Government corruption is hard to see, and the drag it imposes on economic development is hard to measure. But Chicago Booth's Hans B. Christensen, Mark G. Maffett, and Thomas Rauter found a way to gauge the effects of a crackdown on corruption and to actually see them—observing how many lights are on after sundown as a metric for economic activity.
This methodology helped them determine that a four decades-old American anti-corruption statute was associated with a 14 percent increase in economic activity near mines and oil wells in Africa. The findings suggest that measures to reduce public bribery, extortion, and embezzlement can help reverse the “political resource curse,” the phenomenon where rich endowments of natural resources can warp behavior in countries with weak political institutions.
In the aftermath of Watergate, the US Congress in 1977 enacted the Foreign Corrupt Practices Act, barring American corporations and individuals from bribing foreign officials to benefit their businesses. Reflecting a lack of domestic support and limited international cooperation, the FCPA was largely unenforced for decades, according to Christensen, Maffett, and Rauter. That changed in 2005 with an expanded legal definition of bribery and the introduction of deferred and nonprosecution agreements in FCPA cases, and in the wake of the passage of the Sarbanes-Oxley Act, which reformed public-company accounting, they write.
This unleashed a tenfold increase in FCPA cases over the next dozen years. The researchers exploited this development to study the effects of the crackdown. As the enforcement actions mainly affected companies with headquarters in countries that had signed on to the Organisation for Economic Co-operation and Development Anti-Bribery Convention, the researchers could create a control group of communities untouched by the FCPA.
They built a sample focusing on 487 mines and 113 oil and gas wells across 34 African countries and used luminosity readings from a US Air Force satellite program that compiles data on low-light imaging for every location around the globe every night. They combined that with location, ownership, and commodity data for extraction facilities, determining whether each facility's owner had been affected by the increased enforcement of the FCPA.
Advocates of calculating economic activity using nighttime light emissions argue that it compensates for the shortcomings of GDP data and allows for more granular assessments. Christensen, Maffett, and Rauter used the technique to measure economic growth in areas within 10 km to 50 km of the extraction sites in their sample.
Using satellite images to measure economic development in the vicinities of 600 mines and oil and gas wells in 34 African countries, the researchers find improvement in the years after regulators began an international crackdown on corrupt business practices.
They find that between 2004 and 2013, luminosity increased significantly in areas within 50 km of extraction sites affected by the crackdown, compared with little to no change in areas around sites with owners who were not subject to the increased scrutiny. Gains in luminosity were more pronounced the closer to an FCPA-regulated extraction facility. Areas within 10 km of a site enjoyed a 14 percent boost, compared with just 3 percent for those within 25 km of a site.
Countries with weak political institutions before the FCPA enforcement increase saw the largest jump in economic activity, they add, ruling out the possibility that the gains could be related to various other things, including an overall decline in mining activity or changing local economic conditions at the owners' headquarters.
“We find no evidence of a decline in employment in the extraction sector,” they write. “Rather, consistent with the increase in economic activity being driven (at least in part) by extraction firms shifting to business practices that are more beneficial (or less detrimental) to the local communities where they operate, the association between extraction activities and local economic activity increases by 40 percent.”
Petty corruption was long thought to grease the wheels of business. But economists are learning how much it can hold back some companies and local economies.
How to Fight Corruption—and Why We Should
To save the world, some say to start with reporting requirements.
Should Sustainability Disclosures Be Standardized?The findings point to how anti-corruption regulation might stimulate an economy, say the researchers: larger chunks of foreign investment, for example, may reach local businesses and individuals rather than being sucked away by bribes. International companies might start choosing local partners for their competence rather than their political connections. And with bribery jettisoned from the community-relations tool kit, mine owners might instead curry favor (minus any quid pro quo) with local stakeholders by building roads or increasing wages. These effects appear to outweigh anti-corruption measures' possible negative impacts on growth, such as companies pulling projects altogether.
The researchers also analyzed surveys by the nonprofit Afrobarometer asking Africans about their perceptions of corruption. They find that people living near FCPA-affected extraction areas were, after 2004, 8 percent less likely than people elsewhere to say they thought government officials were corrupt, and 18 percent more likely to be satisfied with their local government. This further supports the idea that a decline in corruption leads to higher economic activity.
Overall, the study highlights the long arm of the FCPA: “Anti-corruption regulation originating in developed countries” may increase companies' operating costs, Christensen, Maffett, and Rauter write. But it can also “have a positive impact on the economic conditions in developing countries.”
Make rules that are simple and apply to all companies.
How Best to Report Carbon Emissions
Analysis of the Multilateral Memorandum of Understanding suggests investors take comfort in regulatory cooperation between countries.
When Financial Regulators Cooperate, Foreign Investors Benefit
In some cases, the costs of increased transparency outweigh the benefits.
Increased Enforcement Can Drive Down Stock ValuesYour Privacy
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.