Corruption related to cohesion policy


The concept of cohesion policy through giving EU funds for state subsidies and corruption

Cohesion policy represents the idea of solidarity: the richer member states make sacrifices to support the development of the poorer ones. This is a great and very respectable idea in itself. On the other hand, the whole concept of fostering social cohesion through providing EU funds for state subsidies is highly problematic in many respects. Let me illustrate my concerns through the example of Hungary.

Hungary, not unlike other CEE countries, suffers from grave social cohesion problems, which the existing EU cohesion policy fails to address. Our labour market collapsed in the transitory years (1989-93), and it never recovered. (The claim that it is recovering now is plainly a lie, and a very ruthless one, too. People suffering from long-term unemployment have no chance of getting any state aid unless they sign up for ‘public works’, the vast majority of which is just meaningless humiliation. If they did some public work, e.g. cleaning the ditch in the village, for some time in the year, they are counted statistically with the economically active. Post 2010 activity rate figures are thus completely misleading.)

There are two main reasons for the failure of our labour market to recover. One is that there is a great number of undereducated people in the active age with critical skill-deprivation who were forced out of the labour market when the state-run economy of the communist era collapsed, and cannot re-enter the labour market. The other is that we have a very week SME sector—in ‘normal countries’ it is usually the SME sector that provides jobs for the relatively uneducated.

We never has adequate policies to address these problems. We have an extremely selective and segregative education system which excludes the children of the poor, in which dramatically underpaid teachers are trying to cope with the ever worsening social situation. The skill-deprivation (in terms of the most elementary skills like reading and numeracy) is thus transferred from one generation to another. The SME sector cannot prosper mainly because it is overtaxed. Taxation of labour is overemphasized in the Hungarian tax mix, mostly in consequence of the narrow tax basis, which is a direct consequence of the low activity rate. Tax wedge at the average wage is second largest in the EU. The result is that the employment problems, and of course the social exclusion problems it causes, are not just retained but aggravated.

This is the heart of our problems with social cohesion. The amount of money we receive from the European taxpayers is enormous. This year, just as it was the case last year, it well exceeds the economic growth we are producing. It is more than the yearly burden of out gigantic sovereign debt. It surpasses also the sum we spend on education. Yet, it does not address our real problems with cohesion. What does it do instead?

EU cohesion policy provides money for individual enterprises on a non-normative basis. It gives money to branches of the state to spend via public procurement. In doing so, it requires the Hungarian tax-payer to contribute, so it drains the local resources that could be spent on policies that really address cohesion. EU cohesion policy excludes spending for, e.g., improved teacher salaries or alleviating the burden of Hungary’s sovereign debt, which could possible allow for easing the tax burden of SMEs. In the meantime the EU insists that the 3% deficit ceiling is maintained, constantly urging the government to cut expenses, which the government does, deteriorating basic public services, and through that, social capital.

The results are empirically well established: Hungary is not catching up with the older EU Member States in terms of per capita GDP at all. The already tragic social cohesion indicators worsened since the country started benefiting from EU cohesion policy. Even within-the-country regional inequalities grew worse than they were before. These massive failures are achieved while the country constantly receives an EU cohesion policy infusion worth, on average, in the neighbourhood of 3% of its GDP.

There are far-reaching consequences of the arising policies in the economy. A massive number of economic players compete for EU subsidies, instead of competing for the customers. There is a considerable opportunity cost involved: resources are invested in subsidy-seeking, instead of marketable innovation. The hand-picked winners of subsidies may prosper, but not through sustainable performance, and often at the cost of the degradation of the competing businesses. So job creation at the winning businesses is often accompanied by job loss at their competitors who lose because the playing field is made uneven by the subsidies.

There are far-reaching consequences in terms of corruption, too. Corruption will always be present in politics, surely, it cannot be fully eradicated. But there is a huge difference between structures and policies that make corruption rare and risky, and others that make corruption the rule, the ‘business as usual’. At the end of the spectrum—and this is where some EU countries, including Hungary, are—the corrupt relations between politics and economy dominate and replace both the fair operation of a market-economy, and fair political competition.

Where large scale state subsidies are distributed by bureaucracies under political control, there is a high motivation for economic players to seek political influence, and for political players to exert ever closer influence on development decisions. Embeddedness in politics becomes the cornerstone of economic success. Strong business players ‘invest’ heavily in politics, there presence in politics is ever stronger, up to the point when they come to dominate mainstream politics.

