Category Archives: Commentary

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 →

UNCAC, Asset Recovery, and the Perils of Careless Legal Analysis

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A little while back I posted a critical commentary on the Stolen Asset Recovery Initiative’s Left Out of the Bargain report.  The report described – and implicitly but clearly criticized – the fact that although the U.S. and other “supply-side” jurisdictions had recovered substantial amounts of money in settlements with bribe-paying firms, only a relatively small percentage of those settlements were transferred to the “demand-side” countries where the bribery took place.  These demand-side countries (which the report, to its credit, carefully avoids calling “victim countries”) are the ones that are “left out” of the “bargain” (that is, the settlement) between bribe-paying firms and supply-side governments.

I read the report as calling for, among other things, greater redistribution of settlement proceeds to demand-side governments, and expansion of the ability of those governments (or private parties) to pursue “follow-on” actions.  My main criticism was that the report neglected to consider the effect that either change would have on the incentives of firms and supply-side enforcers.  Two of the report’s authors, Ji Won Park and Jacinta Odour, posted an interesting reply to my post, which I recommend (along with my rejoinder, which can be found in the comments section of the original post).  But although the main focus of my critique and their response was the incentives issue, our exchange also revealed an important difference of opinion regarding the meaning and significance of the UN Convention Against Corruption, particularly its provisions on asset recovery.  It’s that issue that I want to explore here.

In my original post, I remarked in passing that the StAR report “elides … the distinction between asset recovery actions—in which a country seeks the repatriation of assets stolen by the country’s own nationals (usually former officials or their family members)—and actions for penalties or disgorgement brought against a firm or individual for allegedly bribing foreign officials.” In their response, Park and Odour “disagree that the [Left Out of the Bargain] study does not distinguish between repatriation of assets stolen by public officials and monetary sanctions imposed in foreign bribery settlements.”  The report does this, they say, “through the lens of UNCAC.” They explain that UNCAC Article 51 (the first Article in Chapter V, on asset recovery) states that “[t]he return of assets pursuant to this chapter is a fundamental principle of [UNCAC], and States Parties shall afford one another the widest measure of cooperation and assistance in this regard.”  Park and Odour then declare that this obligation to assist in the return of assets “applies not only to the mandatory return of assets that proceed from embezzlement and misappropriation […] but also to proceeds of corruption from other offences covered by UNCAC (such as Article 16 on Foreign Bribery) and compensating victims.”

If I’m reading this right, Park and Odour seem to be suggesting that, for purposes of States Paries’ obligations under UNCAC Article 51, there is no significant difference between stolen assets recovered in a forfeiture action, fines recovered in anti-bribery enforcement actions, disgorged profits, compensatory damages, and the like; they are all “assets” within the meaning of Article 51 – which implies, presumably, an undifferentiated obligation to “repatriat[e]” (in Park & Odour’s word) both stolen assets and “monetary sanctions imposed in foreign bribery settlements.”

I don’t believe this assertion can withstand close legal analysis, and I certainly think it is misguided as a matter of policy.

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The Quality of Contract Execution Depends on the Process of Contract Selection

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Last week I complained about the dearth of practical, policy-relevant literature available to help governments oversee contracts for the construction of civil works, the development of complex software programs, and other products which take months if not years to complete.  This is but one of many examples where governments must navigate the procurement process without rigorous, empirically grounded work on what procedures to employ when and how.  Absent such guidance, the procurement community falls back on rules of thumbs, old saws, and folk wisdom — the accuracy of which is always suspect.

One of the more suspicious sounding old saws in the procurement practice is the notion that contract execution and contract selection are independent activities — the belief, in other words, is that that how one selects a contractor is of little or no import for how well the contract is performed. But economic theory and recent empirical work both cast doubt on the accuracy of this bit of folk wisdom.
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More on Corruption and Growth, and the Importance of Checking Linked Material

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In my post last week, I went after a bunch of recent blog commentary that asserted there wasn’t much evidence that corruption mattered for development (and that also asserted the allegedly disproportionate focus on corruption was a “fetish” of self-satisfied Western countries). My emphasis in that post was on presenting the evidence that corruption is indeed a serious problem, one that citizens in developing countries care about. But I didn’t say much directly in response to the evidence that the targets of my screed (Christopher Blattman, Michael Dowdle, Jason Hickel) had offered for the claim that corruption’s not all it’s cracked up to be as a development problem. Of the posts I went after, Blattman’s made the most effort to ground the corruption’s-not-so-important claim in academic research. So I think his most detailed post on the subject deserves closer scrutiny than I gave it in my original polemic. (By the way, Blattman also included an interesting direct response to my post here; my reply is in his comments section.)

After reviewing Blattman’s post and the research he cites (and links to) in support of his argument that there’s little evidence that corruption matters very much for economic growth, my conclusions are largely unchanged.  Indeed, I think that the academic papers on which Blattman relies tend to undermine his point more than they support it.

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Will Corruption Matter to India’s Low-Income Voters?

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As India’s new anti-corruption Aam Aadmi (Common Man) Party (AAP) jostles for votes in India’s ongoing (six-week long!) national elections, it must figure out a way to challenge entrenched voting habits and engage with low-income voters on the issue of corruption. The AAP has been described (and sometimes dismissed) as a middle-class phenomenon–a political upstart that will have difficulty connecting with the country’s many low-income voters, who have long been expected to vote along community lines. But this dismissive attitude–and the idea that anticorruption is predominantly a middle-class concern–may not be justified. In fact, the evidence seems to suggest that an anticorruption message is particularly likely to resonate with poorer voters.

