U.S. Foreign Anti-Corruption Regulation Spurs Economic Growth

This summer, President Joseph R. Biden released a memorandum outlining his anti-corruption plan, declaring that corruption “threatens United States national security, economic equity, global anti-poverty and development efforts, and democracy itself.” Countries rich in natural resources with weak political institutions tend to struggle with broad economic growth. Under these conditions, corruption and bribery often thrive, which siphons money that would otherwise boost a country’s economy. Scholars call this phenomenon the “political resource curse.” Anti-corruption regulation from other countries with stronger institutions can help provide support to overcome this curse, argue Hans B. Christensen, Mark Maffett, and Thomas Rauter of the University of Chicago Booth School of Business in a working paper that examined the effects of the enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) on economic development in developing countries in Africa. They found that U.S. regulation could transform corporate behavior and increase economic growth in foreign economies—even those afflicted by the political resource curse. The FCPA prohibits U.S. corporations and their agents from bribing any foreign official to obtain or retain business. The FCPA also sets bookkeeping and accounting standards. U.S. Congress passed the FCPA in 1997, but around 2004, regulatory and legal changes prompted a dramatic increase in federal FCPA enforcement against both U.S. firms and non-U.S. firms under U.S. jurisdiction. Christensen, Maffett, and Rauter observed a decrease in investment in high-corruption-risk countries in 2005, which they use as an indicator for when relevant actors recognized the change in U.S. FCPA enforcement. With this turning point established, Christensen, Maffett, and Rauter studied natural resource extraction firms, assuming that the political resource curse would be more apparent with these firms. They studied 487 mines and 133 oil and gas wells across 34 African countries including South Africa, Libya, the Democratic Republic of Congo, and Zimbabwe. These facilities extracted 20 different commodities including gold, coal, and oil. To measure economic development, Christensen, Maffett, and Rauter used the density of nighttime light—luminosity—because it is “highly associated with economic activities” and allows researchers to narrow on specific geographic areas. Moreover, compared to other economic development measures, luminosity better captures the well-being of the community. Christensen, Maffett, and Rauter note that FCPA cases are limited to firms under U.S. jurisdiction and headquartered in Organization for Economic Co-operation and Development (OECD) countries, likely because it is difficult for the United States to prosecute non-U.S. firms under the FCPA without cooperation from foreign regulators. Christensen, Maffett, and Rauter categorize OECD countries as those that have signed the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which requires signatory countries to have criminal anti-bribery laws. Christensen, Maffett, and Rauter compared luminosity levels in the surrounding areas of firms under US jurisdiction, headquartered in OECD countries—and subject to FCPA enforcement—to the luminosity levels of firms under the United States’ jurisdiction headquartered in non-OECD countries and other firms headquartered in OECD countries outside of United States’ jurisdiction. Christensen, Maffett, and Rauter found that economic activity increases by 14 percent within a 10-kilometer radius of firms subject to FCPA regulation. Based on their findings, they argue that the changes in business practices—away from corrupt practices—increased development because “extraction firms’ contribution to local economic activity is higher in the presence of foreign corruption regulation.” To capture whether changes in business practices caused the increased economic development, Christensen, Maffett, and Rauter measured changes in perceived corruption. They found that after 2004, residents of extraction areas near firms subject to the FCPA were 8 percent less likely to perceive their government as corrupt and approximately 18 percent more likely to be content with the performance of their local government. Furthermore, for the extraction firms that changed owners during the study, increases in economic growth preceded acquisitions. Christensen, Maffett, and Rauter claim that “the increase in economic activity is more likely attributable to changes in how existing owners operate extraction than new—non-bribe paying firms—entering the market.” They also found that economic activity increased more in areas with weak political institutions. These findings support the political resource curse theory that natural resource-rich countries with weak political institutions mitigate bribery and corruption less effectively, but foreign regulation may impose the missing accountability. Christensen, Maffett, and Rauter note that research shows that anti-corruption regulation costs lead to lower foreign direct investment. But their findings indicate that, upon closer inspection, regulation may have positive effects despite decreases in foreign direct investment. According to Christensen, Maffett, and Rauter, the overall impact of foreign corruption regulation depends on three factors—“how much the regulation decreases corruption, what regulated firms do instead of paying bribes, and whether the marginal investments forgone because of the regulation would have positively impacted development.” Christensen, Maffett, and Rauter ultimately conclude that foreign corruption regulation originating in developed countries can support developing countries that may not be able to eradicate corruption on their own