky 1984).
Corruption and Transitions from Socialism
Examples of corruption in former socialist, centrally planned economies during the early stages of their transition to market-oriented economies in the early 1990s abound:
- Credit relations and the financial system generally suffered from widespread corruption in Hungary, including the exchange of loans for bribes, self-enrichment schemes, and manipulation of bankruptcies, state-initiated debt restructuring programs, and banking supervision processes ("How Hungary Escaped" 2001).
- Corruption was rampant in Romania: bribes were common for making reservations in hotels, renting real estate, or getting a grave in a cemetery. Moreover, the political leadership took over homes and other property in the early days of the transition and regularly sold favors for private gains (Mungiu-Pippidi 1997).
- In October 1994 the head of the Czech privatization agency was caught taking a large bribe in connection with the sale of a dairy (World Bank 2000, 32).
- In Russia, the process of privatizatsia ("privatization") was nicknamed prikhvatizatsia ("grabitization") to highlight the high degree of corruption that it involved; it has been estimated that 61 percent of Russia's new rich were former Soviet managers who appropriated the industries they managed during privatization (Naím 1995, 253). With the loosening of the restraining hand of the KGB, the Soviet Union's once-illegal "shadow economy" came into its own as the mafiya (Malia 1995). Capitalizing on corrupt officials, organized crime in Russia—the mafiya—has acquired large holdings of state assets through criminal and violent methods and has broadened its reach to more than two dozen countries, including the United States, Canada, and Sweden.
Naím (1995, 251) points out that the transition from socialism and the deepening of democratization should have corruption-curbing effects. Why, then, did corruption run rampant in countries transitioning from authoritarian, centrally planned regimes to democratic, market economies?
One explanation for this phenomenon is that in the absence of strong institutions, democracy and free markets provide more—and more visible—opportunities for corruption than those present under authoritarian rule. Under authoritarian rule, corruption can be institutionalized, controlled, and predictable. Naím argues that a well-organized dictatorship can provide "one-stop shopping" for corruption services, where the right amount of money given to the right official will take care of all needed interventions. In such a system, bribe takers under the control of the authority (either the authoritarian leader or a political party) collude and keep their actions out of the public's view. Under a democratic system, in contrast, the central government's control over the providers of bribery services is diluted, and corrupt officials compete for bribes, resulting in a process that is more visible to the public than under authoritarianism. Freedom of the press and independent civil society organizations also contribute to the perceived increase in corruption—whether or not it has really increased—as allegations of corruption that would have gone unreported under the authoritarian regime are openly aired by the media and discussed by the public and by civil society organizations.
Krastev (2004, 46-47, 63), based on the experiences of the former Soviet Union and Central Europe, explains the paradox of the perception of the rise in corruption in post-communist societies in terms of a shift from an economy of "favors" to an economy of "paid services." Individuals and businesses in communist societies depended on a generalized system of illegal "favors" (known as blat in the former Soviet Union, "connections" in Bulgaria) for survival for their families or the enterprises in which they worked, in an environment of state ownership of the means of production and centralized decision making. As we have discussed above, these practices were generalized and socially acceptable in part because they did not involve monetary exchanges and were perceived to increase social equality by redistributing goods and services under state control. The transition "marketized" these relationships and brought them into the open. Krastev (2004, 63) concludes that in societies undergoing transition, "Blat networks are re-organized on market principles. Blat networks are transformed into classical corruption networks involved in the redistribution of the state assets while other blat networks simply disappeared. Personal interests have become business interests."
Particularly during the early stages of transition, corruption can explode. Glynn, Kobrin, and Naím (1997, 10) suggest:
Corruption in these emerging markets is doubly pernicious. First, it compromises the efficacy and efficiency of economic activity, making the transition to free market democracy more difficult. Second, and equally important, corruption distorts public perceptions of how—and how well—a proper market economy works. Under such circumstances it becomes all too easy for economically beleaguered publics to confuse democratization with the corruption and criminalization of the economy—creating fertile soil for an authoritarian backlash and engendering potentially hostile international behavior by these states in turn.
