Yesterday’s post about corruption’s positive influence in poor, unfree countries brought the following comment from Andy Spalding. He’s a lawyer on a year-long Fulbright Research Grant in Mumbai, India whose own view of anti-corruption laws has caused a stir.
Here’s what he said:
Dear FCPA Blog,
I was delighted to read yet another article in our field written in the ever-important vein of constructive criticism. For those of us who support the FCPA, it is tempting to categorically dismiss the suggestion that in some economies, some of the time, bribery may actually promote development. But I’m not sure that this is the right response, for at least two good reasons:
1. This idea has been around for a very long time. As Carden and Verdon readily admit, theirs is a new permutation on an idea that has circulated in mainstream economics and political science for over forty years. It grew out of the study of Soviet bureaucracy, and many of us lawyers who took undergrad majors in poli sci, econ, or history, may at least vaguely recognize names like Samuel P. Huntington. This idea is not new, and it’s not radical. We would do well to see the FCPA, and the problem of corruption, in a broader context of human experience and intellectual inquiry.
2. Hasn’t the FCPA community understood this since 1988? That was the year that we amended the FCPA to include the affirmative defense — which some find counter-intuitive, or worse — for facilitating payments. How many of us have had the experience of describing this defense to non-lawyers in a compliance seminar, a meeting with clients, or around the dinner table, only to be met with chuckles of astonishment? The non-FCPA world believes that “a bribe’s a bribe,” and so did we when we originally drafted the FCPA in the mid-70s. But ten years of experience taught us otherwise. For those of us today who endorse the affirmative defense — who do not believe it is a “loophole” that should be abolished, but instead strikes an important balance — haven’t we tacitly accepted at least some version of Carden and Verdon’s thesis?
We may tend to assume, perhaps unconsciously, that if bribery is bad, then deterring bribery must always be good; the logic is seductive in its simplicity. But as Holmes taught, “the life of the law has not been logic; it has been experience.” Experience in bribery-prone countries, with all its irony and tragedy, teaches us that though bribery is indeed bad, the alternative may sometimes be worse. Those who amended the FCPA in 1988, and myriad observers of the human condition dating much further back, understood this regrettable fact. In today’s prosecutorial zeal we may try to ignore it, but those who live and work under corrupt and inefficient regimes cannot escape it.
I think there’s frequently a good deal of talking past each other that can happen in the anti-corruption and business communities when it comes to the question of whether corruption is "necessary" or "culturally acceptable" in various countries abroad. I was lucky to be able to do some very brief work with a civil society group in Cambodia pushing for corruption reform there. Two things were clear: (1) business leaders viewed corruption as necessary and acceptable; and (2) most of the rest of society absolutely was firmly against the endemic corruption there (a 1 million signature petition was turned in to the Nat’l Assembly calling for a strong anti-corruption law in May of 2006). Cambodians–particularly the poor–are absolutely tormented by constant solicitations for bribes in return for a huge array of "routine governmental actions." There was a great piece by Philip Nichols where he empirically tested claims surrounding "cultural acceptance" of bribery in Kazakhstan and found that the majority of Kazakhstani respondents found it very harmful.
Three quick points here:
1) There is strong economic literature that demonstrates that administrative corruption disproportionately victimizes the poor. Companies have deep pockets, but most Cambodians do not. They are victimized by a form of corruption that demands small payments in exchange for "routine governmental actions." While business leaders may see this form of corruption as a necessary convenience, for most citizens it is a constant burden. We should also acknowledge that by carving out a safe harbor for such payments the FCPA helps perpetuate this form of corruption. And debates about the FCPA shouldn’t focus solely on its affects on the business leaders.
2) GDP growth–what Carden and Verdon were looking at–does not necessarily mean bottom-up growth. Corruption naturally favors the actor with access to most capital. It is easy for multinational corporations with ready access to elites and plenty of capital to feel as though corruption is a culturally accepted, benign phenomenon. After all, they are working to bring investment to a poor country. But local entrepreneurs who lack the deep pockets to compete on the bribe market may feel quite differently.
3) The Carden and Verdon piece, suggests its own problem: bribery is good when public institutions are bad and there is little economic freedom; bribery is bad when public institutions are strong and there is economic freedom. But given corruption’s extremely corrosive effect on public institutions and its tendency to be associated with highly undemocratic regimes, how can a country which tolerates corruption also successfully establish economic freedom and strong institutions? That is to say, corruption may be a short term GPD boost for countries in the weak-institutions, low econ. freedom category. But it will only be counterproductive if the ultimate goal is to move into the strong-institutions, high econ. freedom group.
I guess my question is: in light of these three observations, what type of development are we talking about when we say that in some cases corruption increases development? If we’re looking at a single data point–short term GDP growth–I suppose that’s not nothing. But GDP growth that’s associated with increasing income inequality, competitive disadvantages to local businesses, and the erosion of those institutions which are necessary for long term economic prosperity is not the kind of growth that I’d be too hasty about calling "development."
Thanks for these terrific comments. They challenge me quite a lot. I actually don’t disagree with any of your three points, and my experiences in India confirm each of your observations. The challenge, rather, comes in answering your ultimate question: "what type of development are we talking about?" I am working on a much longer explanation that I will like to submit to the Blog after it is more fully developed, but as a preliminary answer, just let me say this. India, as an example, depends heavily on foreign investment to stimulate its economic development. This is especially noticeable in the infrastructure sector, which is generally regarded as the greatest impediment to India’s development, but which will not improve sufficiently without outside investment. At the same time, the infrastructure sector is, as you likely know, notoriously corrupt. India has had difficulty attracting foreign investors, and corruption is one of the reasons — foreign investors are beginning to feel that they can’t afford the risk. So let me pose a general question: if the increasingly severe penalties attached to bribes deter foreign companies from investing in India’s infrastructure sector, have we made the right policy trade-off? It is one thing to say that companies should not profit from investment in bribery-prone sectors; it is quite another to say that the citizens of that country should not have the benefit of the foreign investment. Corruption hurts citizens, no doubt; but doesn’t the loss of foreign investment also hurt them? In India, it most definitely does, and tragically so. Which is the greater harm?
I’d love to hear your thoughts. Thanks again for the exchange.
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