Category Archives: Commentary

Invalid Instrumental Variables in Corruption Research: A Lament

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A while back, I posted a critical commentary on Paulo Mauro’s widely-cited paper purporting to show that corruption lowers foreign investment and growth. My criticisms focused on Mauro’s use of a statistical technique called “instrumental variables” (or “IV”) analysis, which — when done properly — can help figure out whether a hypothesized explanatory variable actually causes an outcome of interest, or whether instead the observed statistical correlation is due to the fact that the alleged outcome variable actually influences the proposed explanatory variable (“endogeneity” or “reverse causation”).  But an IV analysis requires making certain strong and untestable assumptions about the relationships between the variables.  If those assumptions are wrong, the conclusions one draws about causation will be unsound (not necessarily wrong, but not worthy of credence on the basis of the analysis).

This may seem like an issue that only stats nerds should care about, but I actually think it’s important that other researchers, activists, and policy advisers understand the basics of the technique and how it can go wrong (or be misused).  I say this because a surprisingly large amount of the research on the causes and consequences of corruption — research that is often cited, individually or collectively, in discussions of what to do about corruption — relies on this technique. And, I hate to say it, but much of that research uses IV analysis that is clearly inappropriate.

I’ve been thinking about this issue recently because I’ve been going through the literature on the relationship between democracy and corruption for a paper I’m writing, and this issue crops up a lot in that literature. But I’ve seen essentially the same problems in lots of other research on corruption’s causes and consequences, so I’m reasonably confident that this is not an isolated problem.

Let me say a bit more about the essence of the statistical problem, how IV analysis is supposed to solve it, and why much of the IV analysis I’ve seen (focusing on the democracy-corruption context) is not worthy of credence: Continue reading →

A Tale of Two Earthquakes: Different Types of Corruption in Nepal and Sichuan

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In the wake of the horrifying human toll taken by the earthquake in Nepal, attention has once again turned to the role of corruption in increasing the original death toll and in hampering the effectiveness of aid. Rick recently posted about it on the blog. Bribery of building inspectors enabled a great deal of new construction in Kathmandu that violated the building code, and it was these buildings that were the most likely to trap people when the earthquake hit. There is a feeling of deja vu about the allegations. After the 2008 earthquake in Sichuan province in China, corruption in the building of schools led to thousands of additional deaths when schools across the region came down on pupils. But not all corruption is created equal, and the corruption in building in Kathmandu may have been less harmful than that in Sichuan province.

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Uses and Abuses of Anticorruption Tactics in the Gambia

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The tiny African country of the Gambia rarely receives international media attention.  Perhaps once a year, shocking statements from its president, Yahya Jammeh, might win it a small news blurb, but even then, these stories tend to be treated in a perfunctory, “look at this wacko human rights abuser” manner: reporting something awful or absurd—like his declaration that LGBT people are “vermin”, or that he has developed a cure for AIDS—but doing so in a derisive or condescending tone. A headline like “Five Crazy Things About Gambia’s Jammeh” is fairly typical.  (The latest zaniness-oriented reporting has been centered on an incredibly poorly planned attempted coup by two Gambian-Americans against whom the U.S. Department of Justice just filed charges.)

However, such gawking, hit-and-run style reportage overlooks the very real, very sinister way that Jammeh has solidified his hold on power by co-opting the language of anticorruption as a rhetorical tool to justify his tenure, and by using purported anticorruption crackdowns as a weapon to eliminate his opponents.  By utilizing the language of anticorruption advocates, and selectively throwing certain members of the government to the wolves while perpetually tossing the (anticorruption) book at his political opponents, Jammeh has managed to create the myth that his administration is at least relatively committed to fighting corruption, and is the best hope for the Gambia to pursue economic development.

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Death by Corruption: The Nepal Earthquake

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Although press reports attribute the growing death toll in Nepal to the April 25 earthquake, earthquakes were in fact the proximate cause of very few fatalities.  Nepalese did not die from shaking ground but, as news footage shows, because they were crushed by falling buildings.  The link between earthquakes, collapsing buildings and fatalities has been known for centuries if not millennia as has the solution: codes setting standards that ensure all structures can withstand the shock of a quake.  Since 1994, Nepal’s building code has contained several provisions requiring buildings to be earthquake proof, but as the New Zealand consultant who helped develop the ’94 code told Bloomberg News, drafting a quakeproof code is easy, “the hard thing is to get implementation.”

That is where corruption makes its appearance.  Builders can find many ways to bribe around building codes, and judging from New York Times correspondent Chris Buckley’s May 1 story, Nepalese builders found them all.  The collapsed buildings in Katmandu “exposed not only flaky concrete and brittle pillars, but also a system of government enforcement rotted by corruption and indifference. . . . Residents and building experts say the corruption is an open secret . . . .  The developers and landlords who slap up the buildings . . . know they will rarely be punished by officials, who are often happy to look the other way for a price.”

