Circuits of Profit: Business Network Research Conference 28 th January Center for Network Science, CEU, Budapest Zoltán Szántó – István János Tóth – Tünde

http://www.crc.uni-corvinus.hu

Circuits of Profit: Business Network Research Conference

28th January

Center for Network Science, CEU, Budapest

Zoltán Szántó – István János Tóth – Tünde Cserpes – Szabolcs VargaLocal Government Corruption

in Hungary


Topics

Introduction – Our earlier research on business corruption in Hungary

Main results of the earlier and present research projects on local government corruption

Idealtypes of local level corruption transactions and its main characteristic features

Network configurations and typical cases of local government corruption in Hungary

Conclusion – challange and response

Topics Introduction Earlier results Idealtypes Networks Conclusions


Introduction – Our earlier research on business corruption in Hungary



Corruption Research Center of the Institute of Sociology and Social Policy at Corvinus University of Budapest (2008)(Founders: György Lengyel, István János Tóth, Zoltán Szántó)http://www.crc.uni-corvinus.hu/

Financial supporters:

2008: Transparency International Magyarország;http://www.transparency.hu/

2008-09: TEXTREND [NKFP_07_A2-TEXTREND, OM-0002/2008] http://www.textrend.hu/

2009-10: Energia Klub; http://www.energiaklub.hu/en/ 2010- : Gazdasági- és Versenyhivatal (GVH);

http://www.gvh.hu/gvh/alpha

Topics Introduction Earlier results Idealtypes Networks ConclusionsIntroduction –Our earlier research on business corruption in Hungary


Introduction –Our earlier research on business corruption in Hungary

Conceptual and theoretical framework of corruption research Misuse of public power for private benefit (J.G.Lambsdorff) Principals, agents, and clients

The joint use of quantitative (media content analysis) and qualitative (concept analysis, in-depth interviews) methods

Recent publications Government failures, rent-seeking and corruption risks in the Hungarian

electric energy sector. Research report by the CRC, 2010



Suspected corruption cases in the Hungarian media. Content analysis of on-line newspapers. Research report by the CRC, 2009 8 internet news portals and online versions of newspapers between

1st January 2001 and 31st December 2007 Keywords: “korrupt” (corrupt), “korrupció” (corruption), “csúszópénz” (slush fund),

“kenőpénz” (palm-greasing), “vesztegetés” (bribe), “pénzmosás” (money laundering) Total of 3469 articles/news on 444 (suspected) corruption cases

Background research studies to the Corruption Risks in the Business Sector (National Integrity System Country Study – Part Two) Transparency International, 2008 (http://www.transparency.hu/part_two)

Business corruption in Hungary: From various angles – Research summary, In: Szántó Zoltán – Tóth István János (szerk): Korrupciós kockázatok az üzleti szektorban – kutatási háttértanulmányok Review of the Hungarian research literature on corruption Interviews with business leaders (qualitative analysis) Media content analysis (2006-2007: 737 articles/news, 176 corruption cases)

Topics Introduction Earlier results Idealtypes Networks ConclusionsIntroduction –Our earlier research on business corruption in Hungary


Main results of the earlier and present research projects onlocal government corruption



Conceptual framework and definition of corruption

“Misuse of public power for private benefit”(J.G. Lambsdorff: The Institutional Economics of Corruption and Reform.

CUP, 2007: 16-20)Private benefit: receiving money or valuable assets, increases

in power or status, favors for relatives and friends etc.Public power is exercised by bureaucrats (appointed to their

office) and by politicians (elected to their position), in a variety of sectors.

