THE WALL STREET JOURNAL of August 5 reported that the U.S. Department of Justice is pursuing a criminal investigation of the Mercedes unit of German car manufacturer DaimlerChrysler, suspected of having paid bribes in many countries, especially in Latin America and Africa. As a company listed on the New York Stock Exchange, DaimlerChrysler is subject to the 1977 Foreign Corrupt Practices Act, which forbids paying bribes to foreign officials (bureaucrats or politicians). The Securities and Exchange Commission is also investigating.
In many countries, the underground economy could not survive without bribes. It is often impossible, or very costly, for an individual or a company to escape restrictions and prohibitions, and to do business, without bribing state officials. Prohibiting bribes is never perfectly enforceable, but it does increase the risk and cost of the bribes, and of the transactions they make possible. As recently as 10 years ago, virtually all governments, except the U.S. government, did not prohibit their nationals from bribing foreign officials. After having forbidden American companies to compete with bribes, the U.S. government has used the OECD to impose the same sort of prohibition to companies from 33 other countries, through the 1997 Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
WHY SHOULD BRIBES to state officials be illegal? Sure, the best situation is one where the state is tightly constrained, has little to offer in terms of privileges, and where consequently bribing officials is not done. The worst situation is one where the state is all powerful and state officials cannot be bribed, except at very high cost (in terms of expected penalties) or in convoluted ways. Between the best and the worst case, there is a second-best situation, where powerful state officials can be bribed to let the briber carry on his peaceful activities.
A simple example will illustrate why bribery is a second-best. Assume that there is a single consumer who wants a unique widget, and is willing to pay up to $50 for it. Further assume that producing this widget costs $20 in labor, $10 in capital (the use of machines, equipment, buildings), and $5 in normal profit. For the sake of simplicity, suppose that there is only one firm that can produce the widget. Both the consumer and the producer will be better off if the widget is produced and sold at a price between $35 and $49.99. Value created is $15, and will be shared between the consumer and the producer depending on the exact price agreed upon. This is the best situation. Now, if the state effectively prohibits production of the widget, value lost is $15: this is the worst case. And here comes the second-best: any bribe to a state official (usually by the producer) of less than $15 would allow production to go ahead and value of $15 to be created (although part of the value is diverted to the state official).
HOW IS A BRIBE DIFFERENT from a straight price in a free-market exchange? A market price looks like a bribe that the buyer gives the seller in order to persuade the latter to part with something (or do something) the former wants. On reflection, however, the term “bribe” is usually meant to describe a situation where the exchange is secret, because the bribed is contractually forbidden to sell what he sells. Offering bribes is generally legitimate, but accepting it is often not. For example, restaurant waiters may accept the bribes called tips that regular customers give them, while purchasing managers are usually (although not always, or in all countries) forbidden to take gifts from suppliers. Thus, in most cases, a bribe is simply a price which should not be accepted by the bribed because it puts him in breach of contract or in breach of trust.
Now consider public bribes, that is, bribes paid to state officials. It is easy to understand why the state wants to forbid its officials to accept bribes. Either the state acts in the general interest, and public bribes can lead some officials to act against the public interest. Or the state acts against the public interest, that is, it favors some interests at the expense of other individuals’ interests, and letting its officials be bought off by harmed interests would go against public policy. Whether the state’s reasons for prohibiting its officials to accept bribes are legitimate or not, the economics of bribes suggests that they are not harmful to the general welfare: under a state that acts in the public interest, there is little that the subjects can gain with bribes, and thus no imperious reason to prohibit their offer; while in a state that favors some clienteles (including its own officials) against others, the liberty of offering bribes will at least allows the harmed subjects to try and minimize their harm. Public bribes are a safety valve.
