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Harry Cassin
Publisher and Editor

Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Shruti J. Shah
Contributing Editor

Russell A. Stamets
Contributing Editor

Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Bill Steinman
Contributing Editor

‘So What?’ Bribes Destroy Market Capitalism. That’s what.

 Tim Worstall, contributor to Forbes and Fellow at the Adam Smith Institute in London, said out loud what some others still think and say privately. Writing about the recent Walmart Mexico scandal, Worstall said “So What?”

[Bribery] really is just the way of the world. Some places do things differently from either the way we do or the way that we think things ought to be done. I tend to think that domestic laws which fail to recognise this fact are doomed to eventual failure. For those different ways are going to carry on even if we or our companies can no longer operate there because of our own domestic laws. My argument is simply that such laws as the FCPA and the Bribery Act shouldn’t exist.

Explaining why bribery abroad is a serious crime is increasingly important as enforcement of anti-bribery laws expand globally and push back efforts mount. Making the case is, in my twelve years of experience, no easy task. I’m sharing some rebuttal points to the “so what” argument, and I’m hoping to hear from others whether any of these points can help folks like Worstall understand what is actually at stake in global anti-bribery laws.

Normative, ethical or religiously based, arguments — although an obvious place to start — are in my experience not effective with the cynical. I usually start by addressing them in their native language – money.  Depending on his or her analytical skills and psychological profile, we proceed inductively (personal revenue stream to overall economic impact) or deductively. Dick Cassin’s FCPA Blog readers are, I’m guessing, among the most sophisticated, so deductive it is.

Point One: Bribery Destroys Rational Market Capitalism

Real economists have been debating for the past thirty years the impact, or lack thereof, that bribery has on societies where it is prevalent.  There are literally hundreds of articles and scores of books (with math formulas, graphs, fights about data bases and time frames).  The economic studies include Russia, China, Nigeria, Mexico, Indonesia, India, Brazil, all the “foreign” places where bribery is endemic as well as my sadly corrupted home town Chicago, Worstall’s home country the U.K., as well as Germany, the Netherlands, Greece, Italy and France.

I’ve summarized the economics research for busy non-economists in “No Body Gets Hurt? Is Bribery a Victimless Crime?”  41 Georgetown J. Int’l L. 861. (2010) Available at SSRN here. (Pages  869 – 875, Bribes Destroy ‘Rational’ Markets, collects the overall data.) (Pages 875 – 883, Shanghaied, reviews the economic literature on China.)

The “fallacy of efficient corruption” discredits the older notion that bribery is necessary to “grease the wheels” of business. This has been nearly universally accepted by economists. The key factor is the time frame. While bribes may ease an individual transaction (the common anecdotal argument normally offered by cynics like Worstall) examining data over time reveals massive economic harm – “sand in the wheels” of commerce.

Bribe based decisions ignore rational market factors – price, quality, service, brand. There is no market discipline. In fact, there is no market. “Crony Capitalism” is a rhetorical propaganda device, slandering the idea of rational market capitalism by conflating it with corrupt elite cronyism. This enables corrupt elites to blame capitalism (and foreigners) for inequality in wealth distribution (the Gini factor).

Bribery destroys rational markets, resulting in serious harm. The economists demonstrate case after case where the wrong project, wrong competitor, lack of quality or safety controls result in waste, inefficiency and in some cases massive deaths or environmental disasters. In addition, the economic studies show bribery used as an anti-competitive cartel device, increasing regulations to restrict market entry and harass competitors.

In extreme cases, as Worstall recounts from his sad and terrifying personal experiences in Russia, unchecked bribery results in what economists term “state capture”, or bi-lateral monopolies of bribe givers and takers.  The people of Mexico, where Walmart is having some problems, are also struggling quite literally for their lives against corrupt cartels attempting to capture their country.

The first rule of global capitalism probably should be “Do No Harm.” Foreigners with deep pockets dramatically increase local bribe prices, accelerating the downward spiral sometimes beyond the abilities of local populations to check.

My own view is that global capitalists should not endorse criminal elites’ claim that kleptocratic cronyism is the same thing or compatible with market capitalism. The stakes here in terms of both macro economics and the political legitimacy of global capitalism are quite high. Bribes destroy market capitalism.

In my next post I’ll address the micro economic, individual transaction personal revenue stream issues.

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Elizabeth K. Spahn is a professor at New England Law Boston, where she’s been on the faculty since 1978. Professor Spahn can be contacted here.

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1 Comment

  1. You're commentary about the negative aspects of bribery are supremely naive. In a world where the US and its companies must compete globally and when other countries not only don't enforce such anti-corruption regulations but, in fact, often encourage bribery as a way to beat out the US competition (see Chinese business practices as one example) it makes for an uneven playing field. The effect is even more drastic when the competition is for ever more limited natural resources and this is long term thinking!! The FCPA is antiquated doctrine that will quickly help lead to the demise of the US as a top level international powerhouse. Naive rhetoric that bases itself on philosophical principles only hurts us a nation. We need better guidelines and more accommodations to help our companies compete. The days when the US could wield a large international "STICK" are over whether we want to admit it or not.


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