Similar Challenges Different Outcomes: Addressing the Supply and Demand Sides of Party Funding Regulations in Post-Communist Space 1.

Similar Challenges Different Outcomes: Addressing the Supply and Demand Sides of Party Funding Regulations in Post-Communist Space 1 Sergiu Lipcean European University Institute sergiu.lipcean@eui.eu Paper prepared for the presentation at the ECPR General Conference Prague, 7-10 September, 2016 Work in progress, Please do not cite without permission 1 This is not a self-standing paper. It is an empirical chapter of my PhD thesis 1

Table of contents 1. Operationalization of restrictiveness towards income limits... 5 2. The development of legal framework on financing with respect to party regular activity... 8 2.1. General trends regarding restrictiveness of income from private sources for party daily activity... 8 2.2. Low restrictive cases... 12 2.3. Medium-high restrictive cases...13 2.4. High restrictive cases... 18 2.5. Conclusion...25 3.The development of legal framework on financing with respect to election campaigns...26 3.1. General trends regarding restrictiveness of income from private sources for election campaigns...26 3.2. Low restrictive cases... 30 3.3. Medium-low restrictive cases...31 3.4. Medium-high restrictive cases...35 3.5. High restrictive cases... 39 3.6. Conclusion...49 2

List of tables: Table 1: Frequency of cases spent by post communist polities under different restrictiveness regimes...10 Table 2: Magnitude of change in restrictiveness degree for party regular activity 1990/1991 2007/2012*... 11 Table 3: Maximum level of donations for physical and legal entities in countries belonging to mediumhigh and high restrictive PFR... 16 Table 4: Summary statistics on donations from physical and legal entities for countries belonging to medium-high restrictiveness type 2007-2012 (thousand $)...17 Table 5: Summary statistics on donations from physical and legal entities for countries belonging to high restrictiveness type 2010-2011 (thousand $)... 20 Table 6: The size of donors network for countries belonging to high restrictiveness type...23 Table 7: Frequency of election campaigns spent by post communist polities under different restrictiveness regimes 1990 2012...27 Table 8: Magnitude of change in restrictiveness degree for party electoral activity 1990-2011...28 Table 9: the maximum limits on campaign spending for candidates and parties in Hungary (US $)...33 Table 10: Summary statistics on donations from physical and legal entities for countries belonging to high restrictiveness type 2007-2011 (US $)...43 Table 11: The size of donors network for high restrictive cases...46 List of figures: Figure 1: Typology of party funding regimes based on restrictiveness of private sources of income... 5 Figure 2: Restrictiveness of party financing regimes with respect to income limits for party regular activity in post-communist polities 1990 1996... 9 Figure 3: Restrictiveness of party financing regimes with respect to income limits for party regular activity in post-communist polities 2007 2011... 10 Figure 4: Timing of switching to more restrictive regimes and duration...12 Figure 5: Frequency of cases under a low restrictive regime by country 1990-2012...13 Figure 6: Frequency of cases under a medium-high restrictive regime by country 1990-2012...14 Figure 7: Maximum levels on donations from physical and legal persons for medium-high restrictive regimes 1994 1997 (in US $ thousand)....15 Figure 8: Maximum levels of donations from physical and legal entities for medium-high restrictive cases 2007-2012 (US $ thousand)...17 Figure 9: Frequency of cases under a high restrictive regime by country 1990-2011...18 Figure 10: Limits on donations from physical and legal entities for countries belonging to high restrictiveness type 2010-2011... 21 3

Figure 11: Overtime distribution of restrictiveness regimes for party regular activity 1990 2012...26 Figure 12: Restrictiveness of party financing regimes with respect to income limits for election campaigns 1990 1996...27 Figure 13: Restrictiveness of party financing regimes with respect to income limits for election campaigns 2007 2011...28 Figure 14: Timing and pace of change between different election financing regimes in post-communist space 1990-2012...29 Figure 15: Frequency of cases under a low restrictive regime for election financing by country 1990-2012...31 Figure 16: Frequency of cases under a medium-low restrictive regime for election financing by country 1990-2012... 32 Figure 17: Frequency of cases under a medium-high restrictive regime for election financing by country 1990-2012... 35 Figure 18: Maximum levels of donations on physical and legal persons during election campaigns for medium-high restrictiveness cases...37 Figure 19: Maximum donation levels from physical entities for high restrictive cases 2007-2011 (US $)...43 Figure 20: Maximum donation levels from legal entities for high restrictive cases 2007-2011 (US $)...44 Figure 21: The relationship between the size of donors network and the size of electoral market...47 Figure 22: The relationship between the size of donors network and the size of electoral market (without Moldova and Russia)... 47 Figure 23: Overtime distribution of restrictiveness regimes for party regular activity 1990 2012...50 4

1. Operationalization of restrictiveness towards income limits In this chapter I investigate the restrictiveness of party and campaign income amassed from private sources relying on the analytical framework exposed in the second chapter. The underlying idea based on which I conceive restrictiveness is linked to fundraising endeavors of political parties. As already noticed, a given PFR becomes more restrictive as political parties have to deploy more efforts in amassing income from private sources. The emphasis falls on income limits imposed on donations from different sources like physical and/or legal persons and aggregate limits on party/campaign income. Hence, the restrictiveness of income from private sources stems from crossing these two legal indicators. Figure 1 graphically depicts this typology. Figure 1: Typology of party funding regimes based on restrictiveness of private sources of income Caps on aggregate income No Yes Caps on individual contributions No Low Medium-low Yes Medium-high High As result of crossing, we obtain four configurations of restrictiveness ranging from a low to a high degree with two intermediate types. Any PFR that envisages limits neither on contributions from a single entity nor on aggregate income records a low restrictiveness score. On the contrary, any PFR that envisages limits on both types of caps records a high restrictiveness score. A medium-low score is assigned to those financing regimes that foresee limits for aggregate income but do not institute caps on private contributions. Finally, a medium-high score is assigned to those regimes that envisage limits on donations but do not set up limits on the aggregate party/campaign income. 5

