Corruption Perceptions in the Caucasus: Impediments to Business Activity in Armenia, Azerbaijan, and Georgia

Abstract

Armenia, Azerbaijan, and Georgia were bound together under Soviet direction for most of the twentieth century. When the veneer of centralized control was wiped away in the 1990’s, political, economic, and ethnic differences re-emerged after decades of being suppressed. This paper utilizes the Business Environmental and Enterprise Performance Survey (BEEPS) data from 2002, 2005, and 2009 studies gathered by a joint initiative of the European Bank for Reconstruction and Development and the World Bank to assess the environment for private enterprise and business development in transitioning economies. Crime and Corruption categories of the BEEPS studies were examined teasing out the shades of similarities and differences between and among the three countries. A series of BEEPS questions about “informal gift/payment expectations or requests” for a variety of business services or requirements reveals some of the impediments to conducting business as these countries moved away from a command economy. The paper shows the shifting importance in the 2002-2009 time period of these subtle and not so subtle extraction of payments for businesses both within these three countries and among the three countries. Changes were often not in a consistent pattern; explanations for the inconsistencies are beyond the scope of this paper.The general trend for the three countries showed Georgian firms perceive fewer informal gift/payment expectations or requests than Armenian firms. Armenian firms perceive fewer informal gift/payment expectations or requests than Azerbaijan firms. For example, in 2009 no Georgian firms, 15% of Armenian firms, and 52% of Azerbaijan firms reported an informal gift/payment expectation or request for permit applications. In addition, no Georgian firms, 10% of Armenian firms, and 21% of Azerbaijan firms stated an informal gift/payment was expected or requested when applying for an operating license. Another trend revealed fewer informal gift/payment expectations or requests in 2009 than in 2002. However, occasionally firms reporting such expectations or requests spiked in 2005. For example, in 2002 18% of firms, in 2005 21% of firms, and in 2009 eight percent of firms revealed informal gift/payment expectations or requests for an electrical connection. During tax inspections 53% of firms in 2002, 62% of firms in 2005, and 15% of firms in 2009 received informal gift/payment expectations or requests. Firms considering exporting to these countries should be aware informal gift/payment expectations or requests may be experienced when importing to or setting up joint ventures in these countries. The prudent firm will conduct their own research on local business conditions before doing business in a country. For many issues it appears these corrupt practices may be declining so the outlook in the future is positive.