Journal of Comparative Economics 31 (2003) 751773

www.elsevier.com/locate/jce

Seize the state, seize the day: state capture

and influence in transition economies
Joel S. Hellman,a Geraint Jones,b and Daniel Kaufmann a,
a The World Bank, 1818 H Street, Washington, DC 20433, USA
b Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142, USA

Received 15 March 2003; revised 4 September 2003

Hellman, Joel S., Jones, Geraint, and Kaufmann, DanielSeize the state, seize the day: state
capture and influence in transition economies
Data from the 1999 Business Environment and Enterprise Performance Survey is used to examine
state capture and influence in transition economies. We find that a capture economy has emerged
in many transition countries, where rent-generating advantages are sold by public officials and
politicians to private firms. While influence is a legacy of the past inherited by large, incumbent firms
with existing ties to the state, state capture is a strategic choice made primarily by large de novo firms
competing against influential incumbents. Captor firms, in high-capture economies, enjoy private
advantages in terms of more protection of their own property rights and superior firm performance.
Despite the private gains to captor firms, state capture is associated at the aggregate level with social
costs in the form of weaker economy-wide firm performance. Journal of Comparative Economics 31
(4) (2003) 751773. The World Bank, 1818 H Street, Washington, DC 20433, USA; Massachusetts
Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142, USA.
2003 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights
reserved.
JEL classification: H4; K2; K4; L1; L2; L5; P26; P27; P30; P31; P52
Keywords: Capture; Corruption; Influence; Property rights; State capture; Transition economies

The evidence and opinions presented here are the authors sole responsibility and do not necessarily
reflect those of their respective institutions or their Executive Directors. Data is available at http://www.
worldbank.org/wbi/governance/data.html.
* Corresponding author.
E-mail address: dkaufmann@worldbank.org (D. Kaufmann).
0147-5967/$ see front matter 2003 Association for Comparative Economic Studies. Published by Elsevier
Inc. All rights reserved.
doi:10.1016/j.jce.2003.09.006

752

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

1. Introduction
In the initial stages of transition in Eastern Europe and the former Soviet Union, the
dominant challenge was to reduce and reorient the states role in the economy. In particular,
the strategies of liberalization and privatization were intended to change the way in which
the state interacts with firms, shifting from command methods to market mechanisms.
Throughout the transition, little attention has been paid to the opposite relationship,
namely, the ways in which firms exert influence on the state. However, in the context of
weak states and underdeveloped civil societies, such influence has had a powerful impact
on the pace and direction of reforms, on the design of economic and political institutions,
and, ultimately, on the general quality of governance in transition countries. After only a
decade of transition, the fear of the leviathan state has been replaced by a new concern
about powerful oligarchs who manipulate politicians and shape institutions to advance and
protect their own empires at the expense of the social interest.
The literature on political economy describes various ways in which firms influence
the state. Grossman and Helpman (1994, 2001) model policymakers and firms conducting
an auction over the content of policy,1 on which we base the concept of state capture.2
Shleifer and Vishny (1994) consider firms that derive power from their control over labor
and thus can implicitly trade votes for political influence, on which we base the concept of
influence.3 In both situations, firms employ different strategies for dealing with the state.
We explore the profiles of the firms engaged in these different types of interactions with
the state and examine their consequences.4
Our analysis of state capture and influence is based on data from the 1999 Business
Environment and Enterprise Performance Survey (BEEPS), a firm-level survey commissioned jointly by the Office of the Chief Economist, European Bank for Reconstruction
and Development (EBRD) and the World Bank to assess obstacles in the business environment across 22 transition economies.5 The survey data allow us to investigate state capture
and influence separately.6 We begin by developing a cross-country measure of the extent
1 Earlier work in this line includes Becker (1983) who models the political process as the outcome of

competition among pressure groups.

2 The related concept of regulatory capture is not limited to a relationship based on illicit transactions.
Regulations could be devised to benefit the regulated at the expense of social welfare for many reasons that
have nothing to do with corruption, e.g. asymmetric information or collective action problems. We are interested
in distinguishing clearly capture as a form of corruption and influence. The vast literature on regulatory capture
begins with Stigler (1971) and continues with Peltzman (1976), and Laffont and Tirole (1991, 1993). The current
theory of regulation focuses more on the characteristics and benefits of competition in a world of private sector
involvement in infrastructure; the earlier emphasis was on the likelihood and costs of regulatory capture in
particular sectors, e.g. natural infrastructure monopolies.
3 In further work, Hellman and Kaufmann (2002) discuss the inequality of influence.
4 In related work, Hellman et al. (2002) discuss the role of foreign direct investment in state capture.
5 Hellman et al. (2000) present a full description of the BEEPS. Additional research based on the BEEPS
appears in European Bank for Reconstruction and Development (1999) and World Bank (2000).
6 Until recently, most empirical studies of corruption have relied on cross-country indices based mainly on
the assessments of external experts or foreign investors. Such indicators do not disaggregate corruption into
different forms and rely on generic questions about the extent of corruption. Without reliable measures of
state capture, as distinct from other forms of corruption, empirical research has concentrated on conventional

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

753

of the capture economy across transition countries. We proceed to identify individual captor firms, i.e. firms that make private payments to public officials to affect the rules of the
game, and influential firms, i.e. firms that have influence on those rules without recourse to
private payments to public officials, and determine the characteristics that affect the desire
and ability of these firms to engage in capture and influence. Finally, we develop microeconomic measures of the costs and benefits to these firms of state capture and influence and
present evidence that both private gains and social costs are involved. The BEEPS survey
offers significant methodological improvements over existing governance and corruption
indices in that it provides a method for measuring state capture and influence, as well as
for identifying the benefits and costs at the firm level from such activities.
A stark contrast in the nature of interactions between firms and the state emerges across
the transition countries. In one group, which we refer to as high-capture economies, public
officials appear to have created a private market for the provision of typically public goods,
e.g. the security of property and contract rights, and for rent-seeking opportunities that a
relatively small number of firms can obtain either through state capture or influence. While
substantial private gains accrue to the individual firms, negative externalities are generated
for the rest of the economy. In the other group of low-capture economies, this market for
concentrated advantages to individual firms through state capture and influence is limited,
although present. In these countries, capture appears to have few direct benefits to those
firms who engage in and produces only a more limited impact on the operations of the
other firms in the economy.
In addition to the variation across countries, we find clear distinctions between the
profiles of individual captor and influential firms. Influential firms tend to be classic
incumbents, which are inherited from the previous Communist system. As such, they are
generally large, state-owned firms, having reasonably secure property rights and close
formal and informal ties with the state. Captor firms have a contrasting profile; they
are likely to be large de novo private firms, i.e. those with no state owned predecessor,
having less secure property rights and weaker ties to the state. Smaller firms are less
likely to engage in either form of interaction with the state. Our analysis suggests that
although influence tends to be inherited from the past by particular state and privatized
enterprises, other firms choose to engage in state capture as a strategy to compete against
these influential incumbents. Captor firms seek to purchase advantages directly from the
state, including, but not limited to, individualized protection for their own property and

forms of administrative corruption, such as bribery to get around red tape by default. The earlier literature
portrays corruption as an efficient response to bureaucratic red tape, e.g. Huntington (1970), Leff (1970) and
Lui (1985). Later work characterizes corruption as costly, e.g. Mauro (1995), Shleifer and Vishny (1993),
Shleifer and Vishny (1998), Kaufmann and Wei (1999). Kaufmann et al. (1999a, 1999b, and 2003) provide
an analysis of existing governance and corruption indicators worldwide and quantify their aggregate effects
on development outcomes. Although worldwide comparative indices are mainly one-dimensional proxies for
corruption, in-depth diagnostic survey tools have been developed to unbundle corruption and to measure other
governance dimensions (World Bank Institute and ECSPE, 1999). However, these country-specific diagnostics do
not lend themselves to cross-county comparative indices for large groups of countries. The worldwide governance
database is available at http://www.worldbank.org/wbi/governance/govdata2002/ together with diagnostics at
http://www.worldbank.org/wbi/governance/capacitybuild/.