Within this framework, however, there are instances of extreme cases belonging to the high restrictive type. This kind of restrictiveness embodiment can emerge in two different situations. The first occurrence emerges when political opposition is completely banned, that is, legal framework doesn t allow the registration and operation of alternative political parties. The second occurrence unfolds when private actors are banned from contribute to any electoral competitor altogether. In former communist polities such cases are found in several authoritarian regimes. 2 I use this framework to scrutinize financing regulations for both party regular activity and election campaigning. This is a necessary and pertinent separation due to national differences related to the duration of election campaigns that affect party fundraising and spending strategies. Therefore, by investigating both regular and campaign funding regulations allows capturing the fullness of regulatory regime. For instance if a given PRF is mainly focused on election campaign while leaving uncovered regular funding, then a large part of party finances would remain completely unaccountable in many respects. In the broadest sense, every party financial activity can be regarded as money for electioneering (Pinto-Duschinsky, 2002, p. 70) regardless of the time frame, although the intensity of electoral competition makes the use of money much more visible during elections. Consequently, it doesn t come as a surprise that electoral rules much more densely regulate the behaviour of electoral contenders regarding their finances. Nevertheless, controlling the sources of money and how it is spent by parties throughout their regular operation is not of a lesser importance. When the boundaries between election and non-election periods are blurred, parties have at their disposal more opportunities to avoid compliance by concealing not only the source of money but also its manipulation between election and non-election cycles. Hence, by analysing PFR relying on this division offers the possibility to look at the way how financing regulations for party daily activity and electioneering are intertwined. This framework also offers the advantage of investigating the incentive structure that regulatory framework lays down for political parties. By incentive structure I imply here the manoeuvring room available to political parties in designing their fundraising strategies. As already mentioned, a given PFR is considered more permissive if it does not require much efforts to be deployed in collecting financial resources. Resorting to this guideline, below I provide some considerations on how to operationalize restrictiveness beyond the mere assignment of cases to one or another restrictiveness type. The assignment of cases to different restrictiveness types does not tell us, however, much on how to compare cases when they belong to the same type. It might well be the case that many PFR could share the same properties, but still exhibiting high variation within the same type. Three out of four types display such a possibility. 2 I will discuss this type in more details while performing empirical analysis of post-communist polities. 6

Bearing in mind that my benchmark is the easiness whereby parties amass resources, the dividing line is drawn between those PFR that envisage and do not envisage caps on private contributions. In our case, low and medium-low restrictive regimes share this property. Since there are no legally binding quantitative restrictions on the amount a single entity is authorized to contribute to party coffers it is relatively easy for parties to collect money, provided that they are capable to access the pool of affluent donors. The only restriction is the payment capacity of a donor and his/her willingness to contribute. Therefore, such financing regimes are the most prone to so called plutocratic financing (Koole & Gidlung, 2001; Nassmacher, 2001; Pinto-Duschinsky, 1989). Low restrictive regime does not require any specific operationalization because it depicts a regime with no legally prescribed restrictions. Under the medium-low restrictive type the operationalization yardstick that allows comparing PFR restrictiveness is epitomized by the upper limit on party/campaign income. The larger the amount of financial resources political parties are entitled to accrue, the more permissive a funding regime is meant to be. Notwithstanding, this does not affect substantively the efforts parties have to carry out in their fundraising. It is legally admissible that a single resourceful contributor could bear the entire cost of financing. The occurrence of such an outcome is highly improbable in an ordinary situation but from a legal perspective it is feasible and analytically relevant. On the other side of the dividing line there are other two types that record higher restrictiveness values due to the presence of contribution limits set up by the regulatory framework. Under these conditions parties have to deploy more endeavours in order to collect the necessary resources for their operation. Overall, the relationship between contribution limits and restrictiveness hinges on the donation s value from a single entity. The larger the amount a single donor is entitled to contribute to party/campaign financing the less restrictive a PFR becomes and vice versa. The logic is that even under the presence of contribution limits, provided they are permissive, parties are not required to struggle too much so as to fill up their war chests. On the contrary, when the upper threshold on donations is fixed at low values, it is more likely to be associated with more constraining regimes due to greater efforts needed to be deployed so as to reach a broader pool of sponsors. Under these conditions lower caps on private contributions are much closer linked to grassroots financing strategies. Nevertheless, as will be shown throughout empirical analysis, it need not always be the case that donation caps, by default, entail a highly restrictive PFR. Given the fact that medium-high and high restrictive types are differentiated only by the presence of an upper annual/campaign limit (which is a significant additional restriction), but share the same feature of capping donation limits, their operationalization is slightly different. Both types however offer the possibility to explore the variation when many cases would fall within the same type. For the medium-high regimes the indicator that allows comparing similar cases is simply represented by the value of contribution limits itself. As already pointed out, high thresholds on 7