Misuse: a behavior that deviates from the formal duties of a public role

Narrow meaning of corruption: “special exchange”1. Corrupter (or briber), 2. Corrupted (or bribee ), 3. Corruption

fee (or bribe), and 4. Corruption gain (or bribery service)

Principal-agent-client model



Local level corruptionAct LXV of 1990 on Local Governments

More than 3400 local governments Economic management is supervised by the State Audit Office

(Section 92. Paragraph 1.) In practice: slackness in supervision New local elite without former experience Intense need for a more effective monitoring system

Interview analysis (30 structured in-depth interviews)

A full sample survey of online reports and articles of eight dailies and weeklies on corruption topics between 2001 and 2007 Media coverage of stories about local corruption is rather weak High importance of personal networks makes corrupt transactions

more stable and symbiotic



Local government corruption: lessons from the interviews

Concept of corruptionethics based-approach, wide definition

Trendsunquestionably on the rise over the past 5-10 years emergence of new mechanisms

Penetration of political influence?“… previously it [corruption in personnel selection] reached down only to the level of under-secretaries, but now it controls all positions down to deputy department heads.”

Size and scopemore than half of our interviewees mentioned local level

corruption as the most typicalbusiness and government sector cannot easily be

separated, often intertwined



Local government corruption: causes and consequences

Causes of the widespread local level corruption“fully organized, non-party system based on the common complicity of local government officials”

Consequences of corruption


Source: Corruption Research Center, Corvinus University of Budapest


Local government corruption: lessons from the interviews

Personal experiences of our intervieweesCome from different areas and take multifarious forms

Main types of local government corruption

Promoters of countering corruptionGovernment and politicians may be seen as primary

promotersPossibly a bottom-up strategy (small institutions and

local government as initiators)Business leaders can have important role



Topics Introduction Earlier results Idealtypes Networks ConclusionsLessons from media analysis: characteristics of the corruption situations and transactions

Suspected corruption cases by the institutions involved, 2001-2007,(multiple response, %, N = 444)

34,5

3,8

18,7

32,2

5,2

11,0

7,0 6,5

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

Police Courts Localgovernments

Ministries/national

authorities

Tax office Customs andfinancial guard

Localinstitutions

Otherinstitutions

Source: BCE Corruption Research Center, 2009

• more than half of the cases the corrupted was the employee of national authorities or local governments

• more than third of the cases can be related to organisations that have been given the mandate to fight corruption


Topics Introduction Earlier results Idealtypes Networks ConclusionsLessons from media analysis: characteristics of the corruption situations and transactions

Suspected corruption cases by the procedures involved, 2001-2007 (%, N = 444)

19,3

1,4

15,2

20,0

44,0

0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 45,0 50,0

Other

State subventions

Licences, permits

Public, procurements

Inspections


• most of the cases are connected to inspections

• the share of cases related to licence and permit granting and public procurement is high



Lessons from media analysis: emergence of a corruption network system?

Share of multiplayer corruption cases, 2001-2007 (%, N=444)

25,028,8

51,6

23,6

55,0

36,6

60,0

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

2001 2002 2003 2004 2005 2006 2007



Main results of the earlier research projects – summaryCorruption is widespread and increasing in Hungary

Earlier research results only show perception and judgement but not actual mechanisms and motivations

Corruption has been developed to a systemic – regular, predictable, quasi-institutionalised – transaction

The ratio of multi-player, chain-like, networked corruption is increasing year by year



Idealtypes of local level corruption transactions and its main

characteristic features



Idealtypes of corruption: basic model Principal-agent-client triad (Lambsdorff 2007: 18-19)

The agent is entrusted with power by her/his superior (the principal): The principal delegates a task to the agent,sets up the formal rules as to how this task is to be fulfilled, andpays salary to the agent

The agent is supposed to serve the client in accordance to these rules

Different forms of corrupt behavior: the agent defects some ways from her/his rule bound behavior – the principal’s rules are trespassed and his/her interests are hurt



Idealtypes of corruption: basic model


Principal

Agent Client


Idealtypes of corruption: Bribery

The client acts as a briber, and makes a payment (bribes) to the agent (the bribee)

In return the client obtains an advantage (such as a service or a license) (s)he is not entitled to obtain (for example a tax rebate or a public contract)



Idealtypes of corruption: Bribery


Principal

Bribee Briber

Bribe:Advantage:


Idealtypes of corruption: Extortion

The agent (as an extorter) uses her/his power to extract money (or other benefit) from the client (the extortee)

The client (the extortee) may have to pay for a service, although (s)he is legally entitled to obtain it without such payment