From the other angle, dominant political players actively aim at creating and maintaining a loyal clientele through controlling the distribution of development subsidies, to make loyalty the key to success, and to ensure financial resources with which they can bend political competition. The consequences for democracy are far-reaching. Democracy is based on the moral ideals of equality and equal participation. Well, these tendencies undermine the credibility of these very ideals.

This is not just theory, this is actually happening. Paradoxically, the rise of the current Hungarian regime, which is far more extremely oligarchic than any other government since 1990, was made possible by the massive disillusionment that preceded its rise to power in 2010.

There is nothing in this phenomenon which would bind it to be specifically Hungarian: Corruption is eating the moral foundations of democracy in a number of member states, especially on the periphery, where the political system fails to deliver well-being for a great proportion of the society.

There are two broad ways to address these problems at the EU level: reforming cohesion policy, on the one hand, and strengthening anti-corruption policy, on the other. I think it is high time to start both. There is an overlapping area though: there are conceivable ways of reforming cohesion policy in view of reducing its corruption-generating impact. Here are some suggestions in great outline:

  • Seeking ways to use EU taxpayer money for improving cohesion by means other than administrations giving subsidies to individual businesses directly, or through public procurement
  • Strengthening, monitoring and enforcing public procurement standards
  • Criminalizing the use of political power or public office to influence the selection of projects
  • Such crimes with EU money should be prosecuted by an independent European Public Prosecutor’s Office
  • OLAF, the EU’s agency for anti-fraud investigation is not in the right place in the Commission’s organization. The Commission has a political leadership, which is fine; the college of the Commissioners consists of individuals who are deeply embedded in the national politics of their respective member states, which is inevitable; but the EU body whose job is to uncover fraud and corruption, including high-level political corruption should not be under such political direction. In theory, the Commission directs OLAF only in respect of its policy related tasks, and not in its investigative activities. The Dalli scandal, and the ongoing controversy between OLAF’s Supervisory Committee and OLAF itself about the OLAF’s independence clearly shows, however, that this is not the right arrangement.
  • Monitoring and evaluation should be clearly and rigidly separated from the national management of the distribution of the EU funds.
  • On-going funding should be made conditional on the maintaining of transparency and integrity standards in the management, and also on substantive indicators of whether actual progress is made towards the social objectives that the funds are supposed to serve.

More generally, there is much to be done at the EU-level in the area of anti-corruption policy. There is a considerable improvement, which needs to be acknowledged: We clearly needed a monitoring and evaluation tool to keep track of the situation as regards the existing efforts combatting corruption. The EU Anti-Corruption report, which the Commission published for the first time about a year ago, and which it proposes to publish biannualy, is a useful instrument in this respect. Quite controversially, however, the Report stops at the member states, and fails to assess the integrity of the EU institutions themselves. The missing 29th chapter has been produced by Transparency International shortly after the Commission published its report. It has pointed out important loopholes in the EU institutions’ integrity systems, most importantly in the transparency of the law-making process, in the transparency of lobbying, in preventive integrity standards concerning conflict of interest cases, the revolving doors phenomenon. It also raised important institution points of concern, mainly those already mentioned in relation to OLAF’s political independence. Uneven standards of whistle-blower protection is also a concern.

This leads us to a huge issue: the support and protection legislators and political institutions are willing to give to those who come forward to uncover fraud and corruption protecting public interest. There are alarming reports published on a regular basis on the scale of the personal risk whistle-blowers have to take even in the EU countries with relatively strong democratic cultures, running the risk of destroying their professional careers and personal lives. The situation very strongly calls for binding EU level legislation on the standards of whistle-blower protection, which should be ambitious, closely monitored, and vigorously enforced. This is an issue highly relevant to corruption and fraud with cohesion policy resources, too. Uncovering fraudulent practices and corruption is not only a law-enforcement matter. Journalistic investigations have long been known for contributing largely to defending the public’s interest. Yet, the media market developments of the most recent decades made investigative journalism an endangered species. New ways of funding are needed to keep up this genre, and – as successful examples have demonstrated – public money might have a role in it. As far as I can see, it is urgent that these measures come together in a coherent EU-level anti-corruption strategy which encompasses all areas of EU-policy.



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