Financial Transparency Coalition

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The fallout from the scandal surrounding the discovery that Wal-Mart headquarters suppressed an internal investigation when it discovered its Mexican subsidiary had been systematically paying bribes has been swift and significant. According to an investigative piece in the New York Times, Wal-Mart used bribes not only to obtain permits for its stores, but to reduce the time required for those permits, from months to days or weeks. The public outcry to denounce the corporation has been loud.

But not everyone has joined the opprobrium. Many have said, either implicitly or explicitly, that Wal-Mart was doing business the way business needs to be done and that ultimately Mexico came up better off for Wal-Mart’s presence, both for the consumers and its thousands of employees. For example, an article by Holman Jenkins in the Wall Street Journal argues this point. He notes:

Indeed, Wal-Mart will likely be more severely mauled now for failing to act on its own inquiry than for any bribery its Mexican affiliate may have engaged in.

It’s an outcome that will fill many with ambivalence. Mexico’s failure to provide itself with better governance hardly seems a reason to deprive Mexicans of the benefits of Wal-Mart. Just the opposite: Multinational investment is usually seen as a fillip to development, and development as the antidote to corruption, environmental recklessness, human-rights abuse and all the debilities poor countries are thought to be prone to.

This is partly true. At least the part about economic development being an antidote to corruption certainly is.

But the implicit argument here is that had Wal-Mart followed the rules on the FCPA, it would have ultimately deprived Mexicans of the benefits of its presence. This argument assumes that the FCPA is either prohibitive to multinational investment or that has a significantly negative impact on those investment choices.

This assumption is too strong. Would the process have occurred more slowly for Wal-Mart because it wouldn’t have been able to take shortcuts using bribes? Maybe. Would it not have occurred at all? Unlikely.

But there are two other, more important, flaws in this argument.

1. Foreign bribery not a victimless crime.

The argument that foreign bribery needs to be overlooked assumes that Wal-Mart’s presence in Mexico, including the bribes, is unequivocally good. It ignores the damage of those bribes themselves. Foreign bribery, particularly on the scale of Wal-Marts operations has a significant cultural, political, and economic effect. Foreign bribery negatively impacts local businesses, people, and fosters a mistrust of government. There are many victims, even if they are not readily visible.

Now maybe, when you figure the good Wal-Mart has done for the Mexican economy and the bad those individual bribes have done for the Mexican political, economic systems, you still come up positive. But first off consider that you may not; and second, and more importantly, it is not the marginal negative impact of the Wal-Mart case that is important, but the aggregate damage by foreign bribery and its contribution to corruption. To root out the entire problem, we must root out the problem individually as well.

2. Bribery reinforces an economically inefficient system.

From a capitalist’s point of view, in an ideal world, multinational corporations would compete based on merit. The powerful forces of competition create an efficient outcome because the most efficient, advanced, and technologically advanced companies will beat out the inferior ones. With bribery, this changes. It is not the most efficient or effective company that gains access to emerging markets, but the ones that pay the biggest bribes. Local, smaller companies are often pushed out, unable to pay bribes at the scale of their large, multinational counterparts. These bribes then foster a culture of corruption nationwide, which undermines trust in the government, another necessary element of capitalism. From an economists’ perspective, this is a market distortion and it does not lead to the most efficient outcome.

By allowing bribery to continue, we perpetuate this dynamic. We will not reach the world in which companies compete based on merit without first prohibiting them from paying bribes. It’s like putting the horse before the cart.

In this case, Wal-Mart was “in a hurry” to beat out its competitors in Mexico. And it won that game. But it wasn’t with its efficient production function. It was with bribery.

The argument that Wal-Mart ultimately did the best thing by paying bribes, and providing thousands of jobs to Mexicans, ignores the bigger picture. Foreign bribery is not costless. It does not foster economic development without negative consequences. And those negative consequences are not suffered by the venal officials or the profitable multinationals. They are suffered by the people who are the most innocent and powerless to stop it. And when we’re considering this case, those people are the ones we should think of first.

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