Corruption and Cronies: A Popular Revolt Worldwide and a Tectonic Shift in the Making

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Around the world, a change that has been slowly gathering momentum seems to be accelerating: everywhere we look, we see the public revelation of political and economic corruption.

Corruption… A Norm Throughout History

The abuse of political power for personal gain has been an ugly but consistent aspect of every human society and civilization. There have been rare rulers and regimes under whom corruption was suppressed, punished, and minimized… but much more often, corruption has been the norm, and ordinary people have tolerated it. In easy times, they tolerated it because enough trickled down to them that they could excuse "criminals", who at least could “get things done.” In harder times, they tolerated it out of necessity, because those criminals wielded the power of the sword.

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With few exceptions, corruption has been the baseline. Ordinary citizens and subjects could expect that the power of the government would be exploited by a privileged few who would use it to extract ill-gotten gains, secure preferential treatment in business dealings, demand bribes and kickbacks, and so on.

Corruption Changes Its Face, But Is Always Present

The shape of this corruption changes as a civilization changes and as a country develops. It becomes less overt and more subtle. In a civilization’s early stages, corruption is brutal and indiscriminate, but as political institutions mature and economic and technological development occurs, corruption becomes more predictable and systematic, and therefore more humane. It’s not perfect, but its progress. (It’s the difference, for example, between police who will extort bribes and beat you at a roadblock, as many do in the developing world, versus police who will seize your property through civil asset forfeiture.)

Eventually, in a few fortunate times and places in human history, a political culture appears in which the guiding principle and ideal is the rule of law—the absence of corruption, the equal standing of all before the political powers that be, the restraint of the power of government, and transparency in all the rulers’ dealings. We feel fortunate to live in a country which, in spite of all its shortcomings and failures, still cherishes this ideal.

Our regular readers know that we believe the rule of law to be the ultimate foundation of free and prosperous societies—and that we are always carefully watching and analyzing social and political trends throughout the world to identify where the rule of law is being strengthened and supported… and where it is being undermined and overthrown.

Corruption Is Better In Some Places Than Others… But No Country Escapes It

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Source: Transparency International

Change Is In the Wind

But there are changes happening.

Currently, we see the restlessness and rebellion of citizens pushing back against corruption—and we see it rising to a global critical mass across the whole spectrum of the world’s economies and polities. From the global north to the global south, from developed economies to developing economies, looking different wherever it manifests, but still based on the same impulse: a refusal to continue to accept the corrupt status quo, whatever it may be. 

Whatever was hidden, tolerated, accepted, and ignored is now being brought into the light. Whatever remained unspoken by the “official” voices of the economically and politically powerful, is being shouted by the masses from below—and they are finding political figures and forming political movements which will take up their cause and give it a voice.

We believe that the global rise of this phenomenon is a matter of signal importance and one that will shape an environment of political change and turmoil for decades to come. For example, the disruption that has attended the political changes of the Arab Spring and its aftermath is not something that concerns only the Middle East, and not something that will be quickly and simply resolved with a comfortable return to the status quo after a (brief) episode of chaos and confusion.

Developed and Developing Worlds: Anti-Corruption Sentiment Takes Different Paths

As we noted above, corruption changes as a country develop its economy and its political institutions. We see a common trend across the globe—but it is manifesting very differently in the developing countries than it is in the developed world.

In the developing world, we see the trend across Asia—especially in China and India—and in Latin America, especially in Brazil and Argentina. The popular response to typical developing-world cronyism is shifting from resigned tolerance to simmering outrage that threatens to give way to social unrest. We believe some converging social, economic, and technological trends are behind the darker and more intransigent tone of public opinion.

First, social media, internet access, and cheap, commoditized smartphones have allowed societies to leapfrog decades of the slow development of mass media culture. Even the most authoritarian regimes are ultimately incapable of controlling the dissemination of information. For example, the demonstrations that erupted in Iran in 2011 were coordinated through social media in spite of the government’s attempts to shut down communications; Iranian activists and hackers simply enlisted the aid of sympathetic foreigners in setting up proxy servers to evade censorship. As heavy-handed as a state can be, online communication is a weed it simply can’t eradicate. Unlike printing presses and television stations, it is so widely distributed and decentralized that it lies outside the control of any political authority.

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Second, much of the developing world—especially in Asia and Latin America—has experienced several decades of rapid development that has seen the rise of a much more educated middle class. Education has had the effect of raising the consciousness of that middle class, and with that, its hopes and expectations for more self-determination and a better life (such as it sees in the hegemonic media culture of the west that pervades popular entertainment). Not only have people become more materially well-off—they have come to expect that further progress is on the way.

Third, the great financial crisis of 2007 to 2008 and the global economic downturn which followed it was not kind to the new global middle class that had grown up in the developing world. Just at the time that it was flexing its economic muscles and opening itself to the outside world through education and integration into the global information web, this rising middle class was faced with the most severe economic setback in a century. When there’s plenty to go around, corruption can be tolerated more easily; but in straitened circumstances, the theft and conspicuous consumption of a crony elite suddenly became intolerable.

And fourth, slow progress has been made at integrating developing economies into a framework of the global law. As imperfect as the process has been, governments throughout the developing world have become members of all manner of international organizations ostensibly dedicated to the rule of law—and signatories to international conventions intended to promote transparency and clean politics. Maybe it was under duress—maybe it was just to secure the good graces of their developed-world trading partners. But over the course of decades, it made a difference—helping plant the seed of honest and impartial institutions, or at least the expectation that such institutions should exist and serve the people’s best interests.

So what we see in the developing world is this—the rise of a more educated and wealthier middle class, with higher expectations for freedom and prosperity, and less patience in accepting the misdeeds of their rulers, especially when economic hardship begins to bite.

