Can Federalism Curb Corruption in China?

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Many commentators have credited China’s political decentralization, and the inter-jurisdictional competition it fosters, with suppressing local corruption and promoting economic growth. Other commentators have been similarly enthusiastic about the prospects for Chinese “federalism” to improve both economic and government performance, and urge China to go even further in embracing a federalist model.  For instance, an op-ed in the New York Times a few months back suggests that “[I]f China’s leaders want to ensure their country’s peace and prosperity over the long run, they would do well to chart a course toward a federal future.”

The main argument for why political decentralization, and the associated inter-jurisdictional competition, can improve governance and growth is straightforward: Local officials compete for mobile capital and labor, and this competition disciplines government officials because bad behavior (such as corruption) can cause voters and firms to move to another jurisdiction. The greater the mobility of firms and citizens, the stronger the disciplining effect. And there’s some rigorous recent academic research substantiating the hypothesis that political competition can improve governance, including an excellent recent paper that examines recent data from Vietnam and finds that economic growth, coupled with political decentralization and competition, has indeed reduced local government corruption.

So does this mean that China’s best hope for improving its governance performance is to decentralize even further, granting provinces and municipalities greater autonomy in setting policy within their jurisdictions?

The short answer is likely to be no.

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Guest Post: Reaching Bribery’s Victims (Part 2)

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This month GAB is delighted to feature a series of guest posts from Andy Spalding, Assistant Professor at the University of Richmond School of Law and Senior Editor of the FCPA Blog.  This is the second in the series of three posts on how to compensate the victims of transnational bribery:

In my last post, I weighed in on the discussion concerning whether the UN Convention Against Corruption (UNCAC) Article 53(b) (or any other provision), establishes a duty to allocate anti-bribery penalty money to the overseas victims. I’d like to suggest now that regardless of how one answers that question, using enforcement monies to benefit those victims is a good idea. We could engage any number of ethical, economic, foreign policy, or other arguments on this point; I’ll save those for another day. For the remainder of my post, I’ll assume that: 1) the citizens of corrupted governments are the principal victims of transnational bribery; and 2) enforcement should somehow benefit them. The next question, which is no less difficult, is how.

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America’s Pursuit of Absolute Integrity

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Attempts to control corruption have a long history in the United States.  Since the late 19th century numerous laws have been enacted at the federal, state, and local level to end patronage and nepotism in government employment, control conflicts of interest by public servants, and reduce opportunities for bribery and kick-backs.  Although the current corruption landscape differs from that of 20th century America, policymakers considering anticorruption legislation today can profit from a look at the U.S. experience.

A useful, if sobering, place to start is with Professors Frank Anechiarico and James B. Jacobs’ 1997 analysis based on New York City’s century long effort to combat corruption supplemented by the federal government’s more recent experience with ethics laws.  Useful because the authors analyze many of the same interventions now commonly advocated to combat corruption around the globe: conflict of interest legislation, financial disclosure requirements for public servants, whistleblower protection, the creation of inspectors general, the reduction of officials’ discretion.  Sobering, not only because they conclude these reforms have done little to combat corruption, but also because the authors contend that together these laws have contributed to the current dysfunctional state of American government.  In short, they say, America’s effort to suppress corruption has produced little benefit at great cost.

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Let’s Create Sub-National Corruption Perception Indexes for the BRICS

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For all their flaws, the major cross-country corruption indexes—Transparency International’s Corruption Perceptions Index (CPI), the World Bank Institute’s Worldwide Governance Indicators (WGI), and the like—have been quite useful, both for research (at least when used appropriately) and for advocacy.  But one important limitation of these datasets is that by focusing on corruption (or perceived corruption) at the country level, they may obscure the fact that there can be substantial within-country variation in the level of (perceived) corruption.  This variation may occur across government institutions—the same country may have quite different degrees of corruption in the health sector, the police force, the judiciary, customs, etc.  More pertinent here, there may also be significant heterogeneity across regions, particularly in large countries with substantial political decentralization.  Indeed, numerous studies have exploited within-country regional variation in corruption levels to test various hypotheses about corruption’s causes and consequences; such studies include research on Italy, Russia, China, the Philippines, and the United States, among others.  But these studies typically make use of particular data sets that are not reproduced year-to-year.

