Walmart allegedly covers up millions of dollars in bribes paid to local government officials in Mexico. A former Morgan Stanley executive is convicted of funnelling money to a Chinese official in connection with real-estate investments. The S.E.C. sends “letters of inquiry” to several Hollywood studios, looking into the possibility that they used bribes to crack the Chinese movie market. When you read the business pages these days, you can be forgiven for thinking that international commerce is a cesspool of graft. Yet, by historical standards, things have never been cleaner. What’s changed is how strenuously governments are cracking down on corruption.
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. That began to change with a couple of high-profile scandals: the C.E.O. of the fruit giant United Brands killed himself during an investigation revealing that the company had bribed the President of Honduras in order to avoid an export tax; and it emerged that Lockheed Martin had, among many other misdeeds, bribed the Prime Minister of Japan and the President of Italy to win contracts. So, in 1977, Congress passed the Foreign Corrupt Practices Act, which banned the bribery of foreign public officials. The F.C.P.A. was symbolically important, but it didn’t do much: it was rarely enforced, and for almost two decades the U.S. was the only country with a law like it. But in 1997 the O.E.C.D. banned bribery of foreign officials, and in 2003 the U.N. called on its member states to do the same. Meanwhile, the Bush and Obama Administrations significantly stepped up enforcement of the F.C.P.A., to the point where insuring compliance has become an unavoidable part of any multinational’s business. In the past five years, companies have paid the U.S. government almost four billion dollars in F.C.P.A. fines.
Companies complain that these laws make it difficult to do business abroad, pointing out that in many developing countries bribery is a way of life. But that’s exactly the point: these laws are designed to change that, and they do so by acting a bit like economic sanctions. For companies, the fear of potential prosecution effectively raises the cost of doing business in high-corruption countries, making it less likely that they will want to operate there at all. This in turn creates an incentive for developing countries to fight corruption. And the laws have actually had an impact. Alvaro Cuervo-Cazurra, a business-school professor at Northeastern University, has shown that investors from O.E.C.D. countries cut their investments in corrupt countries after the 1997 ban.
This may be ethically sound, but is it economically sensible? Not everyone thinks so. Developing countries often have hypertrophied bureaucracies, requiring businesses to deal with enormous amounts of red tape. The political scientist Samuel Huntington once argued that under these conditions 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.
This argument is appealingly counterintuitive, but it’s wrong. 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. ♦