The agent (the extortee) uses coercion, violence, or threats to obtain this payment



Idealtypes of corruption: Extortion


Principal

Extorter Extortee

Money:Extortion:


Idealtypes of corruption: Embezzlement

Theft of public resources by the agent (the embezzler)

The disloyal agent (the embezzler) steals from the principal (the embezzlee)



Idealtypes of corruption: Embezzlement


Embezzlee

Embezzler

Resources:Disloyalty:

Client


Idealtypes of corruption: FraudInformation asymmetry: the agent is commonly better

informed about details of her/his daily tasks and her/his efforts devoted to their fulfillment

The agent can benefit from informational advantages (hidden information, hidden action, moral hazard)

The agent can also actively conceal information from the principal (swindle, trickery, manipulation of information, facts etc.) - fraud



Idealtypes of corruption: Fraud


Principal

Agent Client

Resources:Manipulation:


1. Public procurementRecurrent complaints: the decision is made before the actual end of the tender

2. Licenses, permitsHigh risk of bribe money because oflack of supervision andinstable, non-transparent procedures

3. Assignments and buying servicesBuying services at an ”improved” price (higher than market price)An effective way to siphon money out of the budget system if the local government buys services at this way

4. Buying and selling local government propertyLocal government sells own property at lower price than market price and then the agent gets bribe from the buyers and / orLocal government tries to buy property at an „improved” price and the agent tries to get more money out of this transaction


Main characteristic features of local level corruption


Network configurations and typical cases of local government

corruption in Hungary



Interpersonal and institutional embeddedness of corruption – some typical local governmentalcorruption cases in Hungary


Relations:Personal relationship: actor actorBusiness relations: actor actorOwnership relation: owner ownedBribe: agent clientAdvantage: agent clientFalse service: „seller” „buyer”False price „seller” „buyer”

Actors

P1: (real) principal

P2: (hidden) principalA: agentC: client

B1, B2 : brokers


1.1. Simple model, two actors, resource conversion


P1

A C

1. case:

the „Hunvald’s model” - real estate selling of local government (Budapest, VII. district)

Personal: Business:Ownership:Bribe:Advantage:

false price ( < market price)


1.2. Simple model, two actors, two principals, resource conversion (political party financing)


P1

A C

[P2]

2. case:

„Hidden princial moldel”

political party financing with resource conversion – buying a real estate by local government

(Békés county)


false price ( > market price)


2.1. Three actors, one broker with A, resource conversion

3. case:

„Sophisticated model”

public procurement with resource conversion – reconstruction of city roads by the capital city’s government


P1

A C

B1


false price ( > market price)


2.2. Three actors, one broker with A, ownership and business relations


P1

A C

B1


4. case:

„Feasibility study modell”

Reconstuction of a building – feasibility study - bribery of local government offical: „countryside case”

payoff

False service

enterprise


Conclusions –challenge and response



Conclusions: The evolution of corruption networks – corruption as an institutionalized process?

The evolution of corruption networks in terms ofthe number of actorsthe complexity of network configurationsthe level of interpersonal and institutional factorsthe multiplicity of relationships

Corruption as an institutionalized process in terms ofstabilitymixing the reciprocity, redistribution and market forms of

economic integration



Conclusion: A response to the evolution of corruption networks – anti-corruption strategies and research research focus:

revealing and classifying the mechanisms of corruption; explanatory approach is also preferred with an application of a mix of

qualitative and quantitative methods;

successful anti-corruption policies identify the typical corruption situations and intervene targeted to these

situations;

initiatives and implementation should come from the political sphere;

strong NGOs and the independent mediamay impose the necessary pressure on politics and may become the most important catalysts of efforts to counter corruption;

developing an anti-corruption strategy is urgent, because it is much harder to fight highly institutionalised corruption when it has become embedded



Thank you for your attention!

http://www.crc.uni-corvinus.hu/

Documents

Circuits of Profit: Business Network Research Conference 28 th January Center for Network Science, CEU, Budapest Zoltán Szántó – István János Tóth – Tünde