New Yorker Article re Economics of the FCPA

News Brief

By Cydney Posner

Following up on the Wal-Mart debacle (discussed in the April 22 posting), this week's New Yorker has an interesting article regarding the economics of the FCPA.  The SEC has been active, to say the least, in the last decade in enforcing the FCPA. However, this trend is fairly recent among Western countries: "Until the nineteen-seventies, Western countries paid little attention to corruption overseas, and bribery was seen as an unpleasant but necessary part of doing business there. In some European countries, businesses were even allowed to deduct bribes as an expense." [emphasis added] Ugly bribery scandals involving United Brands and Lockheed led Congress to pass the FCPA in the 1970s, but it was not aggressively enforced until the Bush and Obama administrations. At about the same time, the UN and OECD (the Organisation for Economic Co-operation and Development) adopted or promoted bribery bans.

While companies complain that these laws make it difficult to do business abroad, studies show that they have actually discouraged bribery as a way of life in many developing countries. But, the article asks, ethics aside, do they make economic sense? That appears to be a matter of some debate: "The political scientist Samuel [Clash of Civilizations] Huntington once argued that [when there are hypertrophied bureaucracies, ] bribery was a reasonably efficient way for businesses to cut through that red tape. As he put it, ‘The only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, overcentralized, honest bureaucracy.' Without bribes, the argument goes, it takes much longer to do anything, and you end up with less economic activity—fewer Walmarts, less trade. Seen this way, bribes grease not just palms but the very wheels of commerce."

The author, however, takes issue with this contention: "While bribes may make things run more smoothly in the short run, in the long run they hurt both the business of the bribers and the economies of the bribed. As the economists Daniel Kaufmann and Shang-Jin Wei have shown, bribes beget more bribes: far from cutting through the red tape, they give bureaucrats a reason to produce more of it; each regulation creates another opportunity to collect a payoff. Walmart's bribes in Mexico may have enabled the company to build its stores more quickly, but they also gave local officials an incentive to make the permit process as difficult and arcane as possible. On top of this, the prevalence of corruption encourages officials to misdirect government money: buying fighter jets provides more opportunity for collecting bribes than investing in education. And for the firms paying the bribes corruption is costly—not just monetarily but also in terms of time and uncertainty, since bribery requires bargaining and monitoring. Kaufmann and Wei show that businesses that paid more bribes spent more time dealing with government officials, not less, and that their cost of capital was higher, not lower. Far from greasing the wheels of commerce, bribery tends to throw sand in them.

"In an ideal world, then, good behavior is also good business. But there's a catch. Bans on bribery work best when they're widespread; otherwise, companies start to feel competitive pressure to bribe. The problem today is that some of the biggest players in the global market, like India, don't have laws against foreign bribery, while others, like China and Russia, have laws but little or no enforcement. A recent study by Transparency International found that Chinese and Russian companies—which, in 2010, invested a whopping hundred and twenty billion dollars abroad—were the most likely to pay bribes. It's no wonder that there have been recent calls to roll back, or even repeal, the F.C.P.A. But weakening it would only lead to an arms race of graft. The smarter strategy is to use what leverage we have—including things like membership in the O.E.C.D.—to get countries to adopt a standard. In the fight against corruption we're unquestionably on the high road. We should persuade others to join us there."

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