754

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

contract rights in environments in which the state continues to under-provide the public
goods necessary for effective entry and competition.
Comparing enterprise performance over time, we find that influential and captor firms
grow at a substantially faster rate than other firms, after controlling for countrywide
determinants and for other firm-level characteristics. Influential firms enjoy significant
advantages across the board; they exhibit faster rates of growth and greater improvements
in the security of their property rights in all countries. However, the private gains to
capture are realized only in high-capture economies, i.e. where state officials have created a
sufficiently extensive private market for the key under-provided public goods and for other
rent-generating advantages so that they share the rents associated with state capture. In
countries with more limited levels of state capture, those firms that engage in state capture
exhibit worse performance than other firms. Starting from a lower level, captor firms gain
some improvement in the security of their property and contract rights over time, especially
in high-capture economies.
While there are substantial private gains to captor and influential firms, the social costs
of capture and influence for all other firms in the economy are considerable. Average
firm growth rates are systematically lower for firms in high-capture economies, despite
the concentrated gains to captor firms. The private gains to capture and influence appear
to generate negative externalities for other firms, especially in high-capture economies.
Whereas de novo firms have been the driving force of growth and a major constituency
for further structural reforms in the most advanced transition economies, these firms have
strong incentives to engage in state capture in an effort to compete against influential
incumbent firms, in the high-capture economies. Hence a potential vicious circle may
arise in which a small share of dynamic firms gain concentrated advantages that further
undermine the states provision of necessary public goods and weaken economic growth.7
This paper investigates empirically the characteristics of these different relationships
between firms and the state, and their effects on the performance of the firms, the states
role in the economy, and the development of a dynamic enterprise sector. A recognition
that powerful firms have been able to capture the state and collude with public officials
to extract rents through the manipulation of state power has implications for the political
constraints on the reform process. By analyzing the dynamics of the capture economy, we
build a foundation for incorporating political constraints into the development of feasible
strategies to advance the transition in lagging countries.
The paper is organized as follows. Section 2 discusses the BEEPS survey, develops
measures of both state capture and influence, and then examines the patterns of these
variables across the transition economies. Section 3 discusses our empirical strategy and
examines the micro-level determinants of state capture and influence. Section 4 considers
the private gains resulting from these interactions in terms of firm performance and the
security of property rights. Section 5 discusses the macroeconomic consequences of state
capture in terms of firm performance. Section 6 concludes with policy implications and
suggestions for further research.
7 Johnson et al. (1997) present a multiple equilibria model of the unofficial economy in transition that
underscores the nexus between governance variables and the provision, or lack thereof, of key public goods.

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

755

2. Measuring state capture and influence with the BEEPS

The BEEPS provides a number of important advantages over traditional cross-country
measures of governance. By unbundling forms of influence and corruption from the firm
perspective it allows us to explore whether firms with heterogeneous characteristics interact
differently with the state. Further, it provides a microeconomic perspective on the costs
and benefits to firms associated with different forms of influence and corruption. The
subject matter of the BEEPS is obviously sensitive so that it is natural to ask why firms
would be willing to answer questions about their involvement in state capture, influence
or corruption more generally. A number of features were incorporated into the survey to
improve the quality of the data. Before beginning an interview the nature and purpose of
the research project was explained to respondents. The data were recorded anonymously
without identifying the name of the respondent or the company, and they were collected by
international organizations, not by national governmental authorities. On sensitive topics,
questions were worded to shift any implication of blame away from respondents, who were
usually asked indirectly to describe the typical situation of a similar firm.8
Face-to-face interviews with high-level firm managers or owners were conducted
during the period June through August 1999. The survey covers the following countries:
Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Croatia, Czech Republic, Estonia,
Georgia, Hungary, Kazakhstan, the Kyrgyz Republic, Latvia, Lithuania, Moldova, Poland,
Romania, the Russian Federation, the Slovak Republic, Slovenia, Ukraine, Uzbekistan. In
all countries, except Latvia and Albania, the survey was conducted by the local staff of an
international survey firm to ensure consistency of training and approach across countries. In
Latvia and Albania, the survey was conducted by independent local firms. In each country,
between 125 and 150 firms were included with the exception of three countries for which
higher numbers were contacted, namely: Poland (246), Russia (552), and Ukraine (247).
The sample was heavily weighted towards privately owned firms. Quotas for state-owned
firms and firms with foreign ownership were applied. Specific quotas were also placed on
size, sector, location, and export orientation. The intent was to produce a stratified sample
with representation of the various types of firms. Table 1 gives summary statistics for the
BEEPS sample by country and according to firm size, firm origin, and industrial sector in
which the firm operates.9
The BEEPS includes questions to measure two distinct, but potentially overlapping,
types of interactions between the firm and the state, namely state capture and influence.
In both cases, the rents to be shared between the politicians and firms ultimately derive
from the power of the state to intervene in the economy and distribute regulatory and
legal advantages to specific firms. The key distinction between these interactions lies in the
nature of the bargaining process between politicians and firms. Regarding influence, which
we define as the firms capacity to have an impact on the formation of the basic rules of
the game without necessarily involving private payments to public officials, firms wield
power over the politician. This power derives from such factors as firm size, ownership
8 Further information is provided in Hellman et al. (2000), where in addition tests are carried out to determine
the extent of bias in the more subjective questions of the survey, finding little evidence of such bias.
9 These categories are defined more precisely in the course of the analysis.

756

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

Table 1
The sample composition of the BEEPS (number of firms)
Country

Total

Origin

Size

Sector

firms De novo Privatized State Small Medium Large Manufacturing Mining Services
Albania
Armenia
Azerbaijan
Belarus
Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Republic
Slovenia
Ukraine
Uzbekistan
Total

163
125
137
132
130
127
149
132
129
147
147
132
166
112
139
246
125
552
138
125
247
126

92
63
93
50
77
34
113
73
75
94
69
50
88
84
47
160
85
283
84
41
147
44

31
34
17
56
26
66
10
26
29
24
47
57
25
26
57
53
15
230
26
54
73
52

34
25
25
25
25
27
25
25
25
25
27
25
33
0
25
25
25
25
25
25
25
25

103
80
87
32
68
31
96
59
65
91
72
41
70
93
50
115
77
212
78
37
124
40

54
40
48
86
50
68
40
59
59
42
65
86
76
16
77
108
37
301
49
76
100
69

6
5
2
14
12
28
13
14
5
14
10
5
18
3
12
23
11
39
11
12
23
17

52
42
67
95
93
68
45
60
61
59
70
96
53
35
84
104
65
330
57
68
128
93

2
0
0
0
2
0
1
2
6
0
4
0
2
0
0
1
2
2
0
0
4
1

106
83
70
37
35
59
103
70
62
88
73
36
111
77
55
141
58
220
81
57
115
32

3626

1946

1034

546

1721

1606

297

1825

29

1769

Note. Due to missing responses, the sum of all firms in each subcategory is sometimes less than the total number
of firms in each country.

