P O L I C Y R E S E A RC H W O R K I N G P A PE R 2444

“Seize the State, In a decade of transition,

fear of a leviathan state is

Seize the Day” giving way to increased

focus on oligarchs who

State Capture, Corruption, “capture the state.” In the

capture economy, the
and Influence in Transition policy and legal
environment is shaped to
Joel S. Hellman the captor firm’s huge
Geraint Jones advantage, at the expense
Daniel Kaufmann of the rest of the enterprise
sector. Improved property
rights protection and civil
liberties can significantly
reduce the capture
economy. The analysis and
findings have major
implications for policy.
The World Bank
World Bank Institute
Governance, Regulation, and Finance Division
and
Europe and Central Asia Region
Public Sector Group
and
European Bank of Reconstruction and Development
Office of the Chief Economist
September 2000
P OLICY R ESEARCH W ORKING P APER 2444

Summary findings
The main challenge of the transition has been to redefine how
the state interacts with firms, but little attention has been
paid to the flip side of the relationship: how firms influence
the state—especially how they exert influence on and collude
with public officials to extract advantages. Some firms in
transition economies have been able to shape the rules of the
game to their own advantage, at considerable social cost,
creating what Hellman, Jones, and Kaufmann call a “capture
economy” in many countries. In the capture economy, public
officials and politicians privately sell underprovided public
goods and a range of rent-generating advantages “a la carte”
to individual firms. In the capture economy the ‘captor’ firm
derives significant private benefits at an enormous social cost to
the overall enterprise sector—whose overall growth rate over a
three-year period is reduced by about ten percentage points.
The authors empirically investigate the dynamics of the
capture economy on the basis of new firm-level data from the
1999 Business Environment and Enterprise Performance
Survey (BEEPS), which permits the unbundling of corruption
into meaningful and measurable components.
They contrast state capture (firms shaping and affecting
formulation of the rules of the game through private payments
to public officials and politicians) with influence (doing the
same without recourse to payments) and with administrative
corruption (“petty” forms of bribery in connection with the
implementation of laws, rules, and regulations). They develop
economywide measures for these phenomena, which are then
subject to empirical measurement utilizing the BEEPS data.
State capture, influence, and administrative corruption are all
shown to have distinct causes and consequences. Large
incumbent firms with formal ties to the state tend to inherit
influence as a legacy of the past and tend to enjoy more secure
property and contractual rights and higher growth rates. To
compete against these influential incumbents, new entrants
turn to state capture as a strategic choice—not as a substitute
for innovation but to compensate for weaknesses in the legal
and regulatory framework. When the state underprovides the
public goods needed for entry and competition, “captor” firms
purchase directly from the state such private benefits as secure
property rights and removal of obstacles to improved
performance—but only in a capture economy.
Consistent with empirical findings in previous research on
petty corruption, administrative corruption—unlike both
capture and influence—is not associated with specific benefits
for the firm.
The focus of reform should be shifted toward channeling
firms’ strategies in the direction of more legitimate forms of
influence, involving economic competition, societal “voice,”
transparency reform, and political accountability. These
implications are consistent with the empirical findings in this
paper on the origins of state capture: improving civil liberties
from partial to fuller liberalization can reduce the extent of the
capture economy by 15–30 percentage points.

This paper—a product of the Governance, Regulation, and Finance Division, World Bank Institute; the Public Sector Group, Europe and
Central Asia Region; and the Office of the Chief Economist, European Bank of Reconstruction and Development—is part of an empirical
project on governance in transition. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433.
Please contact Diane Billups, room J3-131, telephone 202-473-5818, fax 202-334-8350, email address governancewbi@worldbank.org.
For an electronic version of this paper and related research papers and governance data, visit http://www.worldbank.org/wbi/governance/.
Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/research/workingpapers. The authors may be
contacted at jhellman@worldbank.org or dkaufmann@worldbank.org. September 2000. (44 pages)

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective
of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited
accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view
of the World Bank, its Executive Directors, or the countries they represent.

Produced by the Policy Research Dissemination Center

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