Jun 3rd 2015

The Impunity Trap

by Jeffrey D. Sachs

 

Jeffrey D. Sachs, University Professor at Columbia University, is Director of the Center for Sustainable Development at Columbia University and President of the UN Sustainable Development Solutions Network.

"Recent studies have shown that when “generalized trust” in society is high, economic performance is improved and life satisfaction is higher. Among other reasons, commercial agreements are more easily reached and efficiently implemented. It is no coincidence that the Scandinavian countries rank among the world’s happiest and most prosperous year after year."

NEW YORK – Ours is a world of impunity. Allegations of corruption swarmed around FIFA for decades, culminating in mass indictments of FIFA officials last week. Yet FIFA President Sepp Blatter was re-elected four times, including after the indictments were filed. Yes, Blatter has finally resigned, but only after he and dozens of Federation members once again showed their scorn for honesty and the law.

We see this kind of behavior all over the world. Consider Wall Street. In 2013 and 2014, JPMorgan Chase paid more than $20 billion in fines for financial malfeasance; yet the CEO took home $20 million in compensation in both 2014 and 2015. Or consider corruption scandals in Brazil, Spain, and many other countries, where governments remain in power even after high-level corruption within the ruling party has been exposed.

The ability of those who wield great public and private power to flout the law and ethical norms for personal gain is one of the more glaring manifestations of inequality. The poor get life sentences for petty crimes, while bankers who fleece the public of billions get invitations to White House state dinners. A famous ditty from medieval England shows that this is not a new phenomenon:

The law locks up the man or woman
Who steals the goose off the common
But leaves the greater villain loose
Who steals the common from the goose.

Today’s greatest thieves are those who are stealing the modern commons – raiding government budgets, defiling the natural environment, and preying on the public trust. When the indictments against the 14 FIFA officials were filed, the cast of characters included not only miscreants from the sports world, but also some familiar players: secret Swiss bank accounts, Cayman Islands tax havens, shell corporations – all of the financial appurtenances that are literally designed to shield the rich from scrutiny and the law.

In this case, the FBI and US Justice Department have done their jobs. But they did so, in part, by penetrating the murky worlds of financial secrecy created and protected by the US Treasury, the Internal Revenue Service, and the US Congress (ever-protective of Caribbean tax havens).

In some societies and economic sectors, impunity is now so pervasive that it is viewed as inevitable. When unethical behavior by political and business leaders becomes widely viewed as “normal,” it then goes unpunished by public opinion, and is reinforced as normal – creating an “impunity trap.” For example, with politicians in the United States now so flagrantly and relentlessly on the take from wealthy donors, much of the public accepts new revelations of financial impropriety (such as the Clinton Foundation’s morally dubious financial dealings) with a cynical yawn.

The situation in the global banking sector is especially alarming. A recent careful study of ethical attitudes in the financial-services industry in the US and the United Kingdom showed that unethical and illegal behavior is indeed now viewed as pervasive. Some 47% of respondents said that it is “likely that their competitors have engaged in unethical and illegal activity,” and 23% believed that their fellow employees have engaged in such activities.

The younger generation has learned the lesson: 32% of respondents employed in the financial industry for less than ten years said that, “they would likely engage in insider trading to make $10 million if there was no chance of being arrested.” The chance of being arrested for such malfeasance is, alas, probably very low.

Yet not all societies or sectors are caught in an impunity trap. Some societies, most notably in Scandinavia, maintain the expectation that their public officials and business leaders should and will act ethically and honestly. In these countries, ministers are forced to resign for petty infractions that would seem trivial in other countries.

Convincing American, Russian, Nigerian, or Chinese citizens that corruption can indeed be controlled might seem to be a futile task. But the goal is certainly worth embracing, because the evidence is overwhelming: impunity is not only morally noxious; it is also economically costly and deeply corrosive to wellbeing.

Recent studies have shown that when “generalized trust” in society is high, economic performance is improved and life satisfaction is higher. Among other reasons, commercial agreements are more easily reached and efficiently implemented. It is no coincidence that the Scandinavian countries rank among the world’s happiest and most prosperous year after year.

So what can be done to overcome an impunity trap? Part of the answer is of course law enforcement (such as the FIFA indictments) and protection for whistleblowers. Yet law enforcement is not sufficient; public attitudes also play a major role.

If the public expresses contempt and revulsion for bankers who cheat their clients, oil executives who wreck the climate, FIFA officials who countenance kickbacks, and politicians who cozy up to all of them in exchange for campaign funds and bribes, illegality for the few cannot become the norm. Public scorn might not end corruption immediately, but it can make life far less pleasant for those who are stealing the commons from the rest of us.

One candidate for US President in 2016, former Maryland Governor Martin O’Malley, recently launched his campaign by asking why not a single Wall Street CEO was convicted of a financial crime in the wake of the 2008 financial meltdown. It is a good question, the kind that can help the US to overcome its impunity trap.

Yet we can ask an even simpler question. Why are those same bankers still fêted by President Barack Obama, invited to glittering state dinners, and reverently interviewed by the media? The first thing any society can and should do is deny respectability to political and business leaders who willfully abuse the public trust.


Copyright: Project Syndicate, 2015.
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