Corruption and crisis in the global economy.

• Author: Howell, Llewellyn D.

There has been considerable hand-wringing and argument in recent months about whether the Asian financial crisis caught American economists and the stock market unaware and, if so, how this could have happened. John Naisbitt, author of Megatrends Asia, and others have portrayed Asian economic growth as inevitable, a concordance of characteristics and trends that perhaps could support almost exponential expansion. Did these prognosticators fail? What were the sources of the collapse that was heard 'round the world?

The most critical problems at the macro level were the failure of financial institutions in the countries damaged and their inability to handle growing foreign debt. Banks and other lending institutions in South Korea, Thailand, Indonesia, etc. found that large loans had been made with little assurance that they were repayable. Loans had been granted on the basis of personal friendships and obligations. rather than on creditworthiness of the borrowers or their business plans. The normal practices of secure banking were violated regularly and pervasively, to the benefit of but a few. Entire systems -- not just some individuals -- were directed away from market-determined practices, or corrupted.

American investors operating abroad long have had to deal with stringent limitations of the Foreign Corrupt Practices Act. Under this law, an American businessman can be fined and even imprisoned for employing corrupt practices to obtain or advance business with foreign governments. While the U.S. enforces the FCPA globally, almost all other countries ignore the corruption that American companies are forced to avoid. Some even give a quasi-endorsement by allowing bribes to become tax deductions.

The FCPA focuses on bribery to obtain contracts and/or advance the business of a firm. The World Bank definition broadens this a bit to "the abuse of public office for private gain." However, corruption also includes any activity that demonstrates favoritism or a bending of the rules, whether there are immediate financial payments or gain or a simple confirmation of a personal benefit such as employing a family member or friend. Most simply, corruption is a deviation from the normal rules of operation with the result that some individuals can take advantage of opportunities while others are shut out.

When relative deprivation is ignored and the benefits to some smaller circle are emphasized as the achievement of "values," there is the volatile...