ties to the state, control over labor, and the economic impact on their local communities
which affects the well-being of potential voters and consequently electoral outcomes. In
the bargain between politicians and firms, implicit political advantages to the politician in
the form of votes are traded in return for economic advantages to the firm. Regarding state
capture, which we define as the efforts of firms to shape the formation of the basic rules
of the game (i.e. laws, rules, decrees and regulations) through illicit and non-transparent
private payments to public officials, firms do not exert direct power over politicians. Instead
collusion between firms and politicians providing preferential treatment creates rents that
are then shared. In the bargain between politicians and firms the politician uses political
power to provide rents to firms in return for private economic gains, which further his
political or economic objectives.
This distinction between influence and state capture is important in transition countries
because it affects the political economy of reform. In the early stages of transition, the
dominant concern was to overcome the ability of incumbent firms to use their existing
resources and advantages to block economic reforms that might undermine their monopoly
positions in the developing market economy. The chosen solution was to privatize firms
and to encourage new market entry as a way to break the link between bureaucrats and
incumbent firms and to increase competition among firms. However, less attention was paid

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

757

to the risk of capture, in which new firms compete against incumbent firms and others by
buying preferential treatment from politicians in the time-compressed process of drafting
the new rules, laws and regulations of the emerging market economy. Considerable scope
for overlap across these types of interaction between the firm and the state exists. Moreover,
some firms are likely to engage in both types of interaction with the state simultaneously.
Some firms may even avoid such interactions with the state altogether, although the survey
suggests that such firms are in the minority. Recognizing these limitations, the BEEPS
survey was designed to disentangle these interactions, allowing us to investigate potential
differences in the roots and consequences of these relationships (both at the firm level and
at the country level).
Our first goal is to develop a cross-country measure of the extent of the capture
economy. One key measurement problem is that the extent to which a set of state
institutions is captured is not necessarily a function of the number of firms that engage
in state capture. In an extreme case, a single powerful monopoly could generate a much
higher level of state capture than that obtained by a larger number of less powerful firms
competing to buy off state officials. Thus the capture economy should be measured by
the extent of its impact on the economy rather than the extent of efforts by firms to
engage in state capture. For the cross-country analysis we develop a measure of the impact
of state capture on all firms in the BEEPS resulting from the capture of the state by a
subset of firms. Firms were asked to assess the extent to which the following six types
of activities have had a direct impact on their business: the sale of Parliamentary votes
on laws to private interests; the sale of Presidential decrees to private interests; Central
Bank mishandling of funds; the sale of court decisions in criminal cases; the sale of court
decisions in commercial cases; and illicit contributions paid by private interests to political
parties and election campaigns.10
Table 2 presents the percentage of firms in each country that consider the respective
form of state capture to have a significant impact on their business.11 The aggregate index
of the capture economy is defined as the unweighted average of the six component indices.
It suggests a clear separation of the transition countries into two groups.12 The low10 The inclusion of the sale of court decisions to private interests and the mishandling of Central Bank funds as
elements of state capture requires explanation. Courts are generally seen as institutions that implement existing
laws as opposed to making them, although the precedent-setting function of courts can blur these boundaries. In
the transition countries, legal systems are still in the nascent stages of development, so that courts play a more
formative role in the development of the legal framework. Regarding the Central Bank, this institutions role in
setting monetary policy and creating the regulatory framework for the developing financial system also blurs the
distinction between the formation and implementation of rules. Recognizing the difficulty of drawing concrete
boundaries within any particular institution, we choose to incorporate these institutions as categories of state
capture because of the unique nature of transition. However, we note that removing these components from the
index of state capture does not change substantially the ranking of countries presented in Table 2.
11 Each component index is calculated on the basis of the following question. What extent have the following
forms of corruption had an impact on your business? The possible responses were no impact, minor impact,
significant impact, and very significant impact. The index is calculated for each component as the percentage of
firms in each country reporting a significant or very significant impact.
12 This division is not intended to indicate that there are no interesting differences between the countries in
a group, but rather to reflect a simple tendency in the data. Furthermore we use this separation in Table 5 as a
dichotomous measure of the extent of the capture economy.

758

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

Table 2
Construction of the index of the capture economy (% of firms affected by capture)
Country

Capture components (% of firms)

Aggregate Capture

Parliamentary Presidential Central Criminal Commercial Party cap. econ.

legislation
decrees
bank
courts
courts
finance
index
Albania
Armenia
Azerbaijan
Belarus
Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Republic
Slovenia
Ukraine
Uzbekistan

12
10
41
9
28
18
18
14
29
12
13
18
40
15
43
13
22
35
20
8
44
5

7
7
48
5
26
24
11
7
24
7
10
16
49
7
30
10
20
32
12
5
37
4

8
14
39
25
28
30
12
8
32
8
19
59
8
9
40
6
26
47
37
4
37
8

22
5
44
0
28
29
9
8
18
5
14
26
21
11
33
12
14
24
29
6
21
5

20
6
40
5
19
29
9
8
20
5
14
30
26
14
34
18
17
27
25
6
26
9

25
1
35
4
42
30
6
17
21
4
6
27
35
13
42
10
27
24
20
11
29
4

16
7
41
8
28
27
11
10
24
7
12
29
30
11
37
12
21
32
24
7
32
6

Average

21

18

23

18

18

20

20

classif.
Low
Low
High
Low
High
High
Low
Low
High
Low
Low
High
High
Low
High
Low
High
High
High
Low
High
Low

capture group includes Albania, Armenia, Belarus, Czech Republic, Estonia, Hungary,
Kazakhstan, Lithuania, Poland, Slovenia and Uzbekistan; it is an unusual combination
of countries because it incorporates some of the most advanced and some of the least
advanced reformers, both politically and economically, in the sample.13 That the most
advanced reformers have the lowest levels of state capture should not be surprising because
their progress in liberalizing the economy, strengthening bureaucratic accountability and
promoting political contestability should place some, albeit imperfect, constraints on the
extent to which individual firms can capture the state. On the other hand, the low capture
index for some of the least advanced reformers, such as Belarus and Uzbekistan, might
appear puzzling. However, in these countries the private sector remains small, important
elements of the command system are still in operation, and the political regimes are highly
authoritarian. In countries with such a severe imbalance between the power of the state and
the private sector, the extent of state capture by the private sector can be only minimal.
The gap separating the low- and high-capture economies is considerable. In the
high-capture economies, more than a quarter of the firms report a significant impact
13 The extent of political and economic reforms is measured using the indices provided by European Bank for
Reconstruction and Development (1999).

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

759

of state capture on their business. This group includes Azerbaijan, Bulgaria, Croatia,
Georgia, Kyrgyzstan, Latvia, Moldova, Romania, Russia, Slovakia and Ukraine. Most of
these countries could be considered partial reformers, both politically and economically.
Although they have made significant advances in liberalization and privatization, much less
progress has occurred in concomitant institutional reforms to support a proper legal and
regulatory framework. Most of these countries have adopted the basic rules of democratic
elections but concerns remain in nearly all of them regarding the concentration of political
power and the limitations on political competition. Hence, state capture appears to thrive
in an environment of partial economic reforms.14
In addition to this impact measure of the extent of state capture, the BEEPS also contains
information about whether firms are engaging directly in illicit private payments to public
Table 3
Summary statistics for the firm-level measures of state capture and influence
Country
Albania
Armenia
Azerbaijan
Belarus
Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Republic
Slovenia
Ukraine
Uzbekistan
Average

Captor firms
(% of sample)

Influential firms
(% of sample)

10.8
6.5
24.4
1.8
10.5
10.3
6.6
5.1
7.8
3.9
6.1
7.2
14.2
13.6
12.0
9.0
13.3
9.2
12.1
10.4
12.3
2.0

5.8
4.2
1.0
5.7
4.5
19.5
10.3
20.2
20.8
1.7
4.3
10.5
29.8
3.5
25.3
5.6
3.8
11.6
6.0
5.5
27.7
8.9

9.5

11.5

14 We investigated the correlation of state capture with other commonly used institutional variables in the

transition economies to determine whether it is a separate institutional problem. In particular we examined

transition indicators (European Bank for Reconstruction and Development, 1999), the unofficial economy
(Johnson et al., 1997, and BEEPS), other forms of corruption (World Bank, 2000) and political freedom (Freedom
House, 2003). The correlation coefficients were insignificant with all these variables except for the unofficial
economy. In particular, the relationship between state capture and civil liberties as measured by Freedom House
(2003) appears to be non-linear, akin to an inverted U-shaped curve. High levels of state capture are associated
with intermediate levels of civil liberties, consistent with quasi-totalitarian regimes and managed democracies.
See the working paper version of this article for details.