It is probably fair to argue, however, that democratic regimes, over the long run, engender more powerful antibodies against corruption than authoritarian systems under which political liberties are stifled (ibid., 11).
The relaxation of the state's economic monopoly created novel opportunities for rent seeking by government officials. For example, the economic opening brought about by perestroika in the former Soviet Union legalized some secondary markets, and that translated into an increase in corruption and black-market activity as government officials diverted scarce (and low-priced) goods from the distribution system into secondary markets where they could gain rents from resale (Schuknecht 1990). Deregulation of areas that were formerly under the exclusive control of the state created opportunities for fraud until a regulatory structure was established.
Privatization, the transfer of state-owned property to private owners, provided manifold opportunities for rent seeking and other misconduct by government officials. The experience of reforming countries of the former Soviet Union and Eastern Europe undergoing massive privatization was an increase in corruption. As is discussed in more detail below, the connection between privatization and the rise of corruption has prompted some analysts to question whether corruption is the inevitable price to pay for privatization (Kaufmann and Siegelbaum 1997, 421).
Opening to International Participation
Opening the economy to international participation—through increased international trade and investment—created opportunities for corruption particularly in the form of "commissions" for issuing import and export permits and authorizations or allocating foreign exchange or for misclassifying goods to obtain more favorable tariff treatment. The approval process for foreign investment, particularly if it required a multitude of discretionary permits, was fertile ground for corruption.
Multiparty Political Systems
The establishment of multiparty political systems opened the door for new forms of corruption as private parties attempted to influence the rules of governance through the political process in a setting where political power was not monopolized by a single party.
Aslund (2002, 3) argues that some of the former socialist countries lost the battle against corruption, becoming rent-seeking states where the dominant interest was not the economic welfare of the whole nation, but the redistribution of available resources through the budget and through regulations to benefit a privileged few oligarchs. These oligarchs were often the beneficiaries of one of the initial and most notorious manifestations of corruption in transition economies, widely known as "spontaneous privatization": the appropriation of state property by members of the nomenklatura through the paper reorganization of state-owned enterprises into "private" corporations of which nomenklatura members were owners or directors. Spontaneous privatization took place during the early stages of the transition, when state socialism had weakened but while there were still legal gaps and uncertainties in property regulations (Agh 1993, 15). It is also observed that a full transition to democratic rule and the market is thwarted when former nomenklatura members retain power under several political guises, as has occurred in several African countries and in Cambodia. In the uncertainty that surrounded the start of the transition, "those possessing economic power carve out for themselves and their clients valuable pieces of the state-owned cake" (Sik 1992, 58).
Unbundling Corruption in Transition Economies
The World Bank (2000) has developed a typology that unbundles corruption in transition economies and recognizes that different forms of corruption have distinct origins and consequences. Differentiating patterns of corruption across transition economies is an essential step to developing specific policy recommendations tailored to them. The typology distinguishes between administrative corruption and state capture:
- Administrative corruption, akin to what social scientists traditionally define as corruption, refers to the intentional imposition of distortions in the prescribed implementation of existing laws, rules, and regulations to provide advantages either to state or nonstate actors as a result of the illicit and nontransparent provision of private gains to public officials. Examples of administrative corruption include bribes, "grease payments," and misuse of public property by state officials for their own benefit or that of their families.
- State capture refers to the activities of individuals, groups, or firms in both the public and private sectors to influence the formation of laws, decrees, regulations, and other government policies (i.e., the basic rules of the game) to their own advantage by means of an illicit and nontransparent payment to public officials. For example, an oligarch who heads a financial or industrial group could pay off legislators to get them to erect barriers to the entry of firms that might provide competition to his group, or a political leader might be influenced to shape the framework of reforms to ensure that specific individuals control key resources (World Bank 2000, 1-2). Recent Russian Federation rules that ban foreign firms or consortiums of firms that are more than 50 percent foreign-owned from bidding on natural-resource projects are cited by analysts as an example of the work of oligarchs—whose firms would be unable to compete with the technology, efficiency, and cash flow of foreign firms—in limiting competition for their own gain (Stratfor 2005).