donations would involve fewer efforts to accrue financial resources and, therefore, would be associated with a less restrictive PFR. The opposite holds for low thresholds on contribution limits. The high restrictive type offers even a better way to operationalize restrictiveness and compare cases that belong to it. Knowing the value for a single donation and the value for the total income it is possible to construct an index that would reflect the extensiveness of donors network. This index is obtained by dividing the value of the upper limit on total campaign income as foreseen by law to the maximum value of a single contribution. The result represents the minimum number of donors that are necessary to reach the limit. The number of donors accounts here for the size of donors network and implicitly for the restrictiveness degree. The greater the number of sponsors needed to reach the aggregate income limit, the more constraining a PFR becomes since parties are compelled to strive harder to reach the limit. Vice versa, the lower the number of donors indispensable to reach the upper limit of the aggregate income, the less constraining are the rules on donations since the efforts undertaken by any party or candidate to reach the maximum limit are less demanding. In the light of these considerations, in the next paragraph I turn to the analysis of regulatory arrangements of party financing in post-communist polities and their development over time. 2. The development of legal framework on financing with respect to party regular activity 2.1. General trends regarding restrictiveness of income from private sources for party daily activity In this paragraph I address two issues related to the development of PFR in post-communist polities cross-country and overtime variation in the restrictiveness degree for party non-election activity. PFR in post-communist space illustrate an interesting paradox regarding their restrictiveness. While displaying a considerable degree of variation they still resembled each other in one respect the direction of restrictiveness. The majority of these financing regimes moved from the lack or very lax rules, pertaining to donation limits and caps on aggregate income, to quite complex regulatory regimes. In many cases, besides quantitative restrictions, i.e. how much money can be raised, these regimes also provided for some qualitative restrictions, that is, money coming from a certain source like party property or anonymous donations (when they were allowed) could not exceed a certain share out of the total income. At the onset of transition, few countries imposed constraints on party regular activity. While there was a motivated concern towards imposing restrictions on certain income sources, little attention was given to capping income from those who were authorized to give out, or to limit the total amount one could raise. Unlike the regulatory framework pertaining to the electoral competition, the regulation of private income sources for party daily activity received little attention. This should not be surprising given the autocratic past and the emergence of pluralistic politics via competitive elections. 8

Figure 2: Restrictiveness of party financing regimes with respect to income limits for party regular activity in post-communist polities 1990 1996 Source: Author s own elaboration Note: High-extreme political opposition is banned or private contributions are prohibited altogether; High - limits on contributions from physical and legal persons & and limits on total annual income; Medium-high - only limits on contributions from physical and legal persons; Medium-low - only limits on total annual income; Low - no limits. Figure 2 illustrates the state of affairs pertaining to the restrictiveness of PFR when former communist countries embarked on democratization process. Except few cases discussed above, during the first decade of transition the majority of postcommunist polities did not alter their rules regarding donations and limits on total income. They followed suit only at later stages by revising existing regulatory framework or enacting brand new legislation on party funding. Figure 3 captures the state of affairs for each country at the moment of GRECO evaluation of thier PFR. 3 As one can notice, there is a quite percievable shift from the low restrictiveness type towards more constraining PFR. Nevertheless, as this map shows, CEE and FSU polities can be diveded in two categories. The first category includes countries that have not altered their PFR regarding income limits for party regular activity, while the second category includes those that moved from a low restrictive regime towards more restrictive regulations. 3 For those post-communist countries that are not GRECO members like Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan data reflect their regulatory regimes as of 2011 except Turkmenistan for which the data reflects the regulations adopted in 2012. 9

Figure 3: Restrictiveness of party financing regimes with respect to income limits for party regular activity in post-communist polities 2007 2011. Source: Author s own elaboration Note: High - limits on contributions from physical and legal persons & and limits on total annual income; Medium-high - only limits on contributions from physical and legal persons; Medium-low - only limits on total annual income; Low - no limits. Yet, the shift towards more restrictive rules occurred slowly and in the majority of cases quite late. This can be inferred from the table 1 which indicates the frequency of cases spent under different restrictiveness regimes since the onset of transition till GRECO evaluation. One country year spent under a certain restrictiveness regime represents here one case and the table 1 indicates the total number of cases for all post-communist regimes for roughly 20 years. Overall, there is a clear prevalence of low restrictive regimes troughtout two decades of transition. In approximately two thrids of all cases political parties proved to be almost completely unconstrained with regard to the way how they amassed financial means from private sources. The restrictivenees of funding regimes under the lack of contribution limits sprang only from the range of banned sources. Notwithstanding, the lack of donation caps and ceilings on aggregate income still allowed political parties to ofset the restrictions placed on banned sources by extracting unlimited resources from the authorized ones. Table 1: Frequency of cases spent by post communist polities under different restrictiveness regimes Restrictiveness degree Number of cases Percentage of cases Cumulative percentage Low 386 68.56 68.56 Medium-low 4 0.71 69.27 Medium-high 111 19.72 88.99 High 41 7.28 96.27 Extreme-high* 21 3.73 100 Total 563 100 Source: Author s own calculations Note: Extreme-high restrictive regime exemplifes an extreme value of high type given the full ban on income from private sources and is usually present in authoriatarian regimes. For this reson I present it separately but it does not constitute a distinct restrictive regime. 10

