The Economist: Ethics and economics

Economists normally don’t deal with issues of morality. We deal with facts and figures and measurable outcomes, leaving it to others to determine what’s right or wrong. But recent stories in the business press have me thinking about an ethical issue that has troubled me for a long time.

First the recent stories: 

1. The GlaxoSmithKline scandal in China.

2. Walmart’s problems in Mexico.

3. Hollywood studios paying to enter the Chinese film industry.

We could go on and on.

There are two schools of thought on the issue at hand, referred to as bribery by some and administrative fees or contributions to development or transactions costs by others. The first group argues that bribery equals corruption and only leads to more corruption. It is wrong plain and simple, and must be punished under all circumstances. The other school counters that these payments are sound business investments, cutting red tape and offering an average return of 10 to 11 times the money spent.

Until the 1970s, bribery was generally accepted as a necessary cost of doing business overseas. The Foreign Corrupt Practices Act, passed in the U.S. in 1977, was rarely enforced and it wasn’t until 20 years later that the OECD banned bribery of foreign officials. Businesses countered that the law made it difficult or impossible to do business abroad, pointing out that it was just a way of life in developing countries. On paper we said the gifts were illegal and wrong, but we generally held our nose and looked the other way.

What troubles me is not whether bribery is acceptable because it more than pays for itself. That question has economic implications and should provide the fodder for several Ph.D. dissertations. It’s not even a question of whether it encourages corruption, which should also be answerable with data and research.

Rather it is the idea that it is wrong because it doesn’t fit with our ethical system, which is clearly the only correct ethical system in existence. Now before I am deluged with angry emails, let me say that I do believe our ethical system, imperfect as it is, is the best in the world.

But it isn’t the only structure of morality in existence. I learned that in the years I worked in Russia, back in the 1990s and early 2000s, when I ran a small company with two Russian colleagues to help small- to medium-sized companies learn to do business in the new commercial world. I quickly learned that we operated in two different ethical universes.

Within a Russian individual’s circle of family and friends, everyone is totally dependable and trustworthy. Friends will do anything for you and expect you to do anything for them. Outside that circle, anything goes, at least when I worked there. Russian citizens would shamelessly brag about how they cheated the government or another business. I had a client, an agricultural machinery manufacturer, who asked me to evaluate a business plan. It involved purchasing a John Deere tractor, bringing it to Russia, copying it and selling it under the John Deere name in Eastern Europe at a substantially reduced price. When I told them that was dishonest and we couldn’t do it, they were completely puzzled.

A Russian expects to give gifts to accomplish anything. During Soviet times and in the early days after the collapse, people were so poorly paid that they depended on these gifts to survive. And it wasn’t bribery, nor was it dishonest or unethical. It was just the way it was. By the same token, there was a line beyond which something was no longer a legitimate gift in return for a favor and became a bribe. No American can determine when that line is crossed, which is why it is necessary to have an honest Russian business partner (one who considers you a friend or family member) to work ethically there – at least by standards in Russia. It could easily land you in jail by our standards.

But we don’t allow individuals and businesses with diverse ethical systems to come to the U.S.; we first insist they abide by our values. What right do we have to go into another country to do business and impose our ethical system on them? It’s worth a wonder. I’m sure the execs from GSK and Walmart are scratching their heads.