The main distinction between administrative corruption and state capture is the nature of the political relationship that underlies them: in administrative corruption, private parties seek individualized exceptions from rules or their favorable application, while in state capture they attempt to shape the rules to their own narrow advantage, which subsequently constrains the actions of others. That is, the main difference lies in how deep the corrupt transaction reaches into the operations and functions of the state and the extent to which the advantages of the corrupt transaction are institutionalized in the rules of the game (World Bank 2000, 2).
While state capture was most evident in several countries during the initial stages of the transition away from socialism, its principal features also can be found in other settings where transparency and government accountability are lacking. State capture occurs, to recapitulate, when firms attempt "to shape the laws, policies, and regulations of the state to their own advantage by providing illicit private gains to public officials" (Hellman and Kaufmann 2001, 1-2). What is meant by "firms," however, should be clarified. In privatization schemes, foreign firms could conspire with former or current corrupt bureaucrats to appropriate for themselves state-owned assets, or former or current bureaucrats could enter into a conspiracy to illicitly assume ownership of state-owned assets. This is not an inconsequential distinction since it has important implications for the manner and the timing at which misappropriation of government resources begins or is consummated.
Privatization processes in Eastern Europe and the former Soviet Union proved vulnerable to corruption, as government officials attempted to manipulate them to favor certain groups or individuals, including themselves. Among the methods of privatizing state-owned enterprises employed in these nations, often combining more than one technique, were assets sales (Hungary, East Germany), voucher-based mass privatization (Czech Republic, early Polish divestitures, Russia), share offerings (later Polish sales), management-employee buyouts, tenders, and insider privatization (Russia), and spontaneous privatization (Slovenia) (Meggison and Netter 2001).
Kaufmann and Siegelbaum (1997) analyzed the corruption potential of the privatization methods by assessing the extent to which each increased or reduced the exercise of control rights by politicians and bureaucrats, which was hypothesized to be associated with more or less corruption. They concluded that voucher-based mass privatization and liquidation were the least prone to corruption,3 while management-employee buyouts and spontaneous privatization were highly conducive to corruption, principally due to their slow pace, high level of discretion on the part of administrators making decisions, and lack of transparency and public information. While spontaneous privatization stands above all others as the most corrupt form of privatization, Russian insider privatizations—particularly of oil and natural resource companies—that disproportionately benefited managers are also examples of privatization that resulted in grand corruption and the creation of oligarchs intent on state capture.
So outrageous have been the examples of corruption associated with privatizations that some have blamed privatization itself for giving rise to corruption. However, Aslund (2002, 265) argues quite convincingly that the corruption eruption in the socialist countries, just as the rise in crime, is a reflection of the weakening of the state rather than a consequence of privatization or any other individual reform measure. In this context, Aslund (2002, 266) writes,
Regular privatization started one or two years after the demise of communism. By elementary logic, a cause cannot follow its effect and privatization appears more likely to have contributed to the abatement of corruption, as officials had less to sell. Like many other transitional events, corruption and privatizations occurred roughly in parallel and involved wealth transfer, but that is true of many other phenomena, and simultaneity must not be confused with causality.
Kaufmann and Siegelbaum (1997, 428) find that "while it is undeniable that, in the transition economies, an increase in corruption coincided with the process of privatization, it does not necessarily follow that this increase was actually caused by the privatization process."
Has there been a quantum increase in corruption around the world in recent times? In other words, has there been what Moisés Naím (1995) referred to in an influential article as a global "corruption eruption"? The inherent difficulties in measuring corruption, either at a point in time or over time, make it impossible to assert unequivocally that corruption has been more or less prevalent in the post-Cold War period than before. However, Tanzi (2002, 22) posits that the recent interest in corruption probably reflects an expansion in the scope of the phenomenon—because of an increase in the role of governments in national economies in the post-World War II period, the growth of international trade and business that has created more situations for the payments of "commissions" (bribes), and privatization of state-owned property—rather than just a greater awareness of an age-old problem.