760

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

officials in order to influence the content of laws, decrees or regulations. Hence we can
identify captor firms and contrast their characteristics and performance with other firms
both within and across countries.15 Table 3 lists the share of all firms in each country that
are classified as captor firms. As expected, captor firms are a minority in all countries,
although the variation across transition countries is considerable. In a similar manner,
influential firms are identified according to the firms own assessment of their capacity
to affect the content of laws, rules, regulations or decrees emanating from various state
institutions that would have a substantial impact on their business.16 The question asked
made no reference to any private payments to public officials or to other explicit forms of
corruption. The share of influential firms as a percentage of the sample in each country is
listed in Table 3. As with captor firms, influential firms make up a minority of the firms in
every transition country, but with considerable variation across countries.

3. Firm-level determinants of state capture and influence

Two issues, namely unobserved cross-country heterogeneity and heteroskedasticity,
must be addressed in our empirical work. The structure of the data makes unobserved crosscountry heterogeneity extremely likely and the Breusch and Pagan (1980) test, reported
in Tables 4 and 6 with the regression results, strongly indicates its presence. We choose
fixed effects, rather than random effects to deal with this problem for two reasons.17 First,
Hsiao (1986) argues that if the same units would be selected again were another sample
to be drawn, as is the case here for the sampled countries, it is appropriate to estimate
fixed effects. Second, in cross-sectional survey data heteroskedasticity is a concern.18 Since
we do not have priors concerning its particular structure we employ robust White (1980)
15 The captor firms are identified on the basis of answers to the following question. How often do firms like
yours nowadays need to make extra, unofficial payments to public officials to influence the content of new laws,
decrees and regulations? The possible responses were: (1) never, (2) seldom, (3) sometimes, (4) frequently,
(5) mostly, and (6) always. Firms responding sometimes or more frequently were classified as captors for the
purpose of constructing Tables 3 and 5, which use a dichotomous definition. Otherwise the full distribution of the
variable was used for the regressions in Tables 4 and 6.
16 The influential firms are identified on the basis of the answers to the following question. When a new law,
rule regulation or decree is being discussed that could have a substantial impact on your business, how much
influence does your firm typically have at the national level of government to try to influence the content of that
law, rule regulation or decree? The responses were: (1) never influential, (2) seldom influential, (3) influential,
(4) frequently influential, and (5) very influential. The question was asked separately for the executive, legislative,
ministry and regulatory branches of government. An index of influence was calculated for each firm as the average
score across these four dimensions. Firms scoring 2.5 or more were classified as influential for the purpose of
constructing Tables 3 and 5, which use a dichotomous definition. Otherwise the full distribution of the variable
was used for the regressions in Tables 4 and 6.
17 We carry out Hausman (1978) specification tests, reported in Tables 4 and 6 that test the assumption that
the effects are orthogonal to the other explanatory variables. A rejection of this test would be sufficient to choose
fixed effects because random effects would lead to inconsistent estimates of the other coefficients in which we
are interested. We find in each case that the orthogonality condition is satisfied, so that both random effects and
fixed effects are consistent estimators and this criterion does not allow us to choose which specification is more
appropriate.
18 White (1980) tests strongly indicate the presence of heteroskedasticity in each regression in Tables 4 and 6.

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

761

standard errors, which give consistent estimates of standard errors, regardless of the nature
of the heteroskedasticity, and can be implemented conveniently with fixed effects.19
Although one might expect some overlap between state capture and influence because
both represent efforts to shape the content of the legal and regulatory framework, the results
of this section show that these activities are actually distinct and undertaken by firms with
very different profiles. A cross-tabulation of captor firms and influential firms reveals that
of the 386 captor and influential firms in the sample, only 40 firms are found in both
categories. By investigating the different profiles of firms that engage in state capture and
in influence, we gain insights into how these relationships with the state differ. We present
regressions that explore the characteristics of firms that affect the propensity of any given
firm to engage in state capture or in influence. Controlling for country fixed effects, we
examine the impact of the firms size, its origins, its bureaucratic recourse, and its security
of property and contract rights.
Regarding size, firms are divided into small, medium and large based on the number of
employees. Small firms have fewer than 50 employees, medium sized firms have between
50 and 500 employees and large firms have more than 500 employees. We expect larger
firms to wield greater influence and to be more likely to engage in state capture because
they have more bargaining power with the state and control more resources. Regarding
origin, firms are divided into de novo, privatized and state-owned. De novo firms are private
from the time of start-up with no state-owned predecessor. Privatized firms were formerly
state-owned and state-owned firms are those in which the state retains majority ownership.
These determine, to some extent, the formal ties between the firm and the state as well as
the number of repeated interactions between firm managers and public officials. We expect
state-owned and privatized firms to retain considerable ties with public officials, which
enhances their influence on the state. As new players in the market, de novo firms, are less
likely to be influential, and possibly more likely to invest in state capture as a substitute for
the lack of formal ties to the state.
Regarding bureaucratic recourse, some firms have better access to public officials than
others and can use that access to ensure fair treatment against transgressions. The BEEPS
survey asked firms to assess whether, if some public official acts against the rules, they
can go to another public official to get fair treatment without recourse to private payments
to that public official.20 Firms that have sufficient access to defend themselves against
such transgressions are described as having greater bureaucratic recourse. We expect
bureaucratic recourse to be associated positively with greater influence. Firms that engage
in state capture are expected to have lower levels of bureaucratic recourse because their
interactions with public officials tend to be based on private payments. Regarding the
security of property and contract rights, firms having insecure property rights, especially
due to discretionary interventions by bureaucrats in their affairs, might seek individualized
19 This is a conservative procedure because in general it leads to larger standard errors relative to OLS.
Although Monte Carlo evidence (Davidson and MacKinnon, 1993) suggests that these standard errors may be
over-optimistic in small samples, the correction they propose of multiplying the residuals by n/(n K) where n
is the sample size and K is the number of regressors does not make any importance difference to our results.
20 The responses to this question measure how frequently the statement is true, taking the values 6 (always),
5 (mostly), 4 (frequently), 3 (sometimes), 2 (seldom), and 1 (never).