Only in one fifth of all cases political parties have been subject to legal constraints in accumulating money from private donors via contribution caps and only in seven percent of cases they faced restrictions on both private contributions and total income. Table 1 doesn t reveal, however, the magnitude and timing of change. The magnitude of change captures the alteration in restrictiveness degree from the beginning of transition until the GRECO evaluation. The maximum change that ranges from the low to the high restrictiveness degree implies three units of change. The timing, on the other hand, reveals the moment of switching from less constraining to more constraining rules. Table 2 presents this change for all post-communist regimes. It shows that 12 countries did not experience any change in the restrictiveness degree, 10 placed only limits on donations and 5 imposed both kinds of caps, i.e. on donations and on the total annual income. Table 2: Magnitude of change in restrictiveness degree for party regular activity 1990/1991 2007/2012* Magnitude of change Number of countries Percentage -2 1 3.57 0 12 42.86 2 10 35.71 3 5 17.86 Total 28 100 Source: Author s own calculations Note: For the Former soviet republics I take 1991 as the lowest time limit while for other post-communist regimes of Central Eastern and South Eastern Europe the lowest time limit is 1990. The upper time limit varies for each country conditional on the GRECO evaluation. For Central Asian Republics which are outside GRECO evaluation scheme the upper time limit is 2011 except Turkmenistan for which it is 2012. Finally, timing of switching towards more restrictive regimes is a crucial factor in regulating party finances. From this perspective, post-communist polities turned out to be quite reluctant in restricting money flows during early 90. This can be seen from Figure 4 that presents sixteen polities that performed regulatory changes, thus shifting to more restrictive PFR. It displays both the moment of introducing restrictions on contribution limits and/or aggregate income and the endurance of adopted PFR until the upper time limit examined here. As one may notice, besides the variation regarding the timing of enacting more restrictive rules, the common feature displayed by all these cases is the preserving of these rules over time intact. 11

Figure 4: Timing of switching to more restrictive regimes and duration BGR BIH GEO HRV Restrictiveness degree Extreme-high High Medium-high Medium-low Extreme-high High Medium-high Medium-low Extreme-high High Medium-high Medium-low Extreme-high High Medium-high Medium-low LTU LVA MDA MKD MNE POL ROU RUS SRB SVN TKM UZB 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Author s own elaboration All countries depicted in figure 4, except Montenegro, jumped from a low to medium-high or high restrictive regimes in one stride. Montenegro, instead, needed two steps to reach the high level of restrictiveness. I turn now to a more detailed analysis of each restrictiveness type by scrutinizing more carefully the evolution of individual cases which are representative for every type. 2.2. Low restrictive cases Cases belonging to this restrictiveness regimes feature no legal constraints either on contribution limits from physical and/or legal entities or limits on aggregate income collected from these contributions. Therefore the only relevant dimension to look at is the length of their stay under a financing regime with no constraints. Figure 5 eloquently illustrates cross-country variation in this regard. 4 Almost half of post-communist polities, including Albania, Armenia, Azerbaijan, Belarus, Czech Republic, Estonia, Hungary, Kazakhstan, Kyrgyzstan, Slovakia, Tajikistan, and Ukraine remained encapsulated into a low restrictiveness regime for the entire period examined here. They are followed by the second group of countries that at least for one decade did not place, alike, any limits on party fundraising. Moldova and Croatia head this group with 16 years spend under the lack of restrictions with Russia and Bulgaria closing it with 10 and 11 years respectively. 4 Frequency of cases is represented by the number of years. 12

Figure 5: Frequency of cases under a low restrictive regime by country 1990-2012 Frequency of cases 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 BIH LVA MKD SVN GEO ROU LTU RUS BGR POL SRB UZB MNE HRV MDA ALB SVK ARM AZE BLR KGZ TJK CZE EST HUN UKR KAZ Source: Author s own elaboration Finally, the last group is represented by those countries which first introduced legal restrictions on income, thus they spent much less time under a low restrictive PFR. Slovenia, Macedonia and Latvia were the first who introduced donation caps between 1994-1995 shortly afterwards followed by Romania and Georgia. 2.3. Medium-high restrictive cases Medium-high restrictive cases feature the presence of annual donation caps on physical and/or legal entities. At the outset of transition only few countries imposed restrictions on the amount a single donor would contribute to party pocket. During the first decade of transition only five countries imposed such legal restrictions Macedonia, Slovenia, Latvia, Romania and Georgia. Similar to low restrictive cases, figure 6 shows the total number of years each country spent under medium-high restrictive regimes. 5 5 Romania is not presented in figure 5 since it also imposed limits on the annual total income parties could amass from private contributions. 13

Figure 6: Frequency of cases under a medium-high restrictive regime by country 1990-2012 Frequency of cases 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 TKM HRV UZB POL BGR LTU BIH GEO SVN LVA MKD Source: Author s own elaboration Slovenia s introduced limits on campaign contributions already in its electoral legislation in 1990 (Toplak, 2007, p. 171). Slovenian Party Law enacted in 1994 applied the same requirements to both physical and legal persons by capping the annual maximum contributions to 10 average monthly wages (AMW) (Art. 22). 6 Macedonia s Law on Political Parties passed in 1994 applied similarly equal restrictions to physical and legal entities by setting up an upper limit at 100 AMW annually. For the election campaigns however this limit was doubled, thus allowing individuals and businesses to donate up to 200 AMW (Art. 30). 7 Latvia followed suit in 1995 by fixing the upper limit on annual donations at 25 thousand Lats for both individuals and companies (Art.4). 8 Only Georgia set up different limits for physical and legal entities. The new party law enacted in 1997 fixed the upper annual limit on donations at 30 thousand and 100 thousand Lari for physical and legal entities respectively. 9 Despite of their belonging to the same restrictiveness type, one may still notice a variation stemming from different levels on contribution limits. Figure 7 depicts this variation among the former communist regimes belonging to the medium-high during the first decade of transition. 10 6 Political Parties Act - ZpolS (Official Gazette of the RS, no. 62/94 dated 7 October 2004), retrieved from www.partylaw.leidenuniv.nl 7 Law on Political Parties (Official Gazette of the Republic of Macedonia no. 41/94), retrieved from https://web.archive.org/web/20041012230714/http://www.mlrc.org.mk/law/l015.htm 8 Law on Financing of Political Parties, retrieved from www.partylaw.leidenuniv.nl 9 Органический закон Грузии О политических объединениях граждан No. 1028, 31/10/1997, Парламентские ведомости, 45, 21/11/1997. 10 The values for individual and corporate donations are obtained by multiplying the number of monthly wages, according to the law, to (BY) the wage value in the year of law enactment. The result is then divided by exchange rate of national 14

