Perils of development funding? The tale of EU Funds and grand corruption in Central and Eastern Europe

Abstract

Given the unprecedented scale of intergovernmental development funding and the importance of institutional quality for human well-being, it is imperative to precisely understand the impact of development funds on corruption. In Europe, European Union (EU) Funds provide a boost to public spending in recipient member states while introducing additional corruption controls. We investigate whether EU Funds increase high-level corruption in the Czech Republic and Hungary in 2009-2012. We analyze newly collected data from over 100,000 public procurement contracts to develop objective corruption risk indicators and link them to agency level data in the public sector. Propensity score matching estimations suggest that EU funds increase corruption risk by up to 34 percent. The negative effects are largely attributable to overly formalistic compliance and EU Funds overriding domestic accountability mechanisms in public organizations entirely dependent on external funds. The policy implications are profound: governments should reduce barriers to market entry by lowering red tape and prevent excessive concentration of funds.

When does open government shut? Predicting government responses to citizen information requests

“…To this end, it appears that requests investigating specific forms of corruption and inefficiency receive lower responsiveness. This finding complements recent research into analytical frameworks for, and empirical assessments of, government corruption in public procurement elsewhere across the globe (Fazekas and King, 2018). However, we also find some evidence of unusually high responsiveness related to local corruption in the education sector, suggesting a role of ATI systems for fire-alarm monitoring of local problems by the political center.…”

Grand corruption and government change: an analysis of partisan favoritism in public procurement

“…The 'surprise winner' companies often have personal connections to the political elites, and some of them are entirely new companies with no prior relevant experience, yet quickly capture major shares of public procurement markets. In Hungary, favoritism appears to be the rule of the game, unconstrained by the extensive EU legislative framework, which is insufficiently equipped to control policy implementation and monitoring (Fazekas and King 2018).…”

“…Theories of corruption control explain this in terms of the balance of opportunities and constraints in a country (Klitgaard 1991;Mungiu-Pippidi 2013. The opportunities depend on factors such as how many resources the state has at its disposal, with natural resources and development aid boosting the opportunities considerably (Fazekas and King 2018;Tavares 2003). The constraints relate partly to international commitments but very largely to domestic institutionsspecifically, the extent to which a country's 'accountability ecosystem' comprises capable and autonomous institutions, including civil society organizations, able to scrutinize the exercise of power and hold misconduct to account (Bauhr and Grimes 2014;Lindstedt and Naurin 2010;Mungiu-Pippidi and Dadašov 2017).…”

Bad governance: How privatization increases corruption in the developing world

“…In addition, government transparency – capturing the extent to which countries report data to the World Bank – promises to be a relatively bias‐free indicator as it is based on observational data. While perception‐based indicators have recently been criticized (Donchev & Ujhelyi ; Stubbs et al ), scholars have attempted to directly measure corruption, for example, by examining irregularities in public procurement (Olken & Pande ; Fazekas & Kocsis ; Fazekas & King ). We cannot use procurement‐based measures here because the relevant data are not available for a wide range of countries.…”

“…Our article also relates to studies on corruption in particular geographical regions, including Central and Eastern Europe (Falkner & Treib ; Dimitrova ; Batory ; Fazekas & King ), as well as Latin America (Manzetti & Blake ; Martimort & Straub ; Martinez‐Gallardo & Murillo ). Notwithstanding distinct regional variation in patterns of corruption control, our results suggest a universal mechanism by which IFI‐mandated privatization shocks let individuals reconsider the benefits and costs of corruption and their preferences for weak institutions.…”