The earthquake – corruption – death nexus is a predictable part of post-quake reporting.  Stories similar to Buckley’s appeared following the 2010 earthquake in Haiti, the 2008 one in China’s Sichuan province, the 2001 quake in the Indian state of Gujarat, and the 1999 one in the Marmara region of Turkey.  But as with the Nepal story, they were based on anecdotes and impressions.  Is corruption really why so many buildings become coffins once a quake strikes?  And if it is, what can be done to curb it? Continue reading →

Williams-Yulee and Why It’s Time for America to Stop Electing Judges

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For casual news fans and avid U.S. Supreme Court junkies alike, the past week’s headlines have been dominated, not surprisingly, by stories about Obergefell v. Hodges, the same-sex marriage case.  But there’s another story that emerged from the Court this week that deserves special attention in this forum:  Williams-Yulee v. Florida Bar Association. In that case — issued the day after oral argument in Obergefell — the Court once again waded into America’s longstanding but peculiar experiment with judicial elections.

For more than 150 years, the United States has stood apart from most of the world in its practice of electing judges; today, 39 U.S. states elect at least some judges and 87% of state court judges will stand for an election at some point in their careers. Why this fascination with judicial elections? Well, it can be chalked up to the populist origins of the practice — as a measure for combating corrupt patronage networks in the mid-1800s — and the belief that elections render judges more democratically accountable.

But as states like Florida have learned, judicial elections never lived up to their populist promise. In fact, there was a time, not so long ago, when corruption ruled Florida’s judiciary. The stories abound: There was the judge in the late 1960s who required lawyers to contribute to his campaign before they could argue. Even more embarrassing were the three members of the Florida Supreme Court who resigned in the early 1970s after getting caught pressuring lower courts to rule in favor of the justices’ campaign donors, allowing an interested party to ghostwrite an opinion, and enjoying a gambling spree in Las Vegas courtesy of a dog track that was litigating a case before the court. The reason for this gap between theory and practice: the need to raise campaign funds undercuts judicial integrity and invites quid pro quo corruption.

Now, Williams-Yulee turned out to be a victory for anticorruption: the Court held that Florida could bar judicial candidates from personally soliciting campaign contributions. Unfortunately, though, the victory is small and fleeting: the Court’s reasoning focused on the extremely narrow nature of the Florida rule and impliedly rejected most campaign finance restrictions in judicial elections (beyond contribution limits). So even after Williams-Yulee, states still have little in their arsenal with which to combat the evils of judicial elections. Maybe then, in an era when more and more money is flowing into judicial campaigns, Williams-Yulee ought to be our wake-up call — a sign that its time for the United States to kick the “insanely and characteristically American” habit of electing judges.

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The FCPA Under Attorney General Loretta Lynch

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After the third longest wait for Senate confirmation in history, Loretta Lynch finally received approval to be the next Attorney General of the United States on April 23. When she assumes her position as the head of the U.S. Department of Justice, complex challenges related to cybersecurity and community-police relations will likely be at the top of her list of undertakings. But Lynch has also vowed to make continuing the DOJ’s commitment to fighting global corruption “a top priority.”

Indeed, Lynch has substantial FCPA experience – more than any previous Attorney General (unsurprising, given that it was her two predecessors, Eric Holder and John Ashcroft, who largely oversaw the ascendance of the FCPA regime). As the U.S. Attorney for the Eastern District of New York, Lynch collaborated with the DOJ’s Fraud Section to secure the Ralph Lauren and Comverse non-prosecution agreements. She as worked on the other side as well. As a partner at Hogan & Hartson, she conducted internal investigations, advised clients that had run afoul of the FCPA, and conducted continuing legal education classes on anticorruption. As lawyers, scholars, and business leaders debate the need for FCPA reform (see, for example, here and here), what might the new Attorney General mean for the enforcement regime?

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Anticorruption Enforcement Policy: Insights from the Deterrence Scholarship

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Over the past three decades much empirical work has appeared on the effect of the criminal law on crime rates.  Usefully summarized in review articles by, among others, Professors Daniel Nagin of Carnegie Mellon University and Michael Tonry of the University of Minnesota (click here and here for examples), this research offers several insights for those engaged in the fight against corruption.

The first is that the criminal justice system can make a difference.  Save for acts committed in the heat of the moment, crime is a cost-benefit proposition.  Would-be criminals tote up the (usually) monetary gains of violating the law against the risks of being caught and punished and, when the benefits exceed the costs, commit an offense.  Thus policies that drive up the cost of crime by increasing the chances an offender will be caught, prosecuted, and appropriately punished reduce the crime rate.  Recent studies confirm that corruption crimes are no exception.  Putting more resources into to prosecuting corruption in the United States and ensuring corruption in the construction of roads is detected both reduced corruption.