Figure 7: Maximum levels on donations from physical and legal persons for mediumhigh restrictive regimes 1994 1997 (in US $ thousand). 80 79.4 60 Thousand US $ 40 20 23.1 47.4 47.4 17.9517.95 12.2 0 2.4 4.66 4.66 Georgia Latvia Macedonia Romania* Slovenia Physical entities Legal entities Source: Author s own elaboration Note: Romania belongs to the high restrictive regime As figure 7 reveals, there is a large variance even among cases that belong to the same restrictiveness type. Georgia leads the top by having set up the maximum level on donations from legal entities at the equivalent of almost US $ 80 thousand. Slovenia, on the other hand, closes this top fixing the maximum level of donations at roughly 4.7 thousand US $ which is about 17 times less than Georgia s maximum levels. The pool of post-communist regimes imposing restrictions on income from private sources started to enlarge around 2000. In this respect they can be divided in two groups. The first group refers to countries that shifted from the low to the medium-high restrictiveness type and encompasses Bosnia & Herzegovina, Bulgaria, Croatia, Poland, Uzbekistan, and Lithuania. The second group concerns polities that switched from the low to the high restrictiveness degree and includes Romania, Russia, Serbia, Moldova and Montenegro. Although there is a difference in the restrictiveness degree between the two groups, they share the same property limits on private contributions. Table 3 presents the full range of regulatory changes since the introduction of donation limits with subsequent amendments for all ex-communist regimes belonging to medium-high and high restrictive regimes. 11 Data on contribution limits, as depicted in table 3, do not indicate clearly the currency to US $. Data on wages and exchange rates are taken from National Statistical Offices and National Banks of each country respectively. 11 If a country records a single observation then the upper level of donation remained unchanged over time. Conversely, every additional observation implies changes regarding the maximum contribution level. 15

direction in the restrictiveness of donation levels. While some countries like Bosnia & Herzegovina, Romania, and Russia lifted up the maximum donation levels, other countries like Bulgaria, Latvia, and Lithuania drifted in the opposite direction by cutting down the amounts a single donor was entitled to give out. Table 3: Maximum level of donations for physical and legal entities in countries belonging to medium-high and high restrictive PFR Country Year Restrictiveness type Maximum level of donations on Maximum level of donations on legal entities physical entities Bosnia & Herzegovina 2000 Medium-high 8 AMW 8 AMW Bosnia & Herzegovina 2010 Medium-high 8 AMW 15 AMW Bulgaria 2001 Medium-high BGN 30.000 BGN 30.000 Bulgaria 2005 Medium-high BGN 10.000 banned Croatia 2006 Medium-high HRK 90.000 HRK 1.000.000 Georgia 1997 Medium-high GEL 30.000 GEL 100.000 Latvia 1995 Medium-high LVL 25.000 LVL 25.000 Latvia 2002 Medium-high LVL 10.000 LVL 10.000 Latvia 2004 Medium-high LVL 10.000 banned Latvia 2008 Medium-high 100 MMW banned Lithuania 1999 Medium-high 500 MLS 500 MLS Lithuania 2004 Medium-high 300 MLS 300 MLS Macedonia 1994 Medium-high 100 AMW 100 AMW Macedonia 2004 Medium-high 100 AMW 200 AMW Macedonia 2009 Medium-high 75 AMW 150 AMW Poland 2001 Medium-high 15 MMW banned Slovenia 1994 Medium-high 10 AMW 10 AMW Turkmenistan 2012 Medium-high 10 AMW 10 AMW Uzbekistan 2004 Medium-high 500 MMW 5.000 MMW Moldova 2007 High 500 AMW 1.000 AMW Montenegro 2008 High 2.000 10.000 Romania 1996 High 100 GMMW 500 GMMW Romania 2003 High 200 GMMW 500 GMMW Russia 2001 High 10.000 MMW 100.000 MMW Russia 2008 High RUB 4.330.000 RUB 43.300.000 Serbia 2003 High 10 AMW 100 AMW Source: Author s own elaboration based on countries legal framework Note: MMW Minimum monthly wage; GMMW Gross minimum monthly wage; AMW Average monthly wage; MLS Minimum living standard. For comparison purposes I transformed data from table 3 controlling for wage levels and exchange rates so as to assess cross-country variation in the restrictiveness of donation caps. This gives us a more fine-tuned picture on donations and highlights within type variance. Figure 8 displays impressive differences concerning the upper contribution levels. On the one hand, there are countries that impose quite harsh requirements by establishing low spending levels on annual contributions from private individual and corporate donors. Bosnia & Herzegovina, Bulgaria, Poland, and Turkmenistan clearly belong to this group by establishing relatively modest annual contribution limits. On the other 16