But more importantly, it is very clear that corruption is no longer a topic that is considered a cultural characteristic of a society and therefore taboo to international discussions and criticism. Today, corruption is openly recognized as a development issue. Thus, the more than 150 high-ranking public-sector officials and key leaders of civil society from sixty-three developing and formerly communist countries who responded to a survey conducted in 1996 by Kaufmann (1997, 125) identified public-sector corruption as their countries' most severe impediment to development and growth.
Corruption has also been recognized by the World Bank and the International Monetary Fund (IMF) as an impediment to development. The IMF's Guidelines on Governance (IMF 1997), for instance, reflect the consensus within that organization of the importance of good governance, including the elimination of corrupt practices, for economic efficiency and growth. In Chapter 2 we examine the literature that documents the costs of corruption on economic performance and the determinants of corruption in general and with respect to specific sectors or issues such as agriculture, the environment, education, public health, energy, the justice system, military spending, and the political system.
Corruption in Socialist Cuba and the Transition
The corruption problem that could be anticipated in a Cuba in transition will be a very complex one because of the confluence of several factors. First among these is the long history of administrative corruption in Cuba during the Republic (1902-1958) and even during the Spanish colonial rule (1492-1898) and U.S. intervention (1898-1902). As we will discuss in Chapter 3, corruption can be traced back to administrative and political institutions and practices during four centuries of Spanish colonial rule. We argue that at the advent of the Republic in 1902, Cuba was already burdened with a deeply ingrained tradition of corruption that rested on governance practices instituted by colonial administrations that placed a premium on the extraction of rents from public office, a management approach that encouraged the sale of official positions, nepotism, and poorly compensated officials.
With the establishment of the Republic and with opportunities for social and economic advancement limited by foreign domination of the economy, Cubans turned to the state to advance their economic situations and security. The state employed a very large pool of poorly paid civil servants, many of them susceptible to corruption or enjoying sinecures obtained through patronage. Many others protected their often meager labor, professional, or business interests through political lobbying, a process that often involved the payment of bribes. Few were the Cubans immune from a culture of corruption, as in one way or another they looked to the state to provide a modicum of security.
Second, the country must contend with the legacy of more than four decades of socialist rule. Since the early 1960s, Cuba's socialist government has actively worked to eliminate the market-oriented economic institutions that existed in republican Cuba and supplant them with institutions that support a centrally directed economy. As we discuss in Chapter 4, Cuba has excelled in adopting the institutions of socialism that are particularly prone to corruption, among them public ownership of the means of production, central planning and government control over most economic activities, absolute political control by the party, generalized privileges for the ruling class, and extremely limited government accountability as reflected in the lack of competitive elections, the limits on creation and operation of genuine civil society organizations, and the government control of media.
In this environment, the most basic anticorruption pillars have eroded. In most societies, moral and ethical guidelines traditionally act as deterrents against malfeasance. The residual effects of those moral and ethical deterrents are not likely to be significant in Cuba after nearly a half-century of socialist rule. The Cuban government's disregard for the rule of law regarding property rights began with its confiscation of privately owned assets in 1959 and the early 1960s.4 This was followed in the 1960s by wholesale expropriations of property owned by foreigners and Cuban citizens. Throughout the entire revolutionary period, from 1959 to the present, routine expropriation of personal property of all permanent emigrants has been the rule. This latter development alone, it could be argued, has given rise to social attitudes that condone—in Cuba's environment of scarcity—taking advantage of someone else's misfortune and assets for personal benefit.
Third, notwithstanding Fidel Castro's assertion that "the Revolution, through its sense of morality, through its sense of responsibility, immunized the basic cadres against corruption" (Castro 1993a), we argue that corruption is rampant in contemporary Cuba. Although measures of corruption—imperfect as they may be—in contemporary Cuba are not available, in Chapter 5 we present a range of corrupt activities for which some concrete evidence is available from the national and international media as well as from insiders' reports; these include misappropriation of state resources, misuse of office, and special perquisites extracted by the Cuban nomenklatura. Such administrative corruption pervades Cuban society mainly because of the nature of the economic system and the scarcity of goods and services it has created. As in other former socialist countries, when given the opportunity, few citizens hesitate to steal from the government. Since the bulk of productive resources are owned and managed by the state and the vast majority of Cubans work for state-owned enterprises, these petty crimes are widespread.