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Is It Unconstitutional To Compel Extractive Industry Firms To Publish What They Pay?

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“Publish What You Pay” (PWYP) is the slogan of the international civil society movement to promote transparency and accountability in the extractive industry sector (oil, gas, minerals, etc.). The idea is to get firms to disclose what they pay to governments, and to get governments to disclose what they receive, in connection with extraction projects. Viewing voluntary programs like the Extractive Industries Transparency Initiative as insufficient, the PWYP movement has been pressing for mandatory disclosure requirements. But would such requirements violate the right to free speech protected by the First Amendment of the U.S. Constitution?

That question may seem absurd. Requiring truthful disclosures by commercial firms of payments to foreign governments may or may not be an effective anticorruption measure, but is it even plausible that such requirements would violate the constitutional guarantee of free speech? I think the answer should be no. But alas, as is often the case, it’s not clear that my view is shared by the federal judges who are likely to decide this issue. Indeed, there are worrisome signs that the powerful D.C. Circuit Court of Appeals may endorse an absurdly expansive conception of the First Amendment that would block any effective PWYP mandate. Continue reading →

New York City Pays a Steep Price for Failing to Guard a Guardian

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This past Monday, April 28, U.S. federal trial court judge George B. Daniels sentenced three persons at the center of a corrupt scheme that cost New York City some $600 million to 20 years each in prison.  Despite the massive loss and the large number of firms and individuals that participated, the scheme was quite simple.  Its simplicity, and the vulnerability of a government as large and sophisticated as that of New York City to it, is a stark reminder of how critical contract administration — one of the more prosaic-sounding responsibilities of government — is to controlling corruption.

The New York scam arose from a $63 million contract to modernize its payroll system. Software contracts, like construction contracts, can take months if not years to perform and may need to be modified as the contractor runs into issues not anticipated when the contract was drafted.  More computer code than initially foreseen may be required to capture the way employees in some departments record their hours; a road may have to be re-routed because the ground along the original route turns out to be unstable.  But it may also be that more code isn’t needed or that the original routing of the road is fine.  Instead, it may simply be that the contractor is looking for a way to squeeze more money out of government.

To deal with this concern, governments typically rely on expert professionals to evaluate a contractor’s requests for change orders. Often these professionals also decide whether the completed project meets contract specifications.  They thus serve as guardians of project quality and integrity.  What happened in New York was simple: the guards deserted their post, conspiring with the contractor to bilk the city of out hundreds of millions of dollars. Where the city erred was its failure to heed the famous question attributed to the Roman satirist Juvenal:  Who guards the guardians?

Heeding that question and coming up with a satisfactory answer are, of course, two different things.  What can a government do to avoid the sort of collusion that cost New York City so much money? Continue reading →

Yes, Corruption Is Bad for Development. No, Corruption Is Not a Western Obsession

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Recently there has been a spate of commentary in the blogosphere that revives a set of tired old canards about corruption and development — the related claims (1) that the focus on corruption and governance in the development discourse is misplaced, because there isn’t a lot of evidence that corruption matters much for development, poverty reduction, etc.; and (2) that anticorruption is a fixation of wealthy, mostly Western countries, because it enables people in those countries congratulate themselves about their moral virtue and to look down on habits and practices in the poor, benighted South. Recent examples include Chris Blattman’s posts on his blog (here, here, and here), Michael Dowdle’s contributions to the Law & Development blog (here and here), and Jason Hickel’s post on Al Jazeera English, though there are others as well.

Sigh. Do we really need to go through this again? OK, look: Yes, there are still lots of unanswered questions about corruption’s causes and consequences, and its significance for various aspects of economic development. And yes, some anticorruption zealots have sometimes over-hyped the role of corruption relative to other factors. But the overwhelming weight of the evidence supports the claim that corruption is a big problem with significant adverse consequences for a range of development outcomes. And the evidence is also quite clear that the focus on corruption as a significant obstacle to development comes as much or more from poor people in poor countries as it does from wealthy Western/Northern elites.

A blog post is not the best format for delving into a very large academic literature on the adverse impacts of corruption. And so the posts to which I’m responding might be forgiven for generally failing to provide much evidence in support of their claims that corruption is relatively unimportant for development, and largely a Western obsession. But, let me at least take a stab at trying to move the conversation beyond unsubstantiated declarations to some assessment of the actual evidence, starting with the impact of corruption on development.

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China’s Anticorruption Crusade Is Reaching a Turning Point

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Xi Jinping is 18 month into his presidency and almost as long into his anticorruption crusade in China. As the Wall Street Journal noted as early as May 2013, anticorruption purges are hardly new in China, but President Xi seems to be pursuing his anticorruption drive with unprecedented vigour and commitment. Zhou Yongkang, the newest and arguably most prominent casualty of the purge, is evidence that this time is different. Shannon Tiezzi recently made the same underlying point in a piece in the Diplomat. Ms. Tiezzi takes issue with the oft-repeated claim that President Xi is only using anticorruption to weaken political rivals and promote his allies; she points out that while President Xi is indeed using the purge to his advantage, political infighting couldn’t be his sole motivation, since if it were “he would likely be winding down the campaign now.”

I don’t disagree with Ms. Tiezzi’s point. President Xi’s anticorruption drive–the centerpiece of his tenure so far–has undoubtedly gone further than others before him. More than 182,000 party members, including 17 high-ranking officials, have been punished for corruption since the beginning of his presidency. Yet despite this progress, recent signals suggest that his campaign might be significantly curtailed in the near future.

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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 →