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Corruption in Russia: a game-theoretic approach

BY ALEXANDER KHODOV AND GEORGE ISTIGECHEV

Corruption has been defined as “a deviation or perversion from some ideal state or natural condition” (Lancaster and Montinola, cited in Bull and Newell, 1997). However, in countries with endemic corruption it is viewed as a natural condition on its own. As Persson and Rothstein put it, “in certain countries, corruption is not the exception to the rule, but the rule…” (2013: 449). Corruption in such states acts as a focal point which coordinates the decision-making of agents in the society. Such is the case in Russia – a country with vast economic resources, yet very weak government institutions. This article intends to show how our understanding of corruption in Russia can be improved using game theory.

 

Corruption game

First, we assume there are two rational players: a businessman and a government official, who have two strategies – being corrupt or honest. The next assumption – that a payoff for a government official in a corrupt society is higher than that of a businessman, while in a corruption-free society the reverse is true – requires some justification. In a corruption-free society, successful businessmen and entrepreneurs are able to earn profits that are often larger than the income of high-ranking state officials. On the other hand, in a corrupt society the payoff received by government officials rises with the level of corruption present, a cost that is then directly incurred by businessmen adhering to a number of institutional norms present in corrupt societies, such as the practice of bribery.

One may argue that certain institutions present in corrupt societies (such as the practice of paying bribes) can in fact increase the speed of transactions or allow businesses to win competition for desirable tender contracts, thereby increasing the payoffs for businesses. However, in a corruption-free society, the same business could have won the tender contract in a competitive manner without the use of a bribe. Moreover, it is the bureaucrats who often benefit from a government apparatus that is poor at coordinating competition: a ‘speed up’ after paying a bribe in processing documentation often barely balances out the slow processing related to the ineffectiveness of government services (Levin M., 2007: 8).

The normal form of the ‘corruption game’ resembles the ‘game of the sexes’.

Public Official

Business

Honest Corrupt
Honest 3, 1 0,-2
Corrupt -2,0 1, 3

There are two Nash Equilibria (Honest; Honest) and (Corrupt; Corrupt) and the players’ preferences between two NE outcomes are in straight conflict (Dixit A., 2004: 109). The expectation of other agents’ behaviour plays a key role in this situation. To coordinate their decisions players need a focal point – a convergence of expectations. Whether players can find a focal point depends on the existence of some commonly known point of reference – historic, cultural and so on (ibid., 106).

Russia’s Focal Point

 

Corruption in the Russian civil service spans back centuries – for example, the term ‘feeding’ was used in the late Middle Ages to describe a method by which Russian rulers allowed the “…government elite to temporarily exploit regional constituencies for private needs” (Ledeneva, 2013 :1140). According to Russian historian V. Kluchevsky, ‘feeding’ was meant to be a reward to the disinterested public servants who did good for their country, but in practice it made Russian officials accustomed to a tribute for their services (1998: 316). As such, ‘feeding’ became entrenched as the unwritten rule of governance, outliving the ban instituted by Ivan IV (‘The Terrible’) in 1555.

“In certain countries, corruption is not the exception to the rule, but the rule”

During the time of the fully nationalised Soviet economy the phenomenon expanded its reach, forming a system underpinned by the logic of feeding. The practice of giving an opportunity to feed expanded from the individual relationship between the government elite and the regional constituencies, becoming the norm for every level of the state bureaucracy. This Soviet version of ‘feeding’ continues to persist in modern Russia – the personalised system of allocation, the culture of privileges, and the redistribution principles witnessed in the USSR have become most pronounced in Putin’s Russia in the form of kickbacks and ‘sistema raiding’ (acts of depriving business owners of their business using threats of state persecution) (Ledeneva A., 2013: 1140). Moreover, under Putin’s rule, the number of officials in the bureaucratic apparatus at the federal level has doubled from 521000 to 1.4 million, while at the regional level the number of officials has grown from 1.2 million to 2.2 million (Arkhipov and Pismennaya, 2015). As a result of these developments, the NE (Corrupt; Corrupt) has strengthened as the ‘focal point’ in Russian society.

Previous state leaders had relied on the use of sensitive information (kompromat) as a tool to combat corruption Ledeneva A., 2013: 1137). President Putin has admitted that “corruption resides not in people, but in the system” – kompromat is thus ineffective, as one must target the entire mechanism from top to bottom (ibid.). Interestingly, Putin did also note that this “can only be done against the background of economic growth and political stability” (ibid.).

 

Fifteen years into Vladimir Putin’s rule, anti-corruption campaigns have had little success – according to the ‘Global Corruption Barometer’ survey, 77% of the population continues to perceive the state as ineffective in fighting corruption (Transparency International, 2013). Given the lack of progress the state has made, one may argue that there is a strong case for the government elite to revise their anti-corruption strategies and methods. Endemic corruption continues to affect all aspects of the economy: corruption-related costs in the private sector, as well as corrupt practices within the largely inefficient state sector have hampered economic growth. According to a 2015 EY report, corruption is also cited as one of the main factors negatively influencing the investment climate – “foreign investors believe that the high level of corruption requires serious attention” (EY, 2015: 8).

