Good Governance, Corruption and Growth: A Political Economy of Post-Socialist Industrial Transformation in Albania and Kosovo, 1998-2015

Abstract

Since the mid-1990s, the “rediscovery” of institutions in development theory and policy has brought political and bureaucratic corruption to the centre stage of donor interventions in developing countries. The Post-Washington Consensus (PWC) has augmented more traditional neo-liberal development perspectives by suggesting that good governance reforms are both necessary and sufficient to stimulate economic growth. In this dissertation, I examine the relation between good governance, corruption and growth and find both the “sufficiency” and “necessity” claim to be wanting. I test these propositions by examining the trajectory of industrial transformation of Albania and Kosovo, two low-middle income post-socialist economies located in the Western Balkans region. Both these countries rank amongst the world’s top recipients of development aid per capita, and provided an arena for the donor community to administer good governance interventions as if in a controlled experiment. By the lights of the PWC, they count as the “most likely” cases of development success. Nearly 20 years on, however, corruption remains endemic and the PWC’s promise of “accelerated development” has fallen flat. In fact, I suggest, external interventions might even have contributed to making corruption yet more anti-developmental.

Despite a generalised trend of industrial stagnation and impoverishment, some industrial sectors have succeeded in weathering the crisis of transition. This raises another puzzle: how can sectors flourish in an intensely “corrupt” business environment? To answer this question, I assemble and codify an emerging body of “sociological” research on corruption that studies in detail the social relations in which corrupt exchange is embedded. What is important from the point of view of economic growth, I claim, is not the incidence and magnitude of corruption, but its structure and organisation: “who bribes whom to get what”. Bribes are typically paid to obtain rents, some of which may promote learning and accumulation. Crucially, both bribes and rents are typically exchanged within the fabric of patron-client networks. Using a detailed sub-national analysis and novel survey data at the firm-level, I then examine the influence of patron-client networks on firm performance. While corruption explains little variation in the performance of Kosovar and Albanian industrial firms, (some) rents (including donor-led engineering consulting services) have a positive impact on total-factor productivity growth. Crucially, though, it is the structure of the patron-client relations comprising the firm’s (informal) institutional environment that explain the best part of sub-national variation in industrial performance. In particular, I find robust evidence in support of the proposition that patron-client networks in which power is more centralised are more developmental than forms of decentralised or fragmented clientelism. Detailed case-study evidence at the sector level corroborates these propositions. This work makes an important contribution to empirical institutional economics and contributes a novel analytical narrative of industrial development in two relatively less studied transition economies.