hand, one finds Croatia, Georgia, and Macedonia with the most permissive rules, particularly due to high levels established for corporate donors. Lithuania, Latvia, and Slovenia are located in the middle by establishing similar caps for both individuals and corporate donors. Uzbekistan can be included in this group as well due to similar caps on corporate donations. Figure 8: Maximum levels of donations from physical and legal entities for medium-high restrictive cases 2007-2012 (US $ thousand). 12 200 189.4 150 Thousand US $ 100 56.1 67.8 50 0 4.3 8.1 7.1 7.1 16.8 17 16.5 16.5 33.3 33.3 33.9 7 7 16.6 16.6 3.3 3.3 BIH BGR GEO HRV LTU LVA MKD POL SVN TKM UZB Physical entity Legal entity 3.2 32.1 Source: Author s own elaboration Summary statistics provided in the table 4 is very instructive with regard to the stretch of contribution limits for both categories of donors. The highest level of donations from individuals established by Macedonia is 10 times larger than level fixed by Turkmenistan and Uzbekistan. Similarly, the ratio concerning corporate donations is even higher. Even if one excludes Croatia as an outlier, the ratio between the highest (Macedonia) and the lowest (Turkmenistan) levels of corporate donations is about 20 times. Table 4: Summary statistics on donations from physical and legal entities for countries belonging to medium-high restrictiveness type 2007-2012 (thousand $) Number of cases Mean Std. Dev. Minimum Maximum Caps on donations: physical entities 11 14.45 11.04 3.2 33.9 Caps on donations: corporate entities 11 39.75 53.94 3.3 189.4 Source: Author s own calculations 12 The values for individual and corporate donations are obtained by multiplying the number of monthly wages, according to the law, to the wage value in the year of GRECO evaluation. The result is then divided by exchange rate of national currency to US $. Data on wages and exchange rates are taken from National Statistical Offices and National Banks of each country respectively. 17

Despite the fact that all these PFR belong to the same type, the data reveals that political parties face different incentives and constraints towards their fundraisng strategies. Consequently, low levels of donations represent a clear indicator of greater efforts needed to be carried out by parties relative to higher levels of contribution limits. 2.4. High restrictive cases High restrictive regimes establish both kinds of restrictions limits on donations and total annual income amassed form private contributions. Only five post-communist polities are encapsulated by this financing regime. Romania, Russia, Serbia, Montenegro and Moldova imposed such legal constraints on party finances but the timing of instituting harsher requirements greatly varied among them. Figure 9 eloquently shows the number of years each of them spent under harsher regulations. Figure 9: Frequency of cases under a high restrictive regime by country 1990-2011 Frequency of cases 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 MNE MDA SRB RUS ROU Source: Author s own elaboration Limits on donations Romania was the first post-communist regime shifted towards high restrictive type although this status was achieved only in 1996 before the third democratic elections, which means that previously party finances were completely unregulated. Indeed the 1989 decree-law that laid the ground for the emergence of political pluralism by setting up the rules for party registration and operation has only a single mention regarding funding, namely parties were compelled to declare their financial means as a requirement for 18

their registration. 13 For more than five years Romanian parties were operating in a quasi-legal vacuum, including their financing. The 1996 Law on political parties brought about dramatic changes to the previous situation. 14 Both kinds of provisions have been introduced. Upper levels of donations were set up at 100 GMMW and 500 GMMW for physical and legal entities respectively. Several other quantitative and qualitative restrictions have been imposed. The maximum amount collected from membership fees was capped at 50 GMMW from a single member. While these limits clearly indicate a shift towards much tighter regulations, some relaxing provisions were still mirroring the willingness of political parties to preserve some regulatory loopholes. For instance, the maximum amount originating from membership fees was not capped altogether and private donors could keep their anonymity for amounts below a certain threshold. This combination created sufficient maneuvering room allowing political parties to conceal the origin of money. Regulatory framework adopted in 1996 was replaced by a new one in 2003 which reflected a softening of rules on contribution limits. 15 While the donation caps for legal entities remained at the same level as in 1996, i.e. 500 GMMW ($ 42.160), those for individuals were lifted up from 100 to 200 GMMW ($ 16.860). Another law on party funding was adopted in 2006 but the provisions regarding contribution limits remained untouched (Art.5). 16 Shortly afterwards, however, the regulations on contribution levels were again relaxed. In 2008 Romanian government adopted an emergency ordinance according to which the upper levels of donations from physical and legal entities were doubled when multiple elections are held in the same year, thus fixing them at the equivalent of 400 and 1000 GMMW respectively (Art.5). 17 These provisions can be regarded as particularly permissive towards political parties because they were to be applied for every single election campaign during the same year when multiple elections are held. Under such conditions it becomes obvious that incentive structure, set by regulatory framework, was designed in a way that was highly prone to large contributions and did not boost, whatsoever, grassroots funding although the provision according to which the total income amassed from membership fees is uncapped remained in force (Art.4). After Romania, Serbian party financing law enacted in 1997 already foreseen contribution limits but the law had a serious shortcoming. While it established caps for legal entities amounting to 50 AMW ($ 6.750) it has not instituted any caps for physical entities (Goati, 2007, pp. 162 163; Stoyanov et al., 2002, p. 91), an omission that rendered contribution limits on corporate donors completely ineffective. 13 Decret - Lege nr. 8 din 31 decembrie 1989 privind inregistrarea si functionarea partidelor politice si organizatiilor obstesti din Romania. 14 L27/1996 Lege nr. 27 din 26 aprilie 1996 Legea partidelor politice: Legea nr. 27 publicată în Monitorul Oficial nr. 087 din data: 04/29/96. 15 Lege nr. 43 din 21 ianuarie 2003 privind finanţarea activităţii partidelor politice şi a campaniilor electorale. Publicat în Monitorul Oficial, Partea I nr. 54 din 30 ianuarie 2003. 16 Lege nr.334 din 17 iulie 2006 privind finanţarea activităţii partidelor politice şi a campaniilor electorale. Publicat în Monitorul Oficial. nr. 632/21 iulie 2006. 17 OUG nr. 98/2008, ordonanta de urgenta pentru modificarea si completarea Legii nr. 334/2006 privind finantarea activitatii partidelor politice si a campaniilor electorale. Publicat in Monitorul Oficial, Partea I nr. 630 din 29/08/2008. 19

