In the early and unsophisticated stages of the transition, people who wanted to gain monetarily from their position in government or their access to public sector officials would target their tender efforts on public expenditures. This meant they either gained access to direct budgetary allocations or to soft loans from public sources that they had no intention of repaying. However, when opening the vein of domestic credit creation through these more conventional means proved hyper-inflationary in so many countries, the hemorrhage was eventually stanched under pressure from the international financial institutions. This led to the more sophisticated rent-seekers we have become familiar with today. These fall into two general types:

Corruption with clout. Those rent-seekers with real clout have utilized it to influence privatization processes, gain control of state-owned companies, strip them of anything of value, default on their liabilities and contingent liabilities, and end up with fortunes. Although much of the cost of this ownership "transfer" was one-off, to the extent that the oligarchs ended up owning or controlling natural or state-sanctioned monopolies, they continue to represent a major deadweight loss to society. The solution is proactive government policy to increase competition, coupled with the enforcement of laws against anti-competitive behavior and, where some form of natural monopoly exists, government regulation.

Petty corruption. Small-timers, on the other hand, have to rely on income from the ubiquitous bribes that are necessary to conduct business in an exceedingly hostile enabling environment. Although not as politically polarizing as the large-scale theft described above, the deadweight loss of small-time official crookery is likely to be just as serious economically in terms of lost sales, jobs, income, and growth, because it preys on the main growth sector: small- and medium-scale enterprises.

The fact is, in many, if not most of the economies in transition, without petty corruption, economic activity would grind to a screeching halt. Why? The complex overlay of economic laws, regulations, inspections, reporting requirements, fees, and taxes, if actually implemented as written, would bankrupt anybody so foolhardy as to follow them to the letter. In many cases following them to the letter is not even possible because they are contradictory and overlapping.

Most countries in transition implemented the maze of economic legislation and regulation without any advance public consultation, or really without much prior analysis at all, and it is rarely subject to any feedback from the citizenry being regulated, or to expost performance review by the agencies supposedly in charge. To be blunt, without a relatively easy way around the incoherent, duplicative, intrusive, and maddeningly time-consuming and costly public sector interference in the economy, no economic activity could survive. And that way is—the bribe.

At a conference held at a major U.S. university some time ago, representatives of public sector institutions of Country Y were almost uniformly blasé about the impact of this kind of petty corruption on their economic prospects. Corruption was universal, the question was only one of degree. It was a form of "networking." Italy was corrupt—and look how successful its economy was. Corruption was embedded in their culture. It was a small cost of doing business. No real harm done.

But that’s not the reaction of foreign investors when they’re asked about barriers to risking their money in the economies in transition. Here’s a sampling of what they tend to say when interviewed about sources of corruption in the wild, wild East:

Currency controls. Currency controls and licensing procedures are often extremely time-consuming, and can harm ventures with foreign partners.

Tax rates. Tax rates, including payroll taxes, are high, and the tax code is an intricate maze, creating disincentives and distortions.

Tariff and nontariff barriers. Tariff and nontariff barriers are often incoherent and distortionary.

Tax and customs collection. Uneven and nontransparent collection of taxes and customs levies creates enormous opportunities for corruption. Import delays are frequently used as an incentive to pay bribes.

Product and building standards. Product and building standards are often significant barriers to investment, are based on outdated methodologies with no reference to cost, and through the threat of significant delays offer significant opportunities for corruption.

Licensing and registration. Regional and local licensing and registration procedures are often fragmented, duplicative, time-consuming and arbitrary, and are sources of frequent corruption.

Redress of grievances. Investors have little recourse for redress of grievances stemming from the arbitrary enforcement of laws, regulations, standards, taxes, and customs levie, or failure to implement contracts with local partners.

The list could go on and on. The point foreign investors are making is that they have other opportunities, with similar potential payoffs, and much less risk of losing the whole venture to a death by a thousand paper cuts. And in fact, Country Y’s record is not good: Despite being accepted for entry into the European Union, foreign investors have pretty much given it a miss. With all the lost sales, jobs, income, and growth that has entailed. The deadweight loss of petty corruption, by this measure, may be the difference between growth and no growth.