But if the good news from the deterrence literature is that the criminal law can make a difference, the bad news is that that the difference is not easy to realize and that the logic of deterrence can lead policymakers astray.  One of the more striking findings is that what would seem to be the easiest way to enhance deterrence, sharp increases in the penalties for corruption crimes, may actually lead to more corruption.  Continue reading →

Private FCPA Enforcement: Some Troubling Trade-Offs

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In my last post, I suggested that one possible drawback to dramatically ramping up enforcement of the Foreign Corrupt Practices Act against individuals (from the perspective of those who, like me, favor aggressive FCPA enforcement) is that individual defendants are relatively more likely to litigate than are corporate defendants. This not only might entail a greater drain on the resources of the government enforcement agencies—a familiar and well-understood concern—but it could also lead to adverse appellate rulings on the meaning of key FCPA provisions (particularly if the targeting of more individuals also entails the targeting of relatively more sympathetic individuals). In this post, I want to raise a similar concern in connection with a prominent proposal for increasing the FCPA’s deterrent effect: the addition of a private right of action under the statute.

The FCPA in its current form does not authorize private individuals to sue defendants for alleged violations of the statute. Although some other statutes might authorize certain forms of private FCPA enforcement—for example, in the form of shareholder derivative suits, or suits alleging violations of the antitrust laws or the RICO Act—these forms of private recourse are quite limited in their availability. (I won’t go into all the reasons in this post—Professor Gideon Mark has a nice discussion in his paper on the topic.) Yet many people (including Professor Mark) have advocated the addition of an express FCPA private right of action which, in the view of its proponents, would substantially enhance FCPA deterrence. This idea has attracted at least some interest in the U.S. Congress, though the proposed bills to add an FCPA private right of action have not yet gone anywhere.

My natural instincts are to support a proposal along these lines, both because I’m more of a “hawk” when it comes to FCPA enforcement, and because I’m generally an enthusiast for the “private attorney general” model for enforcing public law. And I could still be persuaded that a private FCPA action is a good idea. But I have concerns similar to those I raised in my last post about greater targeting of individuals, as well as some additional, closely related worries. Here are the main worries, as I see them: Continue reading →

Institutions, Not Heroes: Lessons from Nigeria’s EFCC

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Nigeria has a corruption problem. Whether described as misuse of public office for private gain, trading in influence, money laundering, or the theft of public funds, this problem is rife, and we know it. There is also a list of scandals that is as long as it is depressing: that fuel subsidy fraud, those egregiously inflated prices for the purchase of vehicles, the disappearing treasury, and a bewildering pardon for an infamous corrupt convict.

Between 2003 and 2007, it looked as if Nigeria had found a solution to the corruption problem, and that solution had a name: Mallam Nuhu Ribadu. As Chair of the Economic and Financial Commission (EFCC), Mallam Ribadu led successful prosecutions of financial crimes, bringing thousands of indictments, over 270 convictions and double that number in arrests. Described by the UN Office of Drugs and Crime as “a crime-buster made of the hardest steel alloy every manufactured”, Ribadu’s work was filled with fearless firsts. Under his leadership, the EFCC conducted investigations leading to the indictment and conviction of the Inspector General of Police (Ribadu was a policeman). The EFCC indicted five governors and secured two convictions – feats previously thought impossible. The EFCC also arrested and prosecuted hundreds of confidence scammers, and served as an effective deterrent to financial crimes. It was also largely due to the EFCC’s efforts that Nigeria was removed from Financial Action Task Force’s list of non-cooperative jurisdictions. Ribadu put a face to the previously mythical dependable and trustworthy law enforcement.

Yet for all his well-deserved praise, Ribadu’s tenure at the EFCC, and what happened afterwards, illustrates the limits of strong individuals in weak institutions. While anticorruption heroes are great, institutions matter more.

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Individual FCPA Liability: A Risky Proposition for FCPA Enforcement Proponents?

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Both supporters and skeptics of aggressive enforcement of the Foreign Corrupt Practices Act have criticized the fact that the act is enforced much more often against corporations than against individuals. Some critics of FCPA enforcement often assert that it is unfair for the government to insist on corporations acknowledging criminal liability when the government is unwilling or unable to prosecute the individuals who committed the actual crimes. At the same time, supporters of aggressive FCPA enforcement argue that the failure to hold individuals personally liable, and to impose criminal penalties (including prison time) on those culpable actors undermines the FCPA’s deterrent effect. And they have a point: many doubt that fines and other monetary sanctions on corporations—at least at the levels that can be imposed under the FCPA—are sufficient to deter bribery, and there is evidence to support this claim.

Of course, individual FCPA liability is hardly novel; a number of past FCPA cases have included criminal convictions of individual company employees. But many have called for dramatically ramping up focus on individuals, and there are some signs that the U.S. Department of Justice may be heeding those calls. For someone like me, who tends to think that FCPA enforcement needs to be even more robust, this would seem like welcome news. And for the most part it is… but I do have a nagging worry, which may be entirely groundless, but that I want to try to flesh out in this post. The worry goes something like this: Continue reading →