Chill Out: Fine-Tuning Anticorruption Initiatives to Decrease Their Chilling Effect

Who is “harmed” by aggressive anticorruption crackdowns? The most obvious answer is corrupt bureaucrats, shady contractors, and those who benefit from illicit flows of money. And while there are concerns about political bias and other forms of discrimination in the selection of targets, in general most of us rightly shed few tears for corrupt public officials and those who benefit from their illicit acts. But aggressive anticorruption crackdowns may have an important indirect cost: they may have a chilling effect on legitimate, socially beneficial behavior, such as public and private investment in economically productive activities. Although chilling effects are often discussed in other areas, such as with First Amendment rights in the United States, there is little discussion of it in the anticorruption context. That should change.

For example, in Indonesia, recent efforts to crack down on corruption appear to have stunted simultaneous measures to grow the economy through fiscal stimulus. As this Reuters article relates, “Indonesian bureaucrats are holding off spending billions of dollars on everything from schools and clinics to garbage trucks and parking meters, fearful that any major expenditure could come under the scanner of fervent anti-corruption fighters.” Nor is Indonesia the only example. In April 2014, Bank of America estimated that China’s corruption crackdown would cost the Chinese economy approximately $100 billion that year. One can challenge that estimate (as Matthew has discussed with respect to other figures used in reports on the cost of China’s anticorruption drive), but the more general notion that aggressive anticorruption enforcement can have a chilling effect on both public and private investment, which in turn can have negative macroeconomic impacts, is harder to rebut.

Taking this chilling effect seriously does not imply the view that corruption is an “efficient grease” or otherwise economically beneficial. The point, rather, is that although corruption is bad, aggressive measures to punish corruption may deter not only corrupt activities (which we want to deter) but also legitimate activities that might entail corruption risks, or be misconstrued as corruption. So, if we think that corruption is bad but that anticorruption enforcement might have an undesirable chilling effect, what should we do?

Before discussing potential solutions, it is important to acknowledge that many anticorruption and transparency advocates are concerned that anything less than a zero-tolerance policy leads anticorruption efforts down a slippery slope to acceptance and perhaps even impunity. Although I tend to disagree with that argument (see my comments to previous posts on this blog here and here), I do not think fine-tuning anticorruption tools necessarily requires departing from a zero-tolerance policy.

Importantly, the tools developed in this context should not eliminate all oversight, or even reduce it more than marginally. Indeed, since the concern is that some legitimate activity is not taking place at all, the mechanisms should be designed narrowly so as to encourage projects to get underway without decreasing the overall level of oversight more than necessary. There are two primary groups of actors who might be chilled by anticorruption crackdowns: government employees who approve government expenditures, and private investors who are investing in the country. The basic idea behind this proposal is to provide lower-level government officials and private investors more certainty about what behavior runs afoul of the law, and what is permissible.

Based on the Indonesia and China examples, it seems that access to information, in both directions, could reduce chilling effects caused by anticorruption enforcement. Here are a few of ways we can modify up-front enforcement policies to reduce the potential chilling effect that corruption crackdowns can have:

  • First, anticorruption entities in countries such as Indonesia and China should be more transparent. It seems that one difficulty both low-level bureaucrats and private investors have in the midst of a corruption crackdown is uncertainty about exactly what behavior is being curtailed by anticorruption agencies. To reduce the uncertainty investors and government employees face, those agencies should publish the findings of individual investigations (redacted as needed) to signal to investors and other government employees exactly what behavior violated the law.
  • Second, and relatedly, anticorruption entities should highly publicize instances where an investigation led to non-enforcement. Publicizing non-enforcement will provide important information to government employees and private investors about what conduct the anticorruption agency deems legal. This is particularly useful on the margin. Given that conduct that is plainly legal is less likely to be investigated, information from these reports will highlight instances where there was smoke but no fire.
  • Third, anticorruption agencies should embrace procedures some U.S. regulators already use, such as opinion procedures, consultation hotlines, and no-action letters as a means of pre-clearing certain honest conduct that a bureaucrat or private investor wants to engage in but is fearful will be investigated for corruption. The Department of Justice uses the opinion procedure process to allow entities to “obtain an opinion of the Attorney General as to whether certain specified, prospective–not hypothetical–conduct conforms with the Department’s present enforcement policy regarding the antibribery” FCPA provisions. Consultation hotlines run by anticorruption agencies would serve a similar role in a less formal context. No-action letters, such as those issued by the SEC, should be used less often, but can in narrow context offer immunity for conduct the anticorruption agency has approved of as not violating the relevant law. Of course, these procedures all require additional resources that anticorruption agencies in Indonesia, China, and other places may not currently have.

Of course, one could also acknowledge that some anticorruption efforts chill honest activity and decide that the slippery slope of trying to mitigate that chilling effect is not worth the reduction in enforcement. Conversely, one could argue that the chilling effect on honest behavior is so deleterious that blanket immunity is needed for certain large projects, as Indonesian President Joko Widodo reportedly considered last year. The suggestions listed above simply offer a more moderate approach, but not necessarily the best approach in all circumstances, in the hopes of getting an important conversation underway.

2 thoughts on “Chill Out: Fine-Tuning Anticorruption Initiatives to Decrease Their Chilling Effect

  1. Thanks for the interesting piece. I would argue that part of this problem also arises from governments’ and international organizations’ failure to understand how corruption functions as part of a system alongside legitimate economic activities. Understanding the functions of corruption within this larger system is only possible when corruption is viewed through a lens of complexity. This is explained in greater detail in a new post on the CDA blog series on corruption.

    http://www.blog.cdacollaborative.org/what-makes-corruption-complex/

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