762

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

Table 4
Firm-level determinants of state capture and influence
Independent variables
Category

Sub-categorya

Origin

De novo

Dependent variables
Captor firm

Influential firm

0.233**
(3.80)
0.069
(1.38)

0.181**
(2.97)
0.150**
(2.58)

0.200**
(2.34)
0.095*
(1.69)

0.345**
(4.22)
0.118**
(2.77)

Initial security of property rights (3 years ago)

0.071*
(4.04)

0.029*
(1.85)

Bureaucratic recourse

0.059**
(5.18)

0.027**
(2.24)

2081
0.07
OLS fixed effects
39.93
0.0000
3.78
0.7068
2 (167) = 308.84
0.0000

1732
0.15
OLS fixed effects
547.90
0.0000
9.37
0.1537
2 (166) = 255.70
0.0000

Privatized
(State owned)
Size

Large
Medium
(Small)

N
R2
Econometric model
BreuschPagan
Hausman test
White test

2 (1)
p-value
2 (6)
p-value
2
p-value

Notes. Country dummies were included but their coefficients are not reported. Robust t-statistics are in
parentheses.
* Significance at the 10% level.
** Significance at the 5% level.
a Dummy variable with the omitted category in parentheses.

protection through state capture. In contrast, firms with more secure property rights are
expected to wield greater influence on the state, due to their longer time horizon and greater
leverage over the state. The survey asked firms to evaluate the security of their property and
contract rights three years ago.21 In the regressions, we use the response as proxy for the
firms initial conditions.
Table 4 presents regressions on the determinants of state capture and influence, with
country fixed effects included but not reported. The results confirm the hypothesis that
different types of firms in transition economies enter into different types of relationships
with the state. Small firms have limited options for either wielding influence or engaging
21 The question asked the respondents to what degree they agreed with the statement, I am confident that the
legal system will uphold my contract and property rights in business disputes. The responses comprised 6 (fully
agree), 5 (agree in most cases), 4 (tend to agree), 3 (tend to disagree), 2 (disagree in most cases), and 1 (strongly
disagree). They were asked to respond about the current situation and the situation three years ago.

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

763

in state capture. Both medium and large firms with their greater command over resources
are more likely to be influential and to engage in state capture.22 As expected, state-owned
firms are more likely to be influential than either privatized or de novo firms, perhaps due
to their stronger formal ties to the state, legacies of previous state ownership, and more
frequent interactions with public officials. In sharp contrast, captor firms are more likely to
be de novo firms. New entrants appear to use state capture as a substitute for the influence
already available to state-owned firms. Privatized firms are less likely than state-owned
firms to be influential but not as likely as de novo firms to engage in state capture. It appears
that privatized firms lose privileged access to state officials making them less influential but
do not make up for it in terms of capture.23
Firms with greater access to public officials, denoted by bureaucratic recourse, are more
likely to have greater influence. By contrast, firms that lack access to public officials who
can protect them against transgressions by other officials engage in state capture, arguably
as a defensive strategy to purchase protection from other public officials. Regarding the
security of property rights, the results are similar but the coefficients are not as significant.
State capture appears to be a strategy used by firms having less secure property and contract
rights and less access to public officials than influential firms.24
In summary, the profiles of influential and captor firms are strikingly different.
Influential firms are the classic state-owned firms inherited from the socialist system; they
are large, and have good access to public officials. These firms began the transition with
much more secure property and contract rights. By contrast, captor firms are the larger new
entrants to the market having no formal ownership ties to the state and less access to public
officials. These firms began the transition with less secure property and contract rights.
Smaller firms, perhaps due to lack of access or to gains that are too small to justify these
activities, are less likely to take part in both state capture and influence.

4. The consequences of state capture and influence

If state capture and influence are voluntary activities that allow firms to extract rents
from the state, differential effects on firm performance should be associated with these
relationships. The BEEPS allows us to measure and compare the costs and benefits
to firms that engage actively in state capture and influence and also to determine the
externalities imposed on other firms that are not engaged in such relationships. Hence,
we can assess the private and social costs and benefits of different types of interactions
22 An F -test with significance level 0.26% reveals that large firms are also significantly more influential than
medium size firms, but with respect to state capture, medium-sized firms are not statistically different, at 10%
significance level, to large firms.
23 An F -test with significance level 0.26% reveals that privatized firms are significantly less likely to engage
in state capture than de novo firms, but are not significantly more likely than de novo firms, at 10% significance
level, to be influential.
24 To assert that the initial security of property rights is a cause of influence is clearly implausible since the
causation is likely to run in the other direction, i.e. influential firms are those that enjoy security of property rights.
We include this regression for symmetry with the other results, but we interpret it as providing information on the
typical profile of an influential firm.

764

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

between firms and the state. However, measuring firm performance in transition economies
is difficult given the incentives for firms to under-report profits and the lack of international
accounting standards in most countries of the region. Moreover, due to well-known
corporate governance problems, managers may be able to extract private gains from
corrupt activities that would not be reflected in firm-level performance, and thus cannot be
measured. Therefore, we proxy the private gains in firm performance by the average real
rates of sales and investment growth over the previous three years, although the limitations
of these measures should be kept in mind. The BEEPS survey also asked firms to assess
how the security of their property and contract rights changed over the past three years.25
Using this information, we investigate how different types of relationships between the
firm and the state affect the evolution of the security of property rights for individual captor
and influential firms by including the improvement in the security of property rights as an
additional measure of firm performance.
The key explanatory variables whose effects we explore will be state capture and
influence for individual firms. In addition to the direct effect of state capture common to all
firms in the region, we will also investigate the extent to which the gains from capture vary
with the size of the capture economy, by dividing the sample of countries into high-capture
economies and low-capture economies based on the binary index presented in Table 2. The
idea behind this interaction term is that in economies in which state capture is pervasive,
the private gains to being a captor firm are likely to be larger. Pervasive state capture is
measured by the burden it imposes on other firms, and part of that burden is translated into
gains to captor firms.
Table 5 shows that on average captor firms demonstrate a considerably higher rate of
sales and investment growth, along with significantly more improvement in the security
of property rights over the past three years than non-captor firms.26 However, the private
gains to captors depend on the broader environment. In high-capture economies having
a significant market for state capture, i.e. those in which the state is willing to sell
customized packages of public goods and legislation to individual firms, the gains to those
firms actively engaging in capture are substantial. Captor firms grew over three times
faster than non-captor firms in high-capture economies; they enjoyed substantially more
investment growth and improvements in the security of property rights.27 In sharp contrast,
in low-capture economies in which states provide a broader range of public goods for the
market and the legislative process is more subject to institutional restraints and political
competition, captor firms exhibit similar sales growth, investment growth and improvement

25 We construct a measure of the change in property rights from the variables measuring security of property
rights described previously in footnote 21. In Tables 5 and 6 the variable takes the value of +100 to indicate
improvement in the security of property rights over the period, 0 to indicate no change and 100 to indicate
deterioration. We do not attempt to measure the magnitude of the change in the security of property rights because
the variables are ordinal.
26 The t-tests (significance level in brackets) on the difference in means between captors and non-captors are
significant for sales (2.9%), investment (9.5%), and property rights (< 1%).
27 The t-tests (significance level in brackets) on the difference in means between captors and non-captors are
significant for sales (< 1%), investment (4.0%), and property rights (< 1%).

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

765

Table 5
Firm performance and interactions with the state (uncontrolled means)
Sales growth
[avg. % increase]

Investment growth
[avg. % increase]

Improvement in security
of property rights
[avg. improvement]

All countries
Influential firm
Non-influential firm
Captor firm
Non-captor firm
Overall

33.2
14.6
24.5
14.5
15.6

(5.6)
(1.6)
(5.3)
(1.4)
(1.2)

28.1
14.1
22.6
14.6
15.6

(6.4)
(1.5)
(5.8)
(1.4)
(1.2)

15.7
5.7
14.5
5.5
5.8

(3.5)
(1.0)
(3.1)
(0.9)
(0.8)

High-capture economies
Captor firm
Non-captor firm
Overall

28.6
8.5
11.1

(7.0)
(1.6)
(1.5)

21.2
9.9
11.5

(7.8)
(1.7)
(1.6)

17.6
4.8
4.8

(3.8)
(1.3)
(1.1)

Low-capture economies
Captor firm
Non-captor firm
Overall

15.7
21.5
21.4

(6.6)
(2.3)
(2.0)

25.5
20.2
21.1

(7.3)
(2.3)
(1.9)

8.9
6.3
7.1

(5.5)
(1.4)
(1.2)