This regulatory loophole was removed only in 2003 when a new law on party funding was enacted after the breakdown of Milosevic regime. 18 The new law capped annual donations at 10 AMW for individuals and 100 AMW for legal entities (Art. 5). Russia, on the other hand, introduced for the first time contribution limits for party daily activity in 2001 capping individual donations at 10 thousand AMW ($ 34.275) and corporate donations at 100 thousand AMW ($ 342.760) (Art.32). 19 In 2008 Party Law was amended which resulted in an increase of annual donation limit to RUB 4.330.000 for individuals ($ 174.000) and to RUB 43.300.000 for corporations ($ 1.740.000). 20 Moldova and Montenegro joined the cohort of high restrictive regimes relatively late. Montenegro introduced contribution limits only in 2008 when it passed a new Law on Party Financing that capped individual and business contribution for the regular activity to 2 thousand and 10 thousand respectively (Art. 9). 21 Only at the end of 2007 Moldovan legislature adopted a brand new law on political parties which put in place a new regulatory framework on party financing. 22 The previous legal framework that survived for more than 16 years did not envisage any restrictions regarding contribution limits. It only focused on allowable financing sources. 23 Notwithstanding the novelty of the new legal frame, it turned out to be extremely generous with the size of contribution limits which were set up at a very high level. Donation caps for physical and legal entities were set up at 500 and 1000 AMW amounting to roughly $ 85.000 and $ 170.000 respectively at the moment of the law enactment. In this respect, Moldova held the second top position after Russia among all post-communist regimes. It appears that even if Moldovan political parties adopted a new law, it was drafted in a way that still left for them quite a large maneuvering room concerning fundraising. Albeit these polities shifted from unregulated to more constraining regimes, they still varied largely regarding the maximum threshold of donations. High restrictive cases display an even higher variation than medium-high cases regarding the upper contribution levels. As table 5 illustrates the range between the minimum and maximum values of donations is extremely large. Table 5: Summary statistics on donations from physical and legal entities for countries belonging to high restrictiveness type 2010-2011 (thousand $) Number of cases Mean Std. Dev. Minimum Maximum Limits on donations: physical entities 5 63.8 66.6 2.7 147.3 Limits on donations: corporate entities 5 376.7 618.9 13.3 1473.1 Source: Author s own calculations 18 Law on Financing of Political Parties. Official Gazette of the Republic of Serbia No. 72/2003, 75/2003. 19 Федеральный закон от 11 июля 2001 г. N 95-ФЗ, О политических партиях. 20 Федеральный закон от 22.07.2008 N 144-ФЗ, О внесении изменений в статьи 30 и 33 Федерального закона О политических партиях. 21 The Law on Financing of Political Parties. ( Official Gazette of Montenegro, no. 49/08 from the 15th of August 2008). 22 Lege Nr. 294 din 21.12.2007 privind partidele politice Publicat: 29.02.2008 în Monitorul Oficial Nr. 42-44, art. Nr: 119. 23 Lege Nr. 718 din 17.09.1991 privind partidele şi alte organizaţii social-politice. Publicat: 04.05.2000 în Monitorul Oficial Nr. 53, art. Nr: 340. 20

Figure 10 graphically depicts the variation among high restrictive cases with Montenegro and Russia representing extremes. Figure 10: Limits on donations from physical and legal entities for countries belonging to high restrictiveness type 2010-2011 1,500 1473 thousand US $ 1,000 500 0 240 120 2.7 13.3 44 110 147.3 4.7 47 Moldova Montenegro Romania* Russia Serbia physical entities legal entities Source: Author s own elaboration Note: * - What concerns Romania in years when multiple elections are held the upper level of donations from physical and legal entities is set up at the equivalent of US $ 88 thousand and US $ 220 thousand respectively. In spite of the presence of contribution limits, there were additional loopholes that made regulatory regime more permissive than they appeared to be. For instance, Serbia, Montenegro and Russia did not impose any limits on the maximum levels of membership dues. This situation could entail a theoretical risk that the legal limits on donations could easily be circumvented 24 by means of unlimited membership fees. 25 Although such a risk was minimal in post-communist space, given the tiny share of membership fees in the overall party income, the poor regulation of membership fees in relation to donations was a common issue for many countries. On the other hand, Romania and Moldova impose harsher rules on membership fees but even in their case one may notice some regulatory loopholes. While the annual cap on membership fees changed several times in Romanian legislation (1996 50 GMMW; 2003 100 GMMW; 2006 48 GMMW), the total income collected from membership fees has never been capped. Moldova applied to membership fees the same rules as for donations, so they turned out to be quite permissive. 24 Evaluation Report on Montenegro Transparency of Party Funding (Theme II) Adopted by GRECO at its 49th Plenary Meeting (Strasbourg, 29 November 3 December 2010), p.16. 25 Evaluation Report on the Republic of Serbia Transparency of Party Funding (Theme II) Adopted by GRECO at its 48th Plenary Meeting (Strasbourg, 27 September 1 October 2010), p.16. 21

