Property rights, liberty, and corruption in Serbia.

• Author: Milovanovic, Milic

The privatization process in Serbia, which began in the early 1990s, may be characterized as a dismal failure so far. It was originally expected to be completed by the end of 2005; however, at the end of that year an amendment to the privatization law made the process open ended. The amendment reflected the reality that less than half of state assets had been privatized. In fact, only small-scale industrial plants and a few big firms had acquired new private owners. Almost all the leading plants, facilities that once were the pride of the Communist regime and now only generate losses, have remained in government hands. Moreover, all state enterprises that had been formed by special laws (natural monopolies and local utilities), which were also slated for privatization according to the original privatization law, have remained in the government's portfolio. In addition, the government has changed the Share Fund law in accordance with its declared interest in influencing the decisions of all companies that have minority state ownership (almost all privatized companies). This action indicates clearly that the government does not intend to loosen its grip on the economy.

Various surveys rank Serbia among the most corrupt states in Europe. According to the 2006 Transparency International Corruption Perception Index (CPI), Serbia shares ninetieth position worldwide, with only five European countries ranked as more corrupt--Albania, Belarus, Macedonia, Russia, and Ukraine. (1) The Heritage Foundation (2006) has not ranked Serbia in its latest survey of economic freedom around the world, although it paints the situation in colors as dark as those used at Transparency International: "Belgrade's underground power structure remains in the grip of war criminals, corrupt security chiefs, and ultranationalist politicians." (2) The Freedom House country report repeats almost the same wording, stating that "corruption remains deeply entrenched [in Serbia] at all levels" (2006, 16). The latest World Bank survey found corruption in Serbia to be on the rise between 2002 and 2005 (Anderson and Gray 2006, 54-58), especially in the government's procurement and among the judiciary (the second-highest increase among transition countries, exceeded only by Albania).

The link between the two important features of postcommunism--privatization and corruption--is by no means accidental. Several studies have explored the likely connection between the privatization scheme and the extent of corruption. Kaufmann and Siegelbaum found that spontaneous privatization and management-worker buyouts are the methods with the greatest potential for corruption, whereas privatizations by vouchers or by sale fare better (1997, 434). Under forceful World Bank pressure, Serbia accepted the sale privatization model in 2001, yet corruption there is greater than in countries that adopted some of the supposedly more corruption-boosting strategies. For example, Slovenia, another spin-off from Yugoslavia, relied on a worker-buyout scheme, but by all accounts it is the least corrupt country in the region. (3)

In this article, I argue that government-induced definition of ownership rights must lead to inefficiency, waste, and insecure property rights, which is a recipe for high overall corruption and the erosion of efforts to liberalize society. First, I deal with the mainstream (neoclassical) approach to transition efforts in central and eastern Europe (CEE), which fosters the governmental role in shaping the economic system; second, I briefly explain the privatization process and recent institutional changes in Serbia; third, I explore the causes of the current extensive corruption in Serbia; fourth, I try to establish common features of government assignment of property rights in two dissimilar political, economic, and cultural environments; and finally, I present some tentative conclusions.

The Two-Tier Neoclassical Consensus and the Role of Culture

At the beginning of the transition process in CEE, economists affiliated with international financial organizations in Washington reached a consensus on the reform agenda for the region. The so-called Washington consensus was achieved along neoclassical lines, with only a few dissenting voices being heard, and emphasized the following commandments: fiscal discipline; reorientation of government expenditures; tax reform; interest-rate liberalization; unified and competitive exchange rates; trade liberalization; openness to foreign direct investment (FDI); and, most of all, policies of privatization, deregulation, and securing private-property rights (Rodrik 2004). The CEE countries were expected to implement these policies simultaneously and thoroughly by means of decisive top-down actions.

Because the policies did not work in many cases, a second generation of reform suggestions emerged, and the augmented Washington consensus was reached. In addition to the meeting the objectives of the first consensus, the governments in transition countries were also to effect improvements in ten more areas: corporate governance, anticorruption, flexible labor markets, adherence to the World Trade Organization principles, adherence to international financial codes and standards, capital-account opening, exchange-rate regimes, independent central banks, social safety nets, and targeted poverty reduction. A combination of sticks and carrots served as incentive for the achievement of these goals (Rodrik 2004).

When one examines these objectives, which had to be implemented indiscriminately although they were in effect a bundle of institutions that had emerged under the common-law tradition and welfare-state policies, one's first impression is that creators of the list approached the problem in a technical manner. It was an expression of neoclassical economists' belief in the mechanical nature of an economic system. If something goes wrong with it, simply replace the malfunctioning part, and everything will then run smoothly. Such an approach not only is naive, but also can be damaging if implemented zealously, disregarding local conditions.

In devising reform policies, the neoclassical economists and the international organizations that accepted their analysis overlooked at least two substantial objections: the rich countries were not always the same as they are now, and all attempts to transfer institutions without country-specific tailoring with reference to informal constraints have failed historically (North [1990] 1993, 36-45). For example, Iraq once had a constitution modeled on Belgium's, and several Latin American countries modeled their constitutions closely on the U.S. Constitution, but with radically different political and economic consequences (North 1988, 7).

Moreover, the rich countries cannot be treated as a single entity. Some are more successful in curbing one form of corruption, but less successful in curbing other forms, and some countries lag behind in curing all forms of the disease. According to certain evaluations, the United States, the chief advocate of clean business relations worldwide, successfully controls only petty (bureaucratic) corruption, but allows substantial grand (political) corruption (Bardhan 2005, 342). Sometimes a single nation has different degrees of corruption in different regions, as present-day Italy does (Del Monte and Papagni 2001, 8). Therefore, if the rich Western countries were unbundled, many differences would become visible, concerning not only the effectiveness of anticorruption policies, but also the form, position, and scope of different institutions in their economic systems.

By treating the economic system as simply a black box that needs certain inputs in order to achieve particular outcomes, the neoclassical economists involved in formulating the consensus were plainly mistaken, and therefore their policy recommendations could not prove successful. Several CEE countries encountered serious obstacles in trying to implement the proffered advice: the Russian debt crisis in 1998; corporate-governance problems in the Czech Republic; the stop-and-go of Polish privatization; and current-account deficits in Romania and Hungary.

At the same time, off-mainstream economists were arguing that history and culture matter. Formal institutions are created and enforced by political means, and politics is strongly affected by cultural values. An application of this approach to CEE countries is straightforward: one is tempted to state that by going east and southeast in CEE, one finds a diminishingly favorable attitude toward capitalist values, along with a rising degree of corruption, owing to differing political attitudes based on culture and essentially on religious affiliations, regardless of these countries' closely related or even common historical background (Pejovich 2006, 239).

Accepting such an explanation, one must become pessimistic about a short-run improvement in CEE countries. Historically embedded traits are tenacious; cultural norms and values change slowly. Nevertheless, substantial evidence shows that policy changes can exert a strong influence on the structure of incentives and thereby bring about dramatic changes in the economic system. For example, if endemic corruption in China is a product of history and cultural values, we might expect it to have remained pervasive among the Chinese living in Hong Kong and Singapore. However, in these two places, corruption was practically eradicated in a decade or so, with a clear policy design in which changes in public servants' salaries played an important role (Wei 2001, 109).

Relying exclusively on the Transparency International CPI, one will certainly be inclined to accept the thesis that the proclivity toward corruption becomes higher the farther to the east one goes in CEE. However, countries that share history, religion, and cultural values sometimes differ in their attitudes toward corruption.

A striking...