Note. Standard errors are in parentheses.

in property rights.28 Hence, the gains to state capture depend not only on characteristics of
the firm, but also on the broader environment in which they operate. In the entire sample,
influential firms exhibit stronger performance than non-influential firms by each of these
three measures.29
From Table 5 a rough estimate of the negative externalities imposed on other firms
from the practice of state capture can be derived. The average rate of sales growth
for all firms in high-capture economies is only 11.1 percent compared to 21.4 percent
in low-capture economies, despite the specific gains enjoyed by the captor firms; the
growth rate of investment is also almost twice as high in low-capture economies; and the
average improvement in the security of property rights is higher in low-capture economies,
although the difference is not statistically significant.30 In summary, captor firms, in highcapture economies, enjoy significant private benefits in terms of firm performance, but at
the expense of other firms in the economy.
Although the characteristics of firms that engage in state capture or have influence on the
state are quite different, our analysis suggests that both forms of interaction with the state
generate significant gains for the firm. To take account of differing firm characteristics, we
now estimate the effects of state capture and influence on firm performance, conditioned
on country fixed-effects, the firm-level characteristics, namely, sector, size, origin, overall
bribe payments and the initial situation of the firm. The dependent variables for the firm
28 Based on t-tests, none of the differences between captors and non-captors are significant in low-capture
economies.
29 The t-tests on the difference in means between influential and non-influential firms are significant at less
than the 1% level for sales, investment, and the improvement in property rights.
30 The t-tests on the difference in means between high-capture and low-capture economies are significant at
less than the 1% level for sales and investment growth and insignificant for the improvement in property rights.

766

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

performance regressions are the average real rate of sales and investment growth and the
improvement in the security of property rights. In addition to variables for captor firms
and for influential firms, we include the interaction between the captor firms and the
index of the capture economy to measure the extent to which the gains to the captor firm
depend upon the overall economic environment. The coefficients of the interaction variable
represent the additional impact of capture on firm performance as the level of state capture
in the economy increases. The total gain to state capture in a particular country, conditional
on the other control factors, is given by the sum of the coefficient on the state capture
dummy plus the coefficient on the interaction term, multiplied by the state capture index
for that country (which is scaled to range between zero and one).
Two questions arise concerning interactive effects. First, if the capture economy affects
the gains to state capture for captor firms, do the gains to influence likewise depend on the
economic environment, in particular the size of the influence economy? Unfortunately the
BEEPS data do not provide a convincing cross-country measure of the impact of influence
distinct from the measure of state capture that would allow us to address this question.31
Second, if it is the magnitude of problems caused by influential incumbents that leads firms
to capture, should the appropriate interaction be between the size of the influence economy
and captor firms? However, there is no theoretical reason why the gains to state capture
should depend on the size of the influence economy, or equivalently the rents that are
available to be distributed through influence, unless the capture economy and influence32
economy overlap significantly. In this case the capture economy would be a suitable proxy.
To the extent that the influence economy motivates state capture that effect is already
implicitly controlled for with country dummies in Table 4 on the determinates of state
capture. Hence we use a single interaction terms in the regressions.
Turning to the other controls, in addition to the size and origin dummies, we include
sector dummies that classify firm operations according to a broad classification into
manufacturing, services and natural resource or mining companies. Overall bribe payments
is a proxy for all other dimensions of illicit interactions between firms and the state.33
Measures of initial conditions (three years previously) are included, as is common in
growth regressions, because the regressions consider changes in performance over three
31 Nevertheless, despite the conceptual limitations of the percentage of influential firms reported in Table 3 as
a measure of the impact of influence, the regressions in Table 6 were rerun with this variable, and an interaction
term, defined as the product of the impact of influence with the influential firm variable. The coefficient of
this interaction term was not significant in regressions, where it was included in addition to or instead of the
state capture interaction. There is therefore no evidence that the gains to influence differ across economies.
Furthermore, if the rents available to influence and capture overlap significantly then the capture economy would
be a suitable proxy for the influence economy. Under this assumption we reran the regressions with interactive
terms between the capture economy and influence with similar negative results.
32 Under this hypothesis the regressions were rerun with additional interactive terms between the capture
economy and influential firms, with insignificant coefficients on the interaction term.
33 The overall bribe payments are measured by the responses to the question, on average, what percent of
revenues do firms like yours typically pay per annum in unofficial payments to public officials? The responses
comprise 0%, less than 1%, 11.99%, 29.99%, 1012%, 1325%, over 25%. A cardinal variable is constructed
by interpolating each of these intervals at the midpoint, except the last interval where we use the endpoint, namely,
0%, 0.5%, 1.5%, 6%, 11%, 19%, 25%.

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

767

years. In particular we use initial sales and initial assets, in millions of US dollars along
with the initial level of security of property rights.34 Country dummies are included to take
account of cross-country heterogeneity in firm performance.
As Table 6 indicates, the impact of state capture on sales growth and improvements
in the security of property rights is markedly different in high capture versus low capture
economies. In all countries captor firms grow less than other firms and the security of
property rights decreases, although the latter coefficient is only marginally significant.
As the extent to which the state has been captured increases, the private gains to captor
firms in terms of sales growth and the security of property rights increase substantially.
Furthermore, these are not linked with significantly higher levels of investment. Hence,
in higher capture economies only, captor firms have managed to extract advantages from
the state that increase sales in the short term, even though investment is not increased
significantly in these firms.
Influential firms exhibit positive performance gains in terms of sales and investment
growth. Moreover, starting from a position of greater initial security, influential firms
experience an improvement in their security of property rights. Controlling for country
fixed effects and characteristics of the firm, both capture and influence yield gains to those
firms that can enter into such relationships with the state. Although influence enhances
performance in all countries, the gains to capture are available only in the high capture
economies.
The dummy variables designating sectors do not indicate any significant impact on firm
performance,35 however the size and origin of the firm do matter for sales and investment
growth. Surprisingly, small firms have lower sales growth36 than either medium or large
firms.37 On the other hand, de novo firms, have significantly higher rates of both sales and
investment growth than other firms over the past three years.38 Interestingly, privatized
firms do not exhibit higher sales growth than firms remaining under state ownership,
although they do have higher rates of investment growth. As expected, firms starting with
more insecure property rights exhibit the greatest probability of strengthening the security
of these rights over time. Large firms have experienced an improvement relative to both
small and medium sized firms.39 However, de novo and privatized firms have not seen
any significant improvement in the security of their property and contract rights over time
relative to state-owned firms. This casts doubt on the view that privatization and new entry

34 This variable is defined in footnote 21.

35 We also tested for the impact of different forms of ownership and control were tested, but found no

statistically significant effects.

36 Small firms may have greater incentives to under-report their income so as not to attract undue attention from
the state or organized crime. Although larger firms might have similar incentives, their size makes them easier to
detect.
37 An F -test, with significance level 5.3% reveals that large firms experienced significantly higher sales growth
than medium sized firms, whereas the investment growth was not significantly different at 10% significance level.
38 An F -test reveals that de novo firms experienced significantly higher sales and investment growth than
privatized firms at significance levels above 1%.
39 An F -test with significance level 6.5% reveals that large firms experienced an improvement in the security
of property rights relative to medium size firms.

