Capitalism will not take root around the world if corruption defiles it. Socialism collapsed a decade ago because it became discredited in the eyes of the peoples who lived under it. Now capitalism is receiving severe rebukes, with its critics given powerful evidence that they are right in seeing it as a system that works for insiders and their cronies. After all, isn't Enron's bankruptcy a crystal-clear example of inmates controlling their guards? If America wants to lead capitalism's global march, it must exorcize a growing culture of corporate crony capitalism.
The choice, of course, is no longer between socialism and capitalism. Socialism became a mess as great expectations of a workers' paradise were bogged down in bureaucracy. Without incentives and radical decentralization, economic progress is simply a dream. So the past century demonstrated time and again, which is why China -- nostalgic egalitarian rhetoric notwithstanding -- opted for all-out capitalism under its post-Mao rulers.
Did Deng Xiaoping (
If inequality is one negative aspect of radical capitalism -- to some extent mitigated by the public sector -- the other one is the potential corruption of capitalist institutions: call it the Enron syndrome. When US Congressional committees weaken regulatory oversight of their business friends; when accounting firms surrender their independence because of the lure of mega-contracts; when corporate boards can't say no because the fees of board members are stunningly large relative to the effort; and when managers live in a frenzy of self-dealing, the stage is set for capitalism to lose its reputation.
That clearly is the case of late in the US. Capitalism involves a delicate problem of agency and trust; giving managers the green light for entrepreneurship is not enough to make certain that the interests of investors are safeguarded; nor is it enough for stock markets to price securities realistically. While evidence about the Enron debacle is not fully in, it is fair to say that Enron is both a great moral scandal and a blot on capitalism. It throws a stark light on the flaws of capitalism's core institutions.
The witch hunt now underway -- with politicians, regulators and even the White House seeking to save their political skins -- is, indeed, essential. Inevitably, it contains populist, anti-business sentiments. At times, it almost looks as if anti-globalization protesters are taking over. But in the swing of the pendulum the excesses of yesterday will incite greater scrutiny and a tougher rulebook for business in the future.
All for the good. Capitalism is a public trust; it works if everybody has a fair chance and corporate theft receives highly visible punishments. The ritual witch hunt now underway may be the only way for bosses to regain their bearings.
For the only way capitalism can be made acceptable, and hence deliver growth and prosperity around the world, is to practice this rite of exorcism in public. Enron bosses will be humiliated; other bosses will (in private) shake their heads at the scale of these purges. They will argue that all the Congressional and newspaper investigations are excessive; that we should put Enron behind us and move on to the business of making money again. But to act in such a way will leave those doubtful of capitalism in even greater doubt. Such, indeed, would create the ultimate moral hazard -- a world of corporate crime without punishment.
Some will say that it will be impossible to build good boards of directors if members can be sued; some will ponder what will happen to stocks if hard questions are asked about financial reporting by companies. A clean sweep, however, will ultimately be good for stocks and certainly much better than cover-up and lingering doubts about what the books really look like.
Capitalism, indeed, has always needed its morality tales. But distinctions must be made. The failure of Long Term Capital Management a few years ago provided a lesson about risk management and the need to not be dreamy-eyed about a string of huge returns.
Nothing remotely illegal happened then; there was no government bailout nor facilitation of management's errors. Investors simply made a mistake out of greed and lost, big time. By contrast the Enron affair involved impropriety and perhaps criminal conduct of just about anyone coming close to management. Moreover, it is not yet clear whether top Enron managers won't walk away with a bundle of cash while the company's workers lose their retirement assets.
Chinese capitalism, too, is rife with corruption and self-dealing. The Chinese government's reaction -- every so often -- is to behead a bunch of obvious and odious villains. That may seem an extreme solution for Western democracies. But to imprison corrupt managers, regulators and politicians is an essential element of a functioning and respected capitalism. Because capitalism redistributes aggressively, it is vital that there be trust, transparency and accountability.
After Enron -- standing not just for a single event but a slippage in corporate culture altogether -- we will only regain our bearings through the imposition of severe punishment for corporate crimes.
Rudi Dornbusch is Ford Professor of Economics at MIT and a former chief economic advisor to both the World Bank and the IMF.
Copyright: Project Syndicate
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