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After ¬effects of anti¬corruption laws

Published: 6th Jun, 2022

Context

Many assume that strict anti-corruption laws like the FCPA when enforced properly by government officials would lead to a fall in corruption and an improvement in the economy.

About

Foreign Corrupt Practices Act:

  • The Foreign Corrupt Practices Act (“FCPA”) is one of the most important anti-corruption laws.
  • Originally passed in 1977, the FCPA prohibits companies issuing stock in the U.S. and their subsidiaries, from bribing foreign officials for government contracts or to obtain any business advantage.
  • Benefits of the FCPA:
    • Many assume that strict anti-corruption laws like the FCPA when enforced properly by government officials would lead to a fall in corruption and an improvement in the economy.
    • The FCPA is considered to be a law that is implemented well.
    • The researchers, however, found that when the U.S. government went after certain U.S. firms that operated in other countries on charges of bribery, other interesting results followed. These results failed to satisfy the initial expectations of the legislators who framed the FCPA.

Key observations:

  • There was no real decrease in the level of corruption among foreign officials after the enactment of the FCPA.
    • The researchers propose what they call the “bribe-switching hypothesis” to explain the failure of corruption to fall in foreign countries despite the enforcement of FCPA regulations.
  • Public officials do not depend on only formal markets to earn bribes but may also depend on other illegal markets to earn bribes.
  • When the cost of extracting bribes in the legal market increases due to laws like the FCPA, this can cause public officials to resort to obtaining bribes from the illegal market instead.
  • In countries where American firms could no longer offer bribes due to FCPA regulations, the size of the black economy increased by as much as 0.25% points.

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