TCS Daily

The Party Goes On

By Meelis Kitsing - August 8, 2003 12:00 AM

By exploiting flexible financing rules, a new entrant increased its market share to equal that of the leading incumbent within a year. Despite its public promise of more transparency and tighter self-imposed ethical standards, the newcomer set up off-balance-sheet vehicles to hide some investments. The leading incumbent spent twice as much as the new entrant, half of which was financed by bonds issued by the main investment bank. Now the new entrant has formed a coalition with two incumbents to tighten up the rules and increase state subsidies -- which, if achieved, would make new entry nearly impossible.


While this scenario may well sound like a fight of greedy corporations for market share, the case is actually one of political parties promising to fight against the evils of the corporate world and to serve the public by addressing concerns raised by the common man. The specifics of the case are drawn from the election campaign in Estonia this past winter. But they also aptly demonstrate problems with the financing of political parties all over Central and Eastern Europe (CEE).


Across Estonia's southern border, political scientist Daunis Auers paints a much bleaker picture of party financing in Latvia in his article, "Potemkin Villages and Campaign Finance Reform", for, a leading public policy portal. Auers writes that many political parties present only a façade and "some are little more than fronts for particular corporate interests." According to Auers, Latvia's elections in 2002 were the most expensive in Europe in terms of per-capita spending. At the same time, Latvia's per capita GDP, at $3,213, is the lowest among candidate countries expected to join the EU in 2004.


Before the general elections in Latvia last fall (won by a newcomer to the political scene, as was the case in Estonia this year) non-governmental organizations criticized the state for not financing political parties. The politicians, on the other hand, did not see reason for change. Latvia is the only CEE country in which the state does not finance political parties.


Over the last few years, international organizations such as the World Bank and NGOs have been pushing CEE countries to adopt new party financing rules. In 2002, Österreichische Zeitschrift für Politikwissenschaft published research by four U.K., Hungary and Latvia-based political scientists, entitled "Political Finance in Central and Eastern Europe: An Interim Report." It analyzed the regulations governing party financing in 17 CEE countries. The authors found that all countries studied offered subsidies to the parties in the form of free broadcasting; three-fourths of the countries contributed direct public funding of candidates; almost two-thirds had set spending limits on parties and/or candidates; and almost half of the countries had limits on contributions to parties and/or candidates. "The absence of significant funding from subscriptions of party members seems to be a marked characteristic," the authors noted.


Certainly, imposing legal constraints to discourage rent-seeking through financial support to the parties is the way to go. However, simply replacing support from corporations with state subsidies creates the danger of restraining competition. More specifically, it may make new entry impossible as the state subsidy depends on the number of seats parties have achieved in the legislative bodies.


Instead, legal frameworks should create incentives for the political parties to focus on grassroots financing by asking voters and party members to put their money where their mouths are. As indicated by the research cited above, this is an area in which all parties in the CEE have failed.


In Estonia, the new political party Res Publica claimed to set a new self-imposed standard, drawing financial support from a wide range of sources. A closer examination reveals this claim as not much more than spin. The total number of financial contributors was higher than in the case of the other parties. Proportionally, however, the dominant share of collected funds was given by a small number of individuals and corporations. Some business people tend to contribute handsomely to all important political parties in Estonia. It doesn't take much imagination to see that their businesses are the most dependent on political decisions.


Drawing up new laws and regulations can root out straightforward corruption, yet the sophistication of financing schemes grows concurrently. The same lawmakers who are constrained by the regulations take pride in referring to the letter rather than the spirit of the law. Normally rather bland figures, politicians show extraordinary creativity where party finance is concerned. In Estonia, rules set a 1,000-kroon limit on cash contributions. One party received 999-kroon payments from the very same people several times within a week. Members of parliament have become extraordinarily generous by donating significant portions of their official income to their own party.


Hence, the financing of political parties in CEE countries resembles an all-night party in a crowded apartment complex. A few participants have a good time after paying only a modest fee. The bulk of total costs incurred for the party are socialized. People outside the party cannot get enough sleep and will be unproductive the next morning. But the partygoers do not compensate them for their trouble.


With an all-night party, the sleepless sufferers can complain to the landlord, who might evict the partiers or call the cops to help silence the crowd. In the case of political parties, people are constrained by a web of complex collective action problems. On the one hand, "we the people" should assume the role of landlord but we have a significant say only once every four years. On the other hand, the people have to talk to the same authorities who claim to act in the interests of neighbors but actually support the revelers.


Could the European Union be the police citizens in the CEE can call? Not really. The Elf scandal in France and Kohl's slush funds in Germany are only two cases in which anti-corruption efforts have shown that the "cops" may actually only represent louder partygoers -- or speak only Italian.


Perhaps, then, the media could act as cop? Certainly the media could alert the public by making use of legal constraints that increase transparency by forcing parties to publicly disclose contributions amounts and sources. However, as has been pointed out by former Estonian President Lennart Meri in a recent article, the Estonian media often act like a political party in their selective publication of the news. Auers adds that media outlets oppose campaign finance reform in Latvia. One need not travel to Russia or leave the EU even to witness the ways in which powerful media interests may converge with politics.


Publishing financial statements on the Web may increase public scrutiny but this may not be necessarily significant. Even in the case of fairly high per capita Internet penetration rates, people may lack incentives to explore such databases. For most people, financing a political party seems like throwing a party at a distant getaway - they are not directly affected until it comes home to their house. Meanwhile, the party goes on for the benefit of few at everybody's expense.



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