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society. In addition, they show that as countries fight corruption, public spending on primary
education becomes more effective in expanding primary education enrolment.
In many countries and especially in Post-communist and Mediterranean countries the role of
the state is often carried out through the use of numerous rules or regulations. In these
countries, licenses, permits, and authorizations of various sorts are required to engage in many
economic activities (Kaufman 1997). The existence of such regulations and authorizations
gives a monopoly power to the officials who must authorize or decide on such activities
(Rose-Ackerman 1978). These officials may refuse the authorizations or may simply delay a
decision for months or even years. Thus, they can use their public power to extract bribes
from those who need the authorizations or permits most. Svensson (2003) argues that firms
have to pay bribes when dealing with public officials whose actions directly affect the firms’
business and such dealings cannot be easily avoided. Therefore it is not a fixed sum for given
services, but a function of sunk costs and future profits. Firms with higher overdue payments
to utilities also appear to pay higher bribes (Clarke and Xu, 2002). Fisman and Svensson
(2000) show that the raised risk of investing causes companies engaged in corrupt deals to
grow slower. For the gathered data, one percent of an increase in given bribe slows the growth
of the company by three percent, which was an effect three times greater than the effect of a
similar raise in taxation. What is more important, the researchers controlling for more and
more factors observed a diminishing role of taxation and an increasing impact of bribes.
Consequently, officially organized firms in Ukraine and Russia are much more probable to
admit to hiding sales and salaries than firms in Central Europe (Johnson, Kaufmann,
McMillan, and Woodruff 2000). Illegal enterprises are more widespread in Russia and
Ukraine, and such firms hide all of their output from the official scrutiny. What's more, firms
in Ukraine and Russia inform about spending more time on administrative and regulatory
matters than anywhere else (18% and 25% respectively compared to about 10% for the other
countries). In Ukraine and Russia generally all firms report making illicit payments, and
consequently they hide a high proportion of their revenues. In Central Europe, there exist a
group of firms, which operates both corruptly and unofficially, but the practice is not so
widespread. McArthur and Teal (2004) use survey data to investigate the importance of
corruption in determining firm performance in Africa. They find that corruption is linked to
significant adverse effects on firm performance in two ways. At the firm level, companies that
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