768

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

Table 6
The effects of state capture and influence on firm performance
Independent variables
Category

Sub-categorya

Captor firm

Direct effect

Interaction with the capture economy

Influential firm
Size

Large
Medium

Origin

(Small)
De novo
Privatized

Sector

(State owned)
Mining
Services

Dependent variables
Sales growth
(% rate)

Investment growth Improvement in security

(% rate)
of property rights

10.2**
(2.29)
48.3**
(2.71)
8.1**
(2.59)

2.2
(0.39)
24.8
(1.13)
11.3**
(2.95)

6.6*
(1.91)
25.6**
(2.00)
3.1*
(1.67)

28.7**
(2.81)
12.4**
(2.23)

18.7*
(1.71)
8.0
(1.46)

10.9**
(2.16)
2.6
(0.81)

34.5**
(5.63)
5.3
(1.18)

31.8**
(5.22)
12.0**
(2.29)

3.0
(0.73)
5.2
(1.39)

6.6
(0.66)
3.1
(0.72)

21.0
(1.38)
6.2
(1.50)

14.6
(0.86)
2.4
(0.90)

0.94**
(2.40)
0.04**
(2.00)

0.47
(1.11)

0.30
(0.91)

0.05**
(2.32)

(Manufacturing)
Overall bribe payments
Initial sales (3 years ago)
Initial assets (3 years ago)
Initial security of property rights (3 years ago)
N
R2
Econometric model
Breusch Pagan test 2 (1)
p-value
Hausman test
2 (11)
p-value
White test
2
p-value

1358
1324
0.10
0.08
OLS fixed effect OLS fixed effect
48.26
9.76
0.0000
0.0018
9.17
8.77
0.6066
0.6435
2 (277) = 321.00 2 (275) = 391.30
0.0354
0.0000

9.63**
(10.46)
1285
0.14
OLS fixed effect
42.04
0.0000
7.24
0.7795
2 (276) = 305.56
0.1068

Notes. Country dummies were included but their coefficients are not reported. Robust t-statistics are in
parentheses.
* Significance at the 10% level.
** Significance at the 5% level.
a Dummy variable with the omitted category in parentheses.

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

769

have created an effective constituency to push for institutional reform that increase the
security of property rights over time.
Finally, bribe payments intended to affect the implementation of laws, regulations and
decrees has a small negative but significant impact on firm sales growth rates, but no
significant effect on investment or on the security of property rights. This result indicates
that firms do not gain much from overall corruption, although state capture and influence
appear to be strongly beneficial. This puzzle highlights a possibly important distinction
between state capture and influence on the one hand, and most other corruption on the
other. State capture and influence are deliberate decisions by firms, but most other forms
of corruption may be extortion. If a firm has been targeted by an official for extortion, it
can be rational for the firm to pay the bribe because the consequences of not paying are
serious. Nonetheless the fact that the firm would be better off if it had not been targeted for
extortion in the first place implies that the negative coefficient on the bribe variable should
not be interpreted as indicating irrational behavior by firms that pay bribes, but instead a
rational response to a predatory official.

5. Macroeconomic consequences of the capture economy

The overall social impact of state capture is ambiguous, creating concentrated gains
for certain captor firms, but potentially creating distortions and imposing externalities on
the rest of the economy. Several negative externalities could be generated by the capacity
of a small number of powerful firms to capture the state and obtain advantages from the
developing legal and regulatory systems. Captor firms could use their relationships with
public officials to erect barriers to entry or to impose harsh regulatory burdens on their
competitors. States that are prepared to sell public goods to individual firms are likely to
be undersupplying those goods to the general market. What can the BEEPS data tell us
about the sign and magnitude of the overall impact of capture on economic performance?
Unfortunately any inferences are plagued with econometric problems. If firm performance is worse in high-capture economies we cannot rule out omitted variable bias, endogeneity, or be sure of the intervening mechanism. Rather than confront these issues directly
we present evidence that capture and macroeconomic performance are linked, but do not
attempt to determine the precise nature of these linkages. The regressions in Table 6 were
all estimated with country dummies to control for unspecified cross-country heterogeneity
in the performance of firms, after accounting for the heterogeneous characteristics of firms
and the strategies firms use in their interactions with the state. Therefore the coefficients
of these country dummies represent the portion of firm performance that can be attributed
simply to aggregate cross-country differences in economic performance.
State capture is negatively correlated with each of the measures of aggregate firm
performance. In particular the correlation coefficients, with significance levels in brackets,
of state capture with the country dummies for sales growth, investment growth and
improvements in the security of property rights are 0.63 (< 1%), 0.46 (3.0%), and
0.25 (26.3%), respectively. State capture is associated with large social costs for the
rest of the economy in deteriorating sales and investment growth, at the same time as
it generates individualized gains to captor firms. A vicious circle emerges in which the

770

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

capture economy begets more captor firms and firm performance across the entire economy
deteriorates. Since captor firms report superior enforcement of property rights this is a
potential source of the negative externalities. The correlation coefficient of the capture
economy with the improvement in the security of property rights is indeed negative, but
with the small sample size it is not statistically significant. Further work is required to
establish the precise mechanisms through which state capture is associated at the aggregate
level with negative economic performance.
Although the BEEPS data are not strong enough to determine the mechanism
through which externalities are generated, a recent study by Slinko et al. (2002)
based on a completely different methodology presents further evidence of externalities
and demonstrates various channels through which these impact aggregate economic
performance. In Russia, these authors find, the state capture generates micro-level gains
for the captor firms, but also leads to a number of macroeconomic problems that impose
negative externalities on the rest of the economy, in particular lower small business growth,
lower regional government revenues, and lower public spending on social services. Instead
of relying on survey evidence, these authors use publicly available accounting data on firm
performance for large firms in each region and identify capture by examining directly the
legislative concessions aimed at these firms. Although the limitations of the BEEPS data
must be acknowledged, such corroborating studies lend credibility to the results and to our
interpretation.

6. Summary and policy implications

This paper tests empirically the nature of relationships between the state and firms in
the transition economies. Two distinct modes of interaction are characterized, namely state
capture and influence, and the BEEPS data allow us to differentiate these channels and to
examine variations both across and within the transition countries. The analysis provides
insights into the origins and dynamics of the capture economy, namely an economy with
a relatively small number of firms that have managed to capture public officials at various
levels of the state, to extract concentrated rents, and to purchase individualized provision
of underprovided public goods. We also provide some evidence that the private gains to
capture are associated with substantial social costs in capture economies both in terms
of overall economic performance and with regard to the capacity or commitment of the
state to provide critical public goods for the development of the market economy. This
argument supports the conclusion of Hellman (1998) that the main political obstacles to
reform in transition economies have been the early winners from partial economic reforms
who succeeded in encoding their advantages in the legal and regulatory structure at large
social cost.
State capture and influence are in evidence in all transition economies, however the
advantages to the firm of such activities can be contrasted sharply between two groups of
countries. In the first group, called high-capture economies, the impact of state capture by
a small number of firms affects many firms throughout the economy. In the second group,
called low-capture economies, firms may seek to capture the state but constraints prevent