The opening of the economy in the 1990s to foreign investment and the dollarization process created new opportunities for corruption to thrive. To keep a lid on administrative corruption, the Cuban government has taken several steps such as promulgating new anticorruption laws and a code of ethics for government officials, creating a Ministry of Audit and Control, and tightening accounting practices. Despite these efforts, corruption in state-run companies, particularly those that operate with hard currencies in the tourism sector, seems to be out of control. Among the corrupt practices that are alleged to be common in the tourism industry are accepting commissions from foreign businessmen, nepotism, selling jobs, and misuse of official cars, expense accounts, and travel. So widespread is corruption in the tourism sector that in early 2004, First Vice President and Defense Minister Raúl Castro assumed oversight of the industry and appointed military personnel to key industry posts. Raúl Castro has been quoted as stating that the corruption-laden tourism industry, Cuba's main earner of export revenue, is like "a tree born twisted that must be uprooted and planted anew" ("Tourists" 2004). In the second half of 2004, the Cuban government tightened control over enterprises, limiting their ability to engage in foreign trade and to hold foreign exchange balances. In February 2005 it issued draconian rules governing workers in the tourism sector that severely curtailed contacts with foreign visitors and banned acceptance of gifts and tips ("Cuba limita" 2005).
Fourth, there is evidence that the basis has already been set for the eventual occurrence of grand corruption in the form of state capture. We discuss in Chapter 5 the very worrisome factor that state-owned commercial ventures (for example, the tourism corporation Gaviota operated by the Cuban military) and joint ventures with foreign investors that have sprung up in recent years provide a foundation for appropriation of public property by influential bureaucrats once a formal transition gets under way. These same bureaucrats could be parties to state capture, shaping the transitory legal and regulatory framework to favor special interests, consequently undermining Cuba's economic recovery, laying the groundwork for decades of social and political discord, burdening Cuba's court system, and poisoning the country's international commercial transactions.
Averting Corruption in the Cuban Transition
Corruption thrives where there are opportunities for under-the-table deals and where government officials are not accountable to the public for their actions. Corruption abhors transparency, openness, and accountability. As U.S. Supreme Court Justice Louis Brandeis aptly noted in 1914—in a critique of large banks that were colluding with businessmen to create trusts in major U.S. industries—transparency is the best antidote against illegal dealings and corruption. The same view is echoed in an editorial in early 2004 in Revista Vitral, one of the very few limited-circulation publications from the island free of government control: Transparency is the most effective weapon to fight corruption and to prevent corruption. Making public the business accounts and transactions of state enterprises, public agencies, and state government is the only way to shine a light on what is occurring within them" ("La corrupción" 2004).
Transparency International (TI), a nongovernmental organization at the forefront of the global fight against corruption, has proposed a model "National Integrity System" to encourage the development of transparency and accountability strategies needed by modern governments to promote the interest of the public rather than the interests of those in control (Pope 2000). Such a system is designed to promote transparency and accountability through the standard checks and balances of democratic societies and the operation of administrative and citizen-driven control mechanisms. The ultimate goal is to have all of the elements operate as part of a coherent whole. In a work published by TI, Jeremy Pope (2000, 37) gives an example of the need for such cohesion: "What is the benefit of a sound and 'clean' Judiciary ready to uphold the Rule of Law, if there is corruption in the police, investigators, prosecutors or the legal profession? The Judges would simply not receive the cases they should hear; they would then sit in splendid isolation—honest, capable, yet able to achieve little."
Cuba's Transition Strategy and Corruption
The central thesis of this book is that averting corruption in the Cuban transition and beyond is critical for sustained economic growth and democracy in the nation. A rich inventory of policy initiatives has been found to be effective in combating corruption in other national contexts and may be relevant to a Cuba in transition—relevant to a transition government as well as to the international development community that will play a key role in Cuba's economic recovery. We posit that during the early stages of the transition, the lessons drawn from the experiences of former socialist countries would be most germane to combating corruption in Cuba, while in the longer term, the most relevant lessons might be those from elsewhere in Latin America and in developed countries. The strategy to avert corruption consists of a set of measures designed to stem the most harmful types of corruption by relying on effective policy levers. The proposed strategy encompasses short-, medium-, and long-term interventions to minimize the incidence of corruption during and after the transition.