“Fifteen years into Vladimir Putin’s rule, anti-corruption campaigns have had little success.”

 

The “Big Bang” as a potential solution.

 

As the game theory framework tells us, the selective, individual purges of corrupt officials – the state’s favoured ‘anti-corruption’ tool – are of little help in fighting corruption. The importance of coordination and ‘focal points’ indicates that a more productive approach may be one that changes players’ expectations. According to Rothstein, only a non-incremental, top-down “Big Bang” can achieve this, while “if the anti-corruption reforms are limited to a number of small measures, they will not convince enough agents that continuing their corrupt practices is no longer a viable option …the likely result is that system will slide back into its old practices of systemic corruption” (Rothstein, 2007). In other words, the upper echelons of power (the President, in this case), need to initiate the comprehensive reform of major political and economic institutions in a relatively short period of time. Such ‘Big Bangs’ have shown to be a successful tool in curbing corruption, as shown by the example of 19th century Sweden, which at that time was a far cry from the corruption-free welfare state of the modern day. During a fairly short period of time (from 1855 to 1875), a range of dramatic, non-incremental reforms were implemented, edging Sweden towards a Weberian bureaucracy: the standards for university degrees were elevated, the civil service wage system was revised, a new criminal code outlawed misconduct in office, and direct payment for services to individual civil servants were abolished. The above, it should be noted, is only a partial list of reforms. More contemporary examples of successful ‘Big Bangs’ include Singapore and Hong Kong.

 

There are a number of possible strategies that can be a part of an effective ‘Big Bang’ reform in the Russian context. Firstly, the periodical change of old government officials to new ones could be a plausible step towards curbing corruption. In terms of game theory, the interaction of government officials who keep their offices for a long time with businessmen changes the “corruption game” from a one-shot to a repeated game, where successful coordination on the (Corrupt; Corrupt) outcome may be negotiated and maintained as an equilibrium (Dixit, 2004:106). Secondly, attracting young educated people to government roles can also be a plausibly effective tactic, as young civil servants may have not yet grasped the workings of the “sistema” and its payoff table(s). Hence, other agents may not be certain about rationality of their actions, and may change their behaviour accordingly. Thirdly, it is important to address corruption in the educational system, as the future knowledge of the payoff matrix of young agents is strongly influenced by actions conducted in the present. The logic behind this is simple – if future government employees do not encounter corruption in their universities, the likelihood of them coordinating on honest behaviour in the future increases. Finally, increasing civil servants’ salaries could complement the above reforms – a higher level of income may serve as an incentive against accepting bribes, as the majority of lower and mid-level civil servants resort to corruption not only because it is an unwritten rule, but out of sheer economic necessity. This can be done with little harm to the government budget in the conditions of an economic crisis through the downsizing of the bureaucratic apparatus. With this in mind, it is important to note that Kremlin is already planning job cuts.

 

Given the uncertain and potentially volatile economic climate, embarking on a path of such drastic reform may seem as too risky a move. The practical implementation of such a reform will be difficult, given Russia’s territorial scale, while its outcome will be very hard to predict. As a theoretical construct, however, game theory allows us to gain a valuable insight into the behaviour of agents within the Russian “sistema”, helping us understand the main difficulties associated with its potential reform.

 

References

Arkhipov I. and Pismennaya E., (2015) “Kremlin Mandarins Feel Heat as Putin Said to Back Job Cuts”, Bloomberg August 17, available at: http://www.bloomberg.com/news/articles/2015-08-16/kremlin-mandarins-in-crosshairs-as-putin-said-to-back-job-cuts .

Bull, M.J. and Newell, J.L., (1997) “New avenues in the study of political corruption”, Crime, Law and Social Change, 27.3-4, pp. 169-183.

Dixit, A. and Skeath, S. (2004) “Games Of Strategy”, New York: Norton.

EY, (2015). Investment Climate in Russia – Foreign Investor Perception. Available at: http://www.ey.com/…/EY-investment-climate-in-russia-2015…/EY-investment- climate-in-russia-2015-eng.pdf

Ledeneva, A., (2013) “Russia’s Practical Norms and Informal Governance”, Social Research 80:4.

Levin, M. and Kovbasyuk S., (2007) “Economics of Corruption Course Manual” (in Russian), Higher School of Economics, Moscow.

Persson A., Rothstein B. and Teorell J., (2013) “Why Anticorruption Reforms Fail—Systemic Corruption as a Collective Action Problem”, Governance, vol.  26, no. 3, pp. 449-471.

Rothstein, B., (2007) “Anti-Corruption – A Big Bang Theory”, QoG Working Papers Series, 2007:3.

Transparency International, (2013). Global Corruption Barometer – Russia. Available at: https://www.transparency.org/gcb2013/country/?country=russia

ALEXANDER KHODOV AND GEORGY ISTIGCHEV

are 3rd year BSc Political Economy students at King’s College London

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