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

771

state officials from distorting the legal and regulatory framework to the advantage of a few
powerful firms. The dynamics of state capture are quite different for these two groups.
Capture tends to be a strategy of large de novo firms trying to compete in a market
dominated by large influential incumbent firms with close historical and formal ties to the
state. In such an environment, the state tends to under-provide critical public goods, such
as the security of property and contract rights, so that the most aggressive de novo firms
seek to purchase these services on an individualized basis directly from public officials.
Hence, these firms engage in capture to compensate for weaknesses in the overall legal
framework and to gain improvements in the security of property rights. Smaller firms
either lack the necessary access or find that the gains do not justify their involvement in
state capture and influence so that they suffer the costs of these activities. In the capture
economy, many dynamic new firms have strong incentives to engage in state capture that
itself creates a vicious circle that can undermine growth and retard further progress in
economic reform. Recognizing the dynamics of the capture economy suggests a political
economy framework is necessary to understand the divergent paths that are now clearly
evident among the transition countries.
The main policy conclusion to be drawn from this analysis is the need to shift the
focus of reform strategies to address the way in which firms interact with the state.
Although deepening the process of economic and political liberalization, which was the
main challenge of the initial stage of transition remains important, a new focus on measures
to channel the strategies of firms away from state capture to more legitimate forms of
influence through a combination of societal voice, reforms that promote transparency,
political accountability and economic competition is required. If state capture has distorted
the process of reform to create or preserve monopolistic structures supported by powerful
political interests, the challenge is particularly daunting. Strategies must combine a gradual
demonopolization with an activist stance on competition and entry policy and mobilize
societal voice so as to make transparent the social costs of state capture to the population,
to pro-reform constituencies and to non-governmental organizations. Strategies aimed at
mobilizing collective action and empowering competitive constituencies should be given
greater prominence, consistent with the empirical observation that, on average, higher
levels of state capture appear to prevail in quasi-authoritarian regimes as well as managed
democracies.
This paper is only an initial empirical investigation of state capture and influence in
transition economies. Future research is required to develop the conceptual framework
more fully and to collect more evidence on the channels through which state capture
exerts macroeconomic costs. A better understanding of these mechanisms could allow
more focused policy approaches to be developed. Detailed within-country studies can
supplement our broad cross-country survey approach. The empirical study of state capture
and influence is just beginning.

Acknowledgments
The authors are indebted to Jean Paul Azam, Simon Johnson, Janos Kornai, Jean
Jacques Laffont, Whitney Newey, Andrei Shleifer, Kenneth Sokoloff, Alex Sundakov,

772

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

Christopher Woodruff, the JCE editor John Bonin, and an anonymous referee for insightful
comments and suggestions. From within the World Bank we had helpful discussions
with Harry Broadman, Sanjay Pradhan, Francesca Recanatini and Randi Ryterman. The
contributions of seminar participants at Harvard University, at the annual RECEP/CEPR
conference in Moscow, and at the World Banks ABCDE and WDR 2001 conferences
are acknowledged gratefully. This paper is part of a joint research project on governance,
corruption and influence in transition initiated in 1998, which includes the design and
implementation of the Business Environment and Enterprise Survey (BEEPS) by the
World Bank Institute and the Office of the Chief Economist at the European Bank for
Reconstruction and Development. The authors are responsible for all errors and omissions.
The data set is available at http://info.worldbank.org/governance/beeps/.

References
Becker, Gary, 1983. A theory of competition among pressure groups for political influence. Quarterly Journal of
Economics 98 (3), 371400.
Breusch, Trevor S., Pagan, Adrian, 1980. The Lagrange multiplier test and its applications to model specification
in econometrics. Review of Economic Studies 47 (1), 239253.
Davidson, Russell, MacKinnon, James G., 1993. Estimation and Inference in Econometrics. Oxford Univ. Press,
New York, NY.
European Bank for Reconstruction and Development, 1999. Transition Report: Ten Years of Transition. EBRD,
London.
Freedom House, 2003. Freedom house country ratings. Freedom House, Washington, DC. Available from
http://www.freedomhouse.org/ratings/index.htm.
Grossman, Gene, Helpman, Elhanan, 1994. Protection for sale. American Economic Review 84 (4), 833850.
Grossman, Gene, Helpman, Elhanan, 2001. Special Interest Politics. MIT Press, Cambridge, MA.
Hausman, Jerry A., 1978. Specification tests in econometrics. Econometrica 46 (6), 12511271.
Hellman, Joel S., 1998. Winners take all: The politics of partial reform in postcommunist transitions. World
Politics 50 (2), 203234.
Hellman, Joel S., Jones, Geraint, Kaufmann, Daniel, Schankerman, Mark, 2000. Measuring governance and state
capture: The role of bureaucrats and firms in shaping the business environment. Working paper 2312. World
Bank, Washington, DC.
Hellman, Joel S., Jones, Geraint, Kaufmann, Daniel, 2002. Far from home: Do transnationals import better
governance in the transition economies? Working paper. World Bank, Washington, DC.
Hellman, Joel S., Kaufmann, Daniel, 2002. The inequality of influence. Paper presented at the American
Economic Association Annual Meetings, 35 January 2003, Washington, DC.
Hsiao, Cheng, 1986. Analysis of Panel Data. Cambridge Univ. Press, Cambridge, UK.
Huntington, Samuel P., 1970. Modernization and corruption. In: Heidenheimer, Arnold J. (Ed.), Political
Corruption: Readings In Comparative Analysis. Holt Rinehart and Winston, New York, NY, pp. 492500.
Johnson, Simon, Kaufmann, Daniel, Shleifer, Andrei, 1997. The unofficial economy in transition. Brookings
Papers on Economic Activity (2), 159239.
Kaufmann, Daniel, Kraay, Aart, Mastruzzi, Massimo, 2003. Governance matters III: Governance indicators for
19962002. Working paper 3106. World Bank, Washington, DC.
Kaufmann, Daniel, Kraay, Aart, Zoido-Lobaton, Pablo, 1999a. Aggregating governance indicators. Working
paper 2195. World Bank, Washington, DC.
Kaufmann, Daniel, Kraay, Aart, Zoido-Lobaton, Pablo, 1999b. Governance matters. Working paper 2196. World
Bank, Washington, DC.
Kaufmann, Daniel, Wei, Shang-Jin, 1999. Does grease money speed up the wheels of commerce? Working
paper 7093. NBER. Cambridge, MA.

J.S. Hellman et al. / Journal of Comparative Economics 31 (2003) 751773

773

Laffont, Jean-Jacques, Tirole, Jean, 1991. The politics of government decision-making: a theory of regulatory
capture. Quarterly Journal of Economics 106 (4), 10891127.
Laffont, Jean-Jacques, Tirole, Jean, 1993. A Theory of Incentives in Procurement and Regulation. MIT Press,
Cambridge, MA.
Leff, Nathaniel H., 1970. Economic development through bureaucratic corruption. In: Heidenheimer, Arnold J.
(Ed.), Political Corruption: Readings In Comparative Analysis. Holt Rinehart and Winston, New York, NY,
pp. 510520.
Lui, Francis T., 1985. An equilibrium queuing model of bribery. Journal of Political Economy 93 (4), 760781.
Mauro, Paulo, 1995. Corruption and growth. Quarterly Journal of Economics 110 (3), 681712.
Peltzman, Sam, 1976. Toward a more general theory of regulation. Journal of Law and Economics 19 (2), 211
240.
Shleifer, Andrei, Vishny, Robert, 1993. Corruption. Quarterly Journal of Economics 108 (3), 599617.
Shleifer, Andrei, Vishny, Robert, 1994. Politicians and firms. Quarterly Journal of Economics 109 (4), 9951025.
Shleifer, Andrei, Vishny, Robert, 1998. The Grabbing Hand: Government Pathologies and Their Cures. Harvard
Univ. Press, Cambridge, MA.
Slinko, Irina, Yakovlev, Yevgeny, Zhuravskya, Ekaterina, 2002. State capture in the Russian regions. Working
paper. Collegium Budapest, Budapest.
Stigler, George, 1971. The theory of economic regulation. Bell Journal of Economics and Management
Science 2 (1), 321.
White, Halbert, 1980. A heteroskedasticity-consistent covariance matrix estimator and a direct test for
heteroskedasticity. Econometrica 48 (4), 817838.
World Bank, 2000. Anticorruption in Transition: Confronting the Challenge of State Capture. World Bank,
Washington, DC.
World Bank Institute, and Europe and Central Asia Public Sector Group, 1999. Governance and Anti-Corruption
Diagnostics: A Step-by-Step Guide to Survey and Diagnostic Implementation. World Bank, Washington, DC.