As we’re starting to see rapidly diminishing returns from the major cross-country corruption datasets, it is high time for those organizations with the resources and capacity to compile information on corruption perceptions on an ongoing basis to turn their focus to within-country regional variation in corruption.  I propose the creation of a sub-national corruption perceptions index (snCPI), starting with the so-called BRICS countries (Brazil, Russia, India, China, and South Africa), which would gather and compile data (primarily perception-based data, perhaps supplemented with more objective data when available) on perceived corruption levels within the major sub-national units (states/provinces, autonomous regions, and municipalities) within each of those countries.

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The Corruption-Security Nexus: Lessons from Afghanistan (Part 1)

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This past February, Transparency International (TI) Germany released a study on the relationship between corruption and stability in conflict and post-conflict zones. Titled “Corruption as a Threat to Stability and Peace”, the report notes that corruption and conflict have a “symbiotic relationship,” in which corruption drives instability by encouraging rent-seeking behavior, undermining state institutions, and fueling social and political grievances, while institutional weakness in fragile or conflict-ridden states allows corruption to take root. (The U.S. military’s Joint and Coalition Operational Analysis (JCOA) Division released a report on a similar theme, focusing specifically on Afghanistan, around the same time. That report will be the subject of my next post.)

The good news, as TI relates it, is that both intervening military forces and peace-builders are taking note of the effects of corruption on security and are starting to implement efforts to fight corruption. The bad news is that the results of those efforts are decidedly mixed, and their long-term success is threatened by countervailing interests, like securing short-term peace agreements. Those observations are not all that surprising. Buried in the report, however, are a few unexpected observations that are worth highlighting.

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Allegations of Corruption and the Qatari World Cup

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Just five days after FIFA voted to award Qatar the 2022 World Cup, Jack Warner, a senior FIFA official (and now a politician in Trinidad), received $1.2 million from a company controlled by the leading proponent for a Qatari World Cup (the proponent, Mohamed bin Hammam, has since been banned from football for life ). Some have argued that this impropriety should cost Qatar the World Cup, and FIFA has created and empowered an ethics committee to investigate potential wrongdoing. The United States FBI is also investigating the payments. If FIFA finds wrongdoing, it might reassign the cup on that basis.

I believe that to reassign the Cup on the basis of corruption in the FIFA vote would be a mistake. The Qatari World Cup is a magnifying glass on unfair labor practices in Qatar, and the Cup’s potential impact on human and labor rights is too great to give up.

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Guest Post: Reaching Bribery’s Victims (Part 1)

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This month GAB is delighted to feature a series of guest posts from Andy Spalding, Assistant Professor at the University of Richmond School of Law and Senior Editor of the FCPA Blog.  This is the first in the series of three posts on how to compensate the victims of transnational bribery:

Who are the victims of transnational corporate bribery? Do existing anti-bribery laws help them? And should they? The answers may not be as intellectually crisp as our gut feelings are strong. But the questions are now unmistakably central to anti-bribery debates, as illustrated by the lively exchange concerning the StAR Initiative’s Left Out of the Bargain report.  (On this debate, see Matthew’s original critique, the rejoinder by two of the report’s authors, and Matthew’s subsequent reply.) In this three-part series of posts, I’ll consider who the victims of bribery are, briefly weigh in on the StAR report debate, and then see if I can’t broaden this discussion a bit.

