Guest Post: The Infeasibility of Evidence-Based Evaluation of Transnational Anti-Bribery Laws

Kevin Davis, the Beller Family Professor of Business Law at New York University School of Law, contributes today’s guest post, based on his recent working paper.

Academics and policymakers enthusiastically endorse “evidence-based” policymaking, for obvious reasons. (After all, what is the alternative? Faith? Popularity contests?) But while evidence—including quantitative evidence—is often helpful, we must be mindful of the limits on what empirical analysis can tell us about important topics. Take the regulation of transnational bribery. Scholars and policymakers would like to know if the current regime—laws like the U.S. Foreign Corrupt Practices Act (FCPA) and U.K. Bribery Act, and international instruments like the OECD Anti-Bribery Convention—has “worked.” That is, have these instruments reduced bribery by the firms that they cover? And did those laws have additional, possibly undesirable collateral consequences, for example reducing investment in countries perceived to be corrupt?

The most sophisticated efforts to answer these questions (see, for example, here and here and here) essentially rely on what social scientists call “natural experiments.” First, the intervention (the law or policy change) of interest, which (in a borrowing from medical terminology) researchers call the “treatment.” Next, one must identify the population of interest—say, firms or countries—and an outcome of interest (such as the frequency of bribery or the level of investment). Then, the researcher identifies the subset of those entities that are affected by the intervention (for example, the firms that fall under the jurisdiction of the new anti-bribery law); this is the “treatment group.” The researcher also identifies another subset of entities—the “control group”—that appears otherwise similar to the treatment group, but did not receive the treatment (for example, a group of firms that are outside the jurisdiction of the new law). The big difference between a “controlled experiment” and a “natural experiment” is that in a controlled experiment the researcher can randomly choose which members of the population receive the treatment (for example by randomly selecting some patients to get a new drug and giving the other patients a placebo), but in a natural experiment, the assignment of the treatment is done not by the researcher, but by some “natural” process in the world. In trying to figure out the effect of an anti-corruption law, it generally is not feasible to conduct a controlled experiment: researchers can’t decide that these firms but not those firms, selected at random, will fall under the jurisdiction of an anti-bribery law. So the best that researchers can do is to rely on natural experiments and try to account as best they can for possible differences between the control group and the treatment group by including additional control variables in a multivariate regression.

Unfortunately, when it comes to studying the effects of transnational anti-bribery laws, these sorts of studies face several fundamental challenges, which are all too often overlooked or understated. Continue reading

Golden Visa/Passport Programs Have High Corruption Risk and No Demonstrated Economic Benefit. So Let’s Abolish Them.

We’ve had a couple of posts recently (from regular contributor Natalie Ritchie and guest poster Anton Moiseienko) about the corruption-related problem associated with so-called “golden visa” and “golden passport” programs (GV/GP programs), which grant either residency (golden visas) or citizenship (golden passports) in exchange for “investments” (or sometimes simply direct payments to the government) that exceed a certain threshold. Both Natalie and Anton reference recent reports by Transparency International-Global Witness and the European Commission, both of which focus in particular on the EU, and which are both very useful in documenting the risks associated with these residence/citizenship programs—including though not limited to corruption and money laundering risks. That said, the solutions proposed, while certainly helpful, feel a bit thin, in part because both the TI-GW and EC reports assume that these programs have at least some legitimate uses, or at the very least that it would be overstepping for outsiders (be they international bodies, other countries, or NGOs) to try to coerce states into abandoning these programs altogether.

My inclinations are somewhat different, and a bit more radical: I’d push for abolishing these programs entirely—certainly the golden passport programs, but probably the golden visa programs too. The risks associated with GV/GP programs are well-documented in Natalie and Anton’s posts, as well as the TI-GW and EC reports (and other sources), so I won’t dwell on them here. In short, as these and other sources convincingly demonstrate, GV/GP programs may provide safe havens for wealthy criminals and their money, often produce corruption in the programs themselves, and may also have more diffuse pernicious effects associated with the commodification and marketization of membership in a political community. I acknowledge that the risks associated with well-run programs may not be huge, but they’re not trivial, either. And I can’t for the life of me figure out what benefits these programs could have (to society, not to the governments that run them) that could possibly justify those risks.

The usual story is that these programs attract necessary foreign investment, stimulate the economy, and create jobs and raise government revenue. I’m no macroeconomist, and so I may be about to reveal my ignorance in embarrassing fashion, but I have yet to hear a convincing argument, let alone see a persuasive study, that establishes that these programs indeed have substantial economic benefits. Let me explain my puzzlement, and if I’m obviously misunderstanding some crucial point, either about how the programs work or about the economics, I hope some readers out there will correct me. Continue reading

Equity Crowdfunding: A (Partial) Corruption Solution for SMEs

One of the most notorious phenomena in international development is the so-called “missing middle” problem: the scarcity and under-productivity of small and medium sized enterprises (SMEs) in developing countries. Around the world, SMEs can be a leading source of employment and an important driver of innovation. There is a strong positive correlation between the existence of a robust SME sector and high per-capita GDP. Yet in far too many countries, the potential of the SME sector is not being realized.

One cause of SME sector underdevelopment in developing countries is the inability of SMEs to access start-up capital and financing, which can be the “single most robust determinant of firm growth.” SMEs in developing communities face substantial challenges accessing capital, and as a result are often unable to scale or form in the first place. And corruption plays a central role in preventing access to finance among SMEs—by discouraging foreign direct investment, distorting the banking sector, and increasing the costs of equity capital. While corruption poses a significant problem for businesses in many developing countries, SMEs bear the brunt of the harm. Indeed, 70% of SMEs in the developing world cite corruption as a major barrier to their operations.

In the spirit of technological solutions to work around the barriers and distortions created by endemic corruption, equity crowdfunding is emerging as at least a partial solution for SMEs that require capital but are unable to get it because of corruption. Continue reading