How Privatizations Affect the Level of Perceived Corruption

Abstract

State economic enterprises' decisions are very open to manipulations by bureaucrats and politicians, making the public sector a potential breeding ground for corrupt activities of both monetary and non-monetary forms. Consequently, privatizations would be expected to have a remedial role. Getting rid of the state's productive assets, however, might not reduce corruption if it fails to sever the official—firm connection. The process of privatization, moreover, is notorious for causing corruption. It is up to observation to determine the exact effect of privatizations on corruption. This article attempts to make the first formal, empirical assessment of this relationship, using data made available by the wave of privatizations in the nineties. Results suggest that higher privatization leads to an increase in corruption.