JUST AS A PRIVATE bribe is (at first sight) difficult to distinguish from a market price, a public bribe looks like a a tax. The U.S. government is at pain to explain that bribes do not include routine payments to state officials (for obtaining permits, licenses and other official documents, for processing governmental papers such as visas, for police protection, mail pick-up and delivery, phone service, power and water supply, loading and unloading cargo, protecting perishable products, scheduling inspections associated with contract performance or transit of goods across country…), and offers prior guidance to advise whether such or such payment is a bribe or not. A study produced for the United States Agency for International Development, which argues against bribes, admits that what is a bribe or not depends on how it is defined by local legislation. Public bribes are more or less what the state defines as such! Contrary to a tax, though, a bribe can serve not only to increase state power, but also to bypass it. The liberty of the subjects to bribe public officials can make their plight more bearable. Thus, in an interventionist state, public bribes can be less harmful than taxes.
A public bribe is different from a tax in another way. Cash bribes often play the same role as donations to political parties, or as non-cash bribes offered to politicians (by organized groups or by other politicians) in terms of future political support. There is a public choice debate on whether straight cash bribes to politicians are more or less efficient than the usual non-cash bribes. But towards state officials of foreign countries, where ordinary political participation is difficult, the case is neat: bribe them if you need to in order to do peaceful business.
WHAT HAVE WE SEEN thus far? As much as there are some reasons for the state to prohibit its employees and associates to take bribes, there are good reasons not to forbid individuals to offer them. Yet, I haven’t considered some important objections.
First objection: Isn’t it possible that, the more bribes are offered, the more state officials will be tempted to take them? It may be so, but only to the extent that state officials do have something to offer against bribes. In a minimal state, few bribes will be offered because there is little to gain from the state. When the state interferes much with commerce and life, more bribing is generally better than less. To see this, consider a situation where many consumers want widgets and many producers are willing to supply them. The state may sell a monopoly of widgets to the highest bidder, or to somebody in the royal family. But as long as others are free to offer bribes, some will try to buy special licenses to bypass the monopoly. The monopoly originally granted will be more fragile than if bribes, except the first successful one, are strictly forbidden. Remember that cash bribes substitute for political competition: if one believes in political competition (with non-cash bribes like lobbyists’ promises of support), one has to agree with bribing competition in the absence of formal political competition.
The second objection against legalizing offers of public bribes parallels the public choice argument on the dissipation of the rent: if offering bribes is legal, resources will be used in competitive bribing, and part of the benefits gained by successful bribers will be dissipated, resulting in no net gain for society. Forget the fuzzy meaning of the “for society,” and just consider that, again, the argument is valid only when bribing is used to obtain anti-market privileges; when it is used to reestablish some market competition, bribing will dissipate the rents of the bribers, but it will also push down prices and benefit the consumer, which is the goal of economic activity. When bribing is used instead to obtain restrictions to competition, we have the same problem as with democratic politics, and the solution lies in limiting the state, not in restricting political or bribing competition. Remember that in today’s world, and especially in Africa or Latin America, the problem is not that bribing could corrupt a minimal state, but that it is necessary to create value destroyed by non minimal states.
The third objection is that offering and receiving public bribes accustom people to cheating not only in their relations with the state but also in their private relations. This is what happened under communism, where everybody was cheated by everybody and thus tried to cheat everybody else. Such a process – a sort of East-Europeanization of our societies – would amount to a depletion of our social capital of honesty and openness, without which a free society cannot exist. This is a serious argument and a serious danger.
HOWEVER, IT points again to the cause of public bribing, which lies in a powerful state. Bribes are only a symptom, not a cause. Moreover, this objection has little to do with allegations of giving bribes in societies where bribing is widespread, and where our social capital of honesty and openness did not exist in the first place. For firms like DaimlerChrysler, paying bribes is only as a cost of doing business in these societies. Whatever the objections are against bribing, they don’t apply when the state leaves no other feasible option.
Give me liberty, or give me the freedom to bribe!
Pierre Lemieux is an economist and co-director of the Economics and Liberty Research Group at the Université du Québec en Outaouais and a Research Fellow at The Independent Institute in Oakland, California.
Originally published November 2005