Most of us would agree that overseas corporate bribery is not a victimless crime. Though there are many possible victims–the bribed governments, the shareholders in the defendant companies, even the companies themselves (which often pay bribes in response to near-extortionate demands)–the principal victims of overseas bribery are the citizens of those countries – almost always developing countries – whose governments have been corrupted. Yet the profound irony of modern anti-bribery enforcement: those substantial monetary penalties are deposited in the public fisc of the perpetrator. They hardly touch the victims at all. And this isn’t by design. It’s a sort of accident of extraterritorial white-collar crime. Continue reading →

The New Chinese-Backed Infrastructure Bank: Will it Tame the Corruption Dragon?

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Asian governments are welcoming China’s recent decision to establish a bank to finance infrastructure across Asia.  As Devex reported June 2, China plans to capitalize it with an initial $50 billion with the possibility of increasing it by an additional $100 billion.  For China, the bank is one more way to assert leadership in the Asian region.  For Asian states leery of relying on the Western-led World Bank and Asian Development Bank for financing public works, the bank is a chance to diversify.  For both the lender and borrowers alike, the bank offers the chance to profit from Asia’s economic dynamism.

The Chinese-led bank will have to overcome many challenges to realize these objectives, the most difficult of which may well be preventing corruption from infecting the projects it finances.  Infrastructure corruption produces half-built roads, dilapidated ports, and white elephants of all kinds.  It leaves borrowing governments indebted for under-performing, over-priced assets while stirring a backlash against the lender.  Will the new bank and its principal backer be able to keep the corruption dragon at bay?   There are at least three reasons to worry that it won’t.  Continue reading →

Guinean, American Anticorruption Investigators Tear Up the “Best Private Mining Deal of Our Generation”

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The mining mogul Benny Steinmetz was once feted for the “best private mining deal of our generation,” after his company secured Africa’s richest iron ore deposit in Simandou, Guinea. Today, the deal “lies in ruins.” A two-year investigation by Guinea’s government has found that Steinmetz’s firm BSGR used corrupt practices to win its mining rights from Ahmed Sekou Touré, Guinea’s former dictator, . The company has now been stripped of these rights. Meanwhile, the FBI has Steinmetz on tape authorizing millions of dollars in payments to the wife of a former Guinean dictator. A BSGR associate, Frederic Cilins, has pled guilty to obstructing an FCPA inquiry into the mining deal in a Manhattan court; Swiss prosecutors are looking to question Steinmetz himself. Perhaps unbelievably for Benny Steinmetz, anticorruption authorities around the world have responded furiously to a clandestine deal in an overlooked, West African backwater.

Four takeaways from these incredible developments, after the jump.

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Guest Post: India’s Whistleblower Protection Act — An Important Step, But Not Enough

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Christine Liu, an associate at Cravath, Swaine & Moore’s New York Office, contributes the following guest post:

As Raj noted in his last post, the recent election of Narendra Modi as prime minister of India demonstrates that the Indian population wants change and supports actions against corruption (as do recent polls, such as the Lowy Institute study, which found that 96 percent of Indians believe corruption is holding the country back, and 92 percent believe that reducing corruption should be one of the government’s top priorities). One of the most important obstacles to fighting corruption in India has been the lack of adequate whistleblower protections. Individuals reporting incidents of bribery or corruption faced numerous hurdles, including verbal threats, physical violence, and ostracism. Others encountered workplace retaliation. Confronted with these risks, many potential whistleblowers chose to remain silent.

But there are encouraging signs that this may change. On May 14, 2014, Indian President Pranab Mukherjee cleared the way for the Whistleblowers Protection Act. This action represents a much-needed change from the history of delay surrounding the original bill, which was first introduced in August 2010 and then took years to pass the two Houses of Parliament—it passed in Lok Sabha on December 11, 2011 and in Rajya Sabha on February 21, 2014. The new whistleblower law is a significant achievement. Nonetheless, the law has some important limitations, and there are outstanding concerns about whether the law will be enforced effectively and foster public confidence. Continue reading →