Author Archives: Eden Schiffmann

How the Export-Import Bank Debate is Destroying Our Understanding of Crony Capitalism

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The sleepy, little-known U.S. Export-Import Bank is having an uncomfortable moment in the spotlight. The bank, a federal agency that finances and insures foreign governments’ and corporations’ purchases of American exports, is due for congressional reauthorization this fall. For most of its history, Congress has reauthorized the Ex-Im bank without controversy. But it has become a political lightning rod amid accusations that it’s an instrument of crony capitalism — a way for well-connected domestic companies to receive federal subsidies at the expense of competitors and taxpayers. A chorus of libertarian and ultraconservative Tea Party Republicans are making reauthorization a litmus test, framing the bank as “corporate welfare” abetted by the Republican establishment. The fight over reauthorization has taken on greater urgency since House Majority Leader Eric Cantor, a key supporter of the bank, improbably lost his Republican Party primary in June in what was billed as a Tea Party-versus-establishment battle. Indeed, after his loss Boeing — a large beneficiary of Ex-Im funds — took a tumble in the stock market on fears that Ex-Im’s survival has been imperiled.

The accusation of crony capitalism is a powerful one. In the age of trillion-dollar corporate bailouts, it’s not hard to see why that accusation resonates with many U.S. voters. However, the debate over whether the bank represents “crony capitalism” illustrates a major point of confusion about what crony capitalism is, obscuring actual steps that could be taken to address the problem. The public debate about crony capitalism should focus not simply on where government and business intersect, but on when that intersection implicates the kinds of traditional corruption — such as bribery, bid-rigging, special treatment, and conflicts of interest — that distinguish crony capitalism from government’s legitimate if controversial engagement with the private sector. Without focusing on the actual corruption that gives rise to crony capitalism, those trying to fight it are aiming at the wrong target.

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Improving OECD Convention Enforcement While Respecting Voluntariness: The Case for an Optional Protocol

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Jordan recently floated a very interesting idea on this blog about how to move forward in strengthening enforcement of the OECD Anti-Bribery Convention. As he pointed out, the Convention itself allows extremely limited means of enforcement: other than shaming noncompliant countries with scathing reports, there’s nothing that can be done within the existing framework. Since changing the Convention to include new sanctions is a nonstarter because noncompliant nations would need to accede to those changes, he suggested that willing members of the Convention “[d]evelop an extra-Convention agreement” to reward countries that live up to the terms of the Convention and “impose collateral consequences upon those who don’t.” The upshot of this extra-Convention agreement is that it would allow states to punish and pressure countries like South Africa, which has resisted the shaming effects of the Convention’s reports.

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When Hedge Fund Managers Put Their Mouths Where Their Money Is

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Over the last few months the business press has written many stories about hedge fund manager William A. Ackman’s billion-dollar short of nutritional supplement company Herbalife. Ackman is betting that the price of the stock will fall because the company (in his view) is nothing more than an immoral and illegal pyramid scheme. The New York Times has noted, however, that Ackman isn’t leaving anything to chance. He has successfully lobbied members of Congress to call for an investigation of Herbalife, pressured the Federal Trade Commission (FTC) to investigate the company, paid civil rights organizations to help him organize against it, and generally conducted an “extraordinary attempt to leverage the corridors of power” to crush Herbalife. The campaign seems to be making progress: the FTC and FBI recently announced that they have begun investigations into Herbalife, and the company’s stock has plunged as much as 32% this year from its recent high. The New York Times has painted Ackman’s tactics as an extreme (and unusually public) form of an increasingly common phenomenon: financiers “frequently” ask regulators to investigate and punish companies they’re betting against, making “Washington [increasingly] a battleground of Wall Street’s financial titans.”

Whether or not we want to call this sort of influence activity “corruption” (which, as Matthew pointed out in a previous post, is the subject of a longstanding debate), it raises difficult questions about how to regulate the influence of wealth on the political, regulatory, and — recently — law enforcement processes. Although Ackman’s concerns about Herbalife may very well be legitimate, the opportunity to abuse government resources and manipulate the market exists if investors push for investigations in bad faith — for no other reason than to make a buck and use law enforcement to do it.

Should we be worried about this conduct? And if so, should government agencies police against possible abuses of the law enforcement process? Continue reading →

Corruption and Shame in South Africa: Lessons from Current Events

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In his recent post, Jordan noted that the OECD Working Group on Bribery recently approved a “scathing” report on South Africa’s noncompliance with the Anti-Bribery Convention. He described group members’ frustration at hitting “a brick wall” as their criticisms fail to effect any change in South Africa. Noting that the Convention’s primary mechanism of enforcing compliance is shame created by critical reports, Jordan asked the very important and provocative question: “What if shame isn’t enough?” A future post will explore an option that might exist for changing, expanding, or enforcing the Convention, but there’s a prior, empirical question: How is the shame mechanism working so far? Continue reading →

The Economist’s Crony Capitalism Index Does Not Measure Crony Capitalism

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The Economist’s recent cover story, introducing what it calls the “Crony-Capitalism Index”, has generated a lot of buzz. The study ranks 23 countries (counting Hong Kong separately) based on the Economist’s calculation of the prevalence of politically connected business dealing. The study takes billionaires from the Forbes Billionaires List who are primarily active in certain industries (such as casinos, banking, extractive industries, real estate, utilities, etc.) that the Economist deems “rent-heavy,” and looks at these billionaires’ share of the economic pie in their country. The index has already been used as the basis for media criticism of those countries that scored poorly, such as Hong Kong (1st) and Malaysia (3rd) — indeed, the Malaysian government was so upset that it censored the Economist for the week the index came out.

Some of the results are unsurprising: Russia and India score fairly high in this measure of crony capitalism, whereas Germany bottoms out the list. But other results are more puzzling.  Not only does the index report that Hong Kong has more crony capitalism than mainland China, but also that mainland China has less crony capitalism than either the United States or Great Britain. What gives? Does the United States really have more of a crony capitalism problem than China?

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