Circuits of Profit: Business Network Research Conference 28 th January

1. Zoltán Szántó – István János Tóth – Tünde Cserpes – Szabolcs VargaLocal Government Corruptionin Hungary Circuits of Profit: Business Network Research Conference 28th January Center for Network Science, CEU, Budapest

2. Topics Introduction  Earlier results  Idealtypes  Networks  Conclusions 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 http://www.crc.uni-corvinus.hu

3. Topics  Introduction Earlier results  Idealtypes  Networks  Conclusions Introduction – Our earlier research on business corruption in Hungary http://www.crc.uni-corvinus.hu

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

5. Topics  Introduction Earlier results  Idealtypes  Networks  Conclusions 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 http://www.crc.uni-corvinus.hu

6. Topics  Introduction Earlier results  Idealtypes  Networks  Conclusions Introduction –Our earlier research on business corruption in Hungary • 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 between1st 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) http://www.crc.uni-corvinus.hu

7. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions Main results of the earlier and present research projects onlocal government corruption http://www.crc.uni-corvinus.hu

8. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions 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 http://www.crc.uni-corvinus.hu

9. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions Local level corruption • Act 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 http://www.crc.uni-corvinus.hu

10. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions Local government corruption: lessons from the interviews • Concept of corruption • ethics based-approach, wide definition • Trends • unquestionably on the rise over the past 5-10 years • emergenceof 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 scope • more than half of our interviewees mentioned local level corruption as the most typical • business and government sector cannot easily be separated, often intertwined http://www.crc.uni-corvinus.hu

11. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions 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 http://www.crc.uni-corvinus.hu

12. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions Local government corruption: lessons from the interviews • Personal experiences of our interviewees • Come from different areas and take multifarious forms • Main types of local government corruption • Promoters of countering corruption • Government and politicians may be seen as primary promoters • Possibly a bottom-up strategy (small institutions and local government as initiators) • Business leaders can have important role http://www.crc.uni-corvinus.hu

13. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions Suspected corruption cases by the institutions involved, 2001-2007, (multiple response, %, N = 444) 40,0 34,5 35,0 32,2 30,0 25,0 18,7 20,0 15,0 11,0 10,0 7,0 6,5 5,2 3,8 5,0 0,0 Police Courts Local Ministries Tax office Customs and Local Other governments /national financial guard institutions institutions authorities Source: BCE Corruption Research Center, 2009 Lessons from media analysis: characteristics of the corruption situations and transactions • more than half of the cases the corrupted was the employeeof 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 http://www.crc.uni-corvinus.hu

14. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions Suspected corruption cases by the procedures involved, 2001-2007 (%, N = 444) Inspections 44,0 Public, procurements 20,0 Licences, permits 15,2 State subventions 1,4 Other 19,3 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 45,0 50,0 Source: BCE Corruption Research Center, 2009 Lessons from media analysis: characteristics of the corruption situations and transactions • most of the cases are connected to inspections • the share of cases related to licence and permit granting and public procurement is high http://www.crc.uni-corvinus.hu

15. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions Share of multiplayer corruption cases, 2001-2007 (%, N=444) 70,0 60,0 60,0 55,0 51,6 50,0 40,0 36,6 28,8 30,0 25,0 23,6 20,0 10,0 0,0 2001 2002 2003 2004 2005 2006 2007 Source: BCE Corruption Research Center, 2009 Lessons from media analysis: emergence of a corruption network system? http://www.crc.uni-corvinus.hu

16. Topics  Introduction Earlier results Idealtypes  Networks  Conclusions Main results of the earlier research projects –summary • Corruption 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 http://www.crc.uni-corvinus.hu

17. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Idealtypes of local level corruption transactions and its maincharacteristic features http://www.crc.uni-corvinus.hu

18. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions 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, and pays 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 http://www.crc.uni-corvinus.hu

19. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Idealtypes of corruption: basic model Principal Agent Client http://www.crc.uni-corvinus.hu

20. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions 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) http://www.crc.uni-corvinus.hu

21. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Idealtypes of corruption: Bribery Principal Bribee Briber http://www.crc.uni-corvinus.hu

22. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions 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 http://www.crc.uni-corvinus.hu

23. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Idealtypes of corruption: Extortion Principal Extorter Extortee http://www.crc.uni-corvinus.hu

24. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Idealtypes of corruption: Embezzlement • Theft of public resources by the agent (the embezzler) • The disloyal agent (the embezzler) steals from the principal (the embezzlee) http://www.crc.uni-corvinus.hu

25. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Idealtypes of corruption: Embezzlement Embezzlee Embezzler Client http://www.crc.uni-corvinus.hu

26. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Idealtypes of corruption: Fraud • Information 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 http://www.crc.uni-corvinus.hu

27. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Idealtypes of corruption: Fraud Principal Agent Client http://www.crc.uni-corvinus.hu

28. Topics  Introduction  Earlier results Idealtypes Networks  Conclusions Main characteristic features of local level corruption • Public procurement Recurrent complaints: the decision is made before the actual end of the tender • Licenses, permits High risk of bribe money because of lack of supervisionand instable,non-transparent procedures • Assignments and buying services Buying 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 • Buying and selling local government property Local government sells own property at lower price than market price and then the agent gets bribe from the buyers and / or Local government tries to buy property at an „improved” price and the agent tries to get more money out of this transaction http://www.crc.uni-corvinus.hu

29. Topics  Introduction  Earlier results  Idealtypes Networks Conclusions Network configurations and typical cases of local governmentcorruption in Hungary http://www.crc.uni-corvinus.hu

30. Topics  Introduction  Earlier results  Idealtypes Networks Conclusions Interpersonal and institutional embeddedness of corruption – some typical local governmentalcorruption cases in Hungary • Relations: Personal relationship: actor actor Business relations: actor actor Ownership relation: owner owned Bribe:agentclient Advantage: agentclient False service: „seller” „buyer” False price „seller” „buyer” • Actors P1: (real) principal P2: (hidden) principal A: agent C: client B1, B2 : brokers http://www.crc.uni-corvinus.hu

31. Topics  Introduction  Earlier results  Idealtypes Networks Conclusions 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) false price ( < market price) http://www.crc.uni-corvinus.hu

32. Topics  Introduction  Earlier results  Idealtypes Networks Conclusions 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) http://www.crc.uni-corvinus.hu

33. Topics  Introduction  Earlier results  Idealtypes Networks Conclusions 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) http://www.crc.uni-corvinus.hu

34. Topics  Introduction  Earlier results  Idealtypes Networks Conclusions 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 http://www.crc.uni-corvinus.hu

35. Topics  Introduction  Earlier results  Idealtypes  Networks Conclusions Conclusions –challenge and response http://www.crc.uni-corvinus.hu

36. Topics  Introduction  Earlier results  Idealtypes  Networks Conclusions Conclusions: The evolution of corruption networks – corruption as an institutionalized process? • The evolution of corruption networks in terms of • the number of actors • the complexity of network configurations • the level of interpersonal and institutional factors • the multiplicity of relationships • Corruption as an institutionalized process in terms of • stability • mixing the reciprocity, redistribution and market forms of economic integration http://www.crc.uni-corvinus.hu

37. Topics  Introduction  Earlier results  Idealtypes  Networks Conclusions 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 mixof 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 media may 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, becauseit is much harder to fight highly institutionalised corruption when it has become embedded http://www.crc.uni-corvinus.hu

38. Thank you for your attention!http://www.crc.uni-corvinus.hu/ http://www.crc.uni-corvinus.hu