What we propose in this book is unique: in no transition instance was averting corruption addressed as a policy priority. While we recognize that combating corruption cannot be the central policy objective of a Cuban transition strategy, we are also cognizant of the potential for rampant corruption to undermine the transition process itself. If unchecked, corruption could retard Cuba's economic growth, negatively impact the flow of foreign investment, lead to the sale of national assets at lower than market values, have a profound regressive effect on income distribution, and increase the costs of providing social services and improving the country's physical infrastructure. Corruption could erode political support for the transitional and subsequent governments and prevent the consolidation of emerging democratic governance institutions, thus potentially contributing to political instability and alienating citizens from the political process. Finally, corruption could also serve as the gateway to international organized crime, including drug trafficking and money laundering, and—due to Cuba's proximity to the United States—make Cuba a transshipment point for undocumented migrants. Because of its cross-cutting nature, we believe that corruption must be addressed as a policy priority in the design and implementation of every aspect of a transition strategy.
The most obvious problem when discussing the elements of a transition strategy that a future government in Cuba might want to consider is the array of unknowns, both primary and secondary. Most evident is the unpredictable form the transition will take (rapid or gradual, peaceful or violent) and when it will occur, nor do we know who would lead it (almost certainly officials in positions of authority in the country today). Equally unpredictable is the extent to which the leaders of a transitional Cuba would condone—or even willingly participate in—corrupt behavior instead of pursuing an honest and transparent political agenda to set the stage for a peaceful and prosperous future.
In Chapter 6 we discuss the conditions likely to shape the early stages of the transition and some of the economic policy levers that could dampen corruption in Cuba over the short term. During the early transition, then, the focus should be on initiatives to prevent the illegal appropriation of the national patrimony by corrupt bureaucrats or phony homegrown "businesses" with or without associated foreign cohorts while limiting many forms of petty administrative corruption through gradually dismantling state controls over the economy. In Chapter 7 we address long-term policy initiatives, including those associated with institution building, that will be necessary if Cuba is to bring corruption under control. Over the long term, the incentives for administrative corruption should erode gradually as the role of the state in economic management is reduced. The key to controlling corruption lies with reforming the institutional setting that engenders corruption, rather than with sanctioning the corrupt (although it is necessary to do so as well). Klitgaard (1998, 6) has noted that solving the problem goes beyond putting a few corrupt officials in jail, creating one or two new government institutions, and passing a few laws: "combating corruption should focus on the reform of systems."
Hellman and Kaufmann (2001) posit that state capture is not only a symptom but also a fundamental cause of poor governance. The capture economy is trapped in a vicious circle in which the policy and institutional reforms necessary to improve governance are undermined by collusion between powerful firms and state officials who reap private gains from the continuation of weak governance. Influencing the legal, policy, and regulatory environment in which they operate constitutes a normal and indeed healthy process for firms and interest groups common to all countries. What is special in the capture economies is exclusion: some firms enjoy exclusive privileges to influence decisions of the state while others are systematically excluded, enabling state officials to make choices that concentrate benefits on those with access at a high cost to those who do not have such access. The prescription to break out of the vicious circle of state capture is to shape a virtuous cycle of competition, transparency, and accountability.
We cannot predict the future, but we are confident that Cuba will evolve toward a democracy with a market-oriented economy, probably with a significant role for the state in selected social sectors such as health and education. We can also predict with a high degree of confidence that unless forceful actions are taken, Cuba will confront an eruption of certain types of corruption as political and economic institutions are transformed. While it may never be possible to totally eradicate corruption in Cuba—or anywhere else, for that matter—the anticorruption toolbox is growing exponentially.
Transparency, accountability, vigilance, and preparing for the worst may be the best deterrents to prevent the scourge of corruption from derailing the long-awaited Cuban transition.