Limits on total income The second distinctive property of the high restrictiveness type is the presence of quantitative restrictions on the total amount of revenue parties are allowed to raise annually from donations. All five countries that belong to this type provide for limits on aggregate income and, to some extent, are indicative for the leeway available to parties in devising their fundraising strategies. By the leeway I mean the minimum number of donors, as pointed out in methodological section, needed to reach the upper limit on aggregate income. Again, Romania was the first post-communist polity that introduced a restriction on aggregate income amassed by parties from private donations throughout a calendar year. However, as in case of private contributions these restrictions were relaxed suggesting an increase in parties demand for financing. In 1996 the maximum level was established at the equivalent of 0.005% from the state budgetary revenue with the possibility to be doubled for the election years, thus reaching 0.01% out of the total (Art.35). 26 This provision remained in place until 2003 when it was replaced with a new one which fixed the upper level of total income collected from private sources at 0.025% the equivalent of the state budgetary revenue, indicating a fivefold increase relative to the previous limit, at the same time maintaining the clause that envisaged to double this amount to 0.05% in the fiscal years when multiple elections are held (Art.5). 27 Russia introduced for the first time a limit on total annual party income accrued from private contributions in 2001 setting out the limit at 10 million MMW, including party regional branches. An additional condition was that each regional branch could not amass income from private contributions exceeding 200 thousand MMW (Art.30). 28 This limit was significantly lifted up in 2008 by an amendment to party law which replaced the previous cap by a fixed sum amounting to RUB 4.330 million. At the same time each party regional branch could not collect from donations more than RUB 86.6 thousand. 29 Given their common statehood up to Montenegro independence in 2006 party finance regulations of Serbia and Montenegro shared many common features, yet they followed different paths. What concerns the maximum level on aggregate income collected from private sources, their regimes resembled each other by tying this amount to public funding. The only difference was the size of state aid. This implies the presence of differentiated limits for beneficiaries and non-beneficiaries of state subsidies. For parties that qualify for state subsidies the aggregate income from private contributions should not exceed 100% the amount they receive from public purse. A different formula was applied to parties that do not receive public funding. For them the upper limit for the revenue amassed from private 26 L27/1996 Lege nr. 27 din 26 aprilie 1996 Legea partidelor politice: Legea nr. 27 publicată în Monitorul Oficial nr. 087 din data: 04/29/96. 27 Lege nr. 43 din 21 ianuarie 2003 privind finanţarea activităţii partidelor politice şi a campaniilor electorale. Publicat în Monitorul Oficial, Partea I nr. 54 din 30 ianuarie 2003. 28 Федеральный закон от 11 июля 2001 г. N 95-ФЗ, О политических партиях. 29 Федеральный закон от 22.07.2008 N 144-ФЗ, О внесении изменений в статьи 30 и 33 Федерального закона О политических партиях. 22

contributions must not exceed 5% from the total amount of state subsidies in the respective calendar year (Serbia/Art. 5; Montenegro/Art. 9). 30 Such a formula creates evident disparities by disadvantaging non-parliamentary parties twice. First, they do not have access to state subsidies and, second, they are confined in gathering resources form private contributions above a certain limit. Finally, Moldova s new regulations on party funding imposed an annual income limit from private contributions at the equivalent of 0.1% from the state budgetary revenue foreseen in the respective year (Art.26). 31 Extensiveness of the donors network As one could observe all high restrictive cases significantly vary with regard to maximum levels of donations and aggregate income. Nevertheless, they still share a common property their regulations are designed in such a way that allows political parties to rely on a handful of donors. It implies that parties do not need to expand and nurture large networks of donors. It suffices to resort on an extremely narrow group who can afford to carry the burden of financing, provided that political actors can reach them. At least, legal framework makes possible this kind of arrangements. Knowing the donation caps for physical and legal entities and limits on aggregate income it is possible to estimate the scope of donors network that indicates the minimum number of donors necessary to reach the upper limit for total income. Relying on legal provisions for high restrictive cases I transformed data on donations and total income to make it comparable across cases in order to assess the extensiveness of donors network. Regardless cross-case variation towards levels of donations and aggregate income, this is the best indicator of comparing these cases since it captures the incentive structure of fundraising. Table 6 is quite telling in this respect. Column 6 and 7 illustrate the stretch of donors network for each country. For several of them including Romania, Russia and Serbia it was possible to show the developments over time since they introduced both types of limits earlier. Moldova and Montenegro adopted restrictive regulation much later and, therefore, did not offer the opportunity to observe their developments for a longer time span. Overall, columns 6 and 7 represent the ratio between total income limit (column 5) and contribution caps for physical (column 3) and legal (column 4) entities respectively. Table 6: The size of donors network for countries belonging to high restrictiveness type Country Year Donation cap on individuals $ Donation cap on corporations $ Total income limit $ Minimum number of individual donors Minimum number of corporate donors 1 2 3 4 5 6 7 Montenegro* 2010 2.650 13.250 129.349 49 10 Serbia* 2003 2.000 20.000 416.559 208 21 30 Law on Financing of Political Parties published in the Official Gazette of the Republic of Serbia No. 72/03 (18 July 2003), 75/03 (25 July 2003), 97/08 (27 October 2008) and 60/09; The Law on Financing of Political Parties ( Official Gazette of Montenegro, no. 49/08 from the 15th of August 2008). 31 Lege Nr. 294 din 21.12.2007 privind partidele politice Publicat: 29.02.2008 în Monitorul Oficial Nr. 42-44, art. Nr: 119. 23