April 3, 2010
How Corrupt Are We?
This will be a "thinking by blogging" post. [Insert reader query: "As opposed to all your other posts?"]
The Wall Street Journal has a story today wherein it is argued that government corruption is not necessarily bad for an economy. If there is enough profit left over for the investors and the corruption is predictable (i.e., the business owner can count on having to make only a certain regular side payment), corruption and growth may go hand in hand. (For some reason, I can't find the article on the web. It is on page W3 and entitled, "Corruption You Can Count On.")
One passage in particular caught my eye:
"Th[e] insight on the evils of decentralized corruption was first made by Andrei Shleifer and Robert Vishny, who noted that after the fall of the Soviet Union, the Russian bureaucracy splintered into an assortment of bureaucracies. Starting a business required bribing the local legislature, the central ministry, the local executive branch, the fire authorities, the water authorities and myriad others . . . ."
This does not seem to be an isolated incident. Witness the recent Daimler AG settlement:
"Diamler AG reportedly has agreed to pay $185 million to settle a long-running FCPA investigation. According to the court papers, beginning in 1998 the company paid million of dollars in bribes to secure business in China, Nigeria, Russia and Vietnam among others. Overall bribes were paid in 22 countries."
That seems like a lot of corruption. So, just how corrupt are we? Some Christians would suggest that we are all weak sinners, with no chance of earning Heaven without Grace. My Buddhist friend occasionally reminds me that I should be grateful that I haven't murdered anyone, since the only thing standing between me and that act is conditions. Such teachings suggest we are very corrupt.
On the other hand, a law and econ person may argue such philosophical musings are irrelevant. All we need to know is that people generally act rationally in their own self-interest. If the expected benefit outweighs the expected cost, we should expect the action to be taken--moral labels are irrelevant. However, it seems to me the question of how corrupt we are still matters because the "cost" part of the equation should include feelings of guilt regarding illegal or immoral behavior. One could argue that the more corrupt we are, the less guilt "costs" and so we need stiffer penalties.
On the third hand, perhaps differing conclusions about how corrupt we are wouldn't impact the law much at all. For example, while concluding that we are very corrupt may lead us to conclude that the business judgment rule presumption that corporate fiduciaries act in good faith is a joke, we really wouldn't likely lose much in practical terms by simply rephrasing the presumption to say: "We presume market efficiency is maximized by only holding corporate fiduciaries liable for gross negligence." (Certainly, some have argued for precisely some version of that definition.)
I'm not sure where that leaves me, other than to say that there certainly seems to be no lack of evidence to suggest the answer to the headline question is: "Very."
Let's look at those 'payments' another way. If they are made to secure approval for the right to do business they could be called licenses or application fees. They are not 'protection' fees where an existing business would have accidents or property destruction result from failure to pay. If the company desiring entry into the target market declines to pay the required entry fees, they simply do not get the right to do business there. Whoever pays to play earns a seat at the table. As long as the rules are essentially the same for all potential players, I don't see how the applicant or the agency can be judged corrupt. If the officials/agencies in the target market charge the same fees (+/-) to all applicants, those fees become a normal cost of doing business there. Final verdict = no harm -> no foul = no corruption (except possibly in the mind of a sinless business saint).
Posted by: Dan S. | Apr 3, 2010 3:08:03 PM
Since "The Beginning," as Genesis tells us, there has been corruption. Long after Adam and Eve, the Puritans came to America intent upon eliminating sin and other forms of corruption. Nearly four centuries after stepping on to Plymouth Rock, how do we think that has gone? The Foreign Corrupt Practices Act was enacted in 1977 in a legislative paroxysm designed to restore integrity. How has that gone?
Corruption is in our DNA, or at least is an essential part of human nature. Humans are designed to look after Number 1 (Thank you Charles Darwin and Adam Smith).
We do not really know just how corrupt we are because the many indices, surveys and reports on Corruption are inherently inaccurate. We have better data on the sex habits of lawyers, priests and politicians than we should expect to have on activities where both parties understand secrecy is essential. The fact that certain corruption perception indices report corruption to four decimal places is simply an exercise in “spurious precision.”
Corruption in its many and varied forms occurs when we see no harm ("grease" payments to a Moscow cop) or when we ("we" as the human race, not as lawyers) think we will get away with it. We come to the "I can get away with it" conclusion because either we think it is a secret that will be kept (not often the fact) or we are too powerful to be prosecuted.
In the latter category are the endless number of politicians who think they will get away with something by blaming their staff or because they are so prominent they cannot be touched. A good mind exercise is to attempt to name at least one politician who has been accused of corruption for each letter of the alphabet. For X and Z think China.
While we prosecute the payer of a corrupt bribe under the FCPA, the OECD Convention Against Bribery in International Business Transactions and the United Nations Convention on Corruption, we find it nearly impossible to prosecute those who receive the bribe. And anyone attempting to get something accomplished in Washington knows that there is a strong demand/extortionate side to bribes and campaign contributions. This is even more true overseas where our Puritan heritage does not exist, even as a myth.
If we truly want to know How Corrupt Are We? we have two approaches: Solve the problem of national sovereignty (why would the leaders of a corrupt nation prosecute themselves?) or end financial privacy for senior government officials. Since sovereignty is likely to remain inviolate for some time, we might best focus on financial “privacy.”
Switzerland, of course, will continue fiercely to oppose any attempt to eliminate financial privacy/legalized tax and grand larceny protection.
How Corrupt Are We starts right there in cuckoo clock land.
Posted by: Bruce W. Bean | Apr 4, 2010 10:46:19 AM
As Dan S. points out, corruption as you described is essentially an unofficial licensing fee. But while we normally see corruption as an inherently bad thing, we tend to think that licensing fees are just part of the process. I'm sure the same thinking plays into the justification for groups like Daimler; it's just part of the process if they want to do business in X country.
But why is it part of the process? Both corruption and licensing fees siphon valuable resources away from people and organizations that have good use for those resources. It's just rent seeking. Licensing fees at least carry the notion that it's for some public good. While licensing fees for dangerous products can do some good, I'm not sure what public good is obtained by requiring state licenses for florists, etc.
The real crime of corruption is honesty: the rent seeking is explicit. They don't even pretend to offer a valuable public good in return.
Posted by: Scott | Apr 7, 2010 10:57:37 AM