The intelligent political leaders of the developing world have seen the writing on the wall—that they had better start to do something to meet their citizens’ demands, or they will face potential revolutions that will sweep them from power. Chinese President Xi Jinping explicitly invoked this specter when he launched his anti-corruption drive in 2012, telling his Communist Party cadres that if corruption were allowed to continue, it would destabilize and threaten Party rule.

China’s Anticorruption Drive Aims to Stave Off the Risk of Public Unrest… Like That Seen At the Tiananmen Protests

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Of course, the sincerity of rulers in pursuing an anti-corruption agenda is always in question.  Venezuela’s late dictator, Hugo Chávez, took power in 1999 on a platform that pledged to root out corruption and transfer wealth to the poor—and his regime went on to become a poster-child for theft and cronyism almost unparalleled in the region, which has brought his country and its unfortunate poor to food shortages, much deeper poverty, and the brink of catastrophe.

Still, we believe that the upsurge in popular resentment of and resistance to corruption throughout the developing world is not a phenomenon that will pass; it will grow in momentum as it faces new challenges, and will remake governments just as it is remaking the power structure in Brazil. The process will emphatically not be smooth and easy—we will likely see more examples of countries like Venezuela, where new leaders are swept into power on promises to fight corruption, and simply exploit their positions to line their pockets, just like their predecessors.

However, their tenures will likely be shorter, and as the developing world moves ahead, there will be less of the unjust but stable cronyism that marked the past, and more unstable and volatile political conflict and struggle as corruption are slowly and painfully reduced (though of course it will never be completely rooted out).

The stoic acquiescence of the impoverished masses is becoming a thing of the past, and the developing world is moving into a new and less certain era—albeit one with ultimate hope for real movement towards the rule of law. As this process unfolds, monitoring the developing political and economic climate in each developing economy becomes more important than ever for investment allocation decisions.

A Different Picture in the Developed World—“Higher Taxes, More Regulation, and a Less Business-Friendly Environment Are Coming Your Way”

In the developed world, the same trend is at work in very different circumstances.  

In the United States, there is also deep public dissatisfaction. However, it’s not the dissatisfaction of a new and rising middle class—it is the dissatisfaction of an old and declining middle class. And it’s not sparked by the vision of blatant cronyism on the part of a visible, obviously corrupt and venal elite. Instead, it is rooted in the pervasive sense of the middle class that the whole game, legal though it may be, is stacked against them. It’s not that there’s cartoon-character evil among a cabal of cronies. It’s more that the whole system is perceived to be rigged, so that ordinary people will never get ahead, and the rich will keep getting richer. It’s an anti-corruption sentiment that’s appropriate for the type of corruption that predominates in the developed world—not naked and brutal, but humane and institutionalized.

In the US, we can see this trend in the insurgent candidacies of outsiders such as Donald Trump and Bernie Sanders, who each in their way rail against, mock, and spurn the culture and policies of the existing system and promise to upend it and sweep it clean. They pledge to replace legalized and legitimized corruption and cronyism with a system that will work for all Americans, not just the wealthy, not just the political class, and not just the connected few. It is a message that resonates deeply with a working and middle-class audience that feels it has made no economic progress in the past two decades while the wealth of the reviled Wall Streeters and one-percenters has skyrocketed.

Both of these candidacies capture a trend that we find worthy of deep reflection. While in the developing world, the uprising is against government corruption, and often fundamentally hungering for and for economic freedom and prosperity, the rhetoric that appeals to the ground-down middle class in the US has a distinctly anti-business atmosphere.

A recent poll showed that 43 percent of Americans under 30 have a favorable view of socialism. (This demographic also overwhelmingly supports the campaign of Bernie Sanders, which often seems to suggest that economic liberty and the entrepreneurial spirit are fundamentally dubious and dangerous powers that can be tolerated only if they’re very closely watched.)

What this means to us is that in the US, the manifestation of the anti-corruption trend is going to be a criticism of business, and of the wealthy, more than a criticism of the government. While anti-corruption sentiment in the developing world is squarely focused on government as the primary enabler and supporter of cronyism, in the developed world, popular sentiment sees government as the people’s savior, rather than as a grave danger in its own right that needs to be kept in check—which was how America’s founding fathers viewed government.

So for Americans, as this process unfolds, we say, “Look out—higher taxes, more regulation, and a less business-friendly political environment are likely to be coming your way.” The irony is that such growth of government if history is any guide is much more likely to worsen corruption and cronyism than to ameliorate it. There will be a renewal of the American skepticism and reserve about government power on the other side of this process if this is indeed how it unfolds… but we believe it will be a long, painful lesson.

Western Europe is well down this path itself. In Western Europe, there exists public distress at the continent’s economic malaise and existential anxiety as it faces new Russian aggression and an overwhelming influx of Muslim migrants. But that distress is just intensifying populism on the right and socialism on the left… even as Europe’s creaking welfare states stare down even an even greater level of indebtedness and insolvency than what is threatening entitlement programs in the US.  

Again, investors should watch the political trends with great care, to spot which industries are in or out of favor—and which suffer most from public censure. For now, the financial and pharmaceutical industries are bearing the brunt of public wrath. But that wrath can be fickle—and we would not be surprised if, at some point in the future, tech firms lose their mantle of positive sentiment and become suspect because of their power and perceived arrogance.

Investment implications: Expect volatility in the developing world; the old pattern of corrupt but stable regimes will be replaced by more political volatility as governments struggle to keep the peace and manage the demands of their newly wealthy and newly educated middle classes. Look for events such as the impeachment of President Rousseff in Brazil as opportunities to buy the Brazilian currency when the public becomes more positive after the impeachment and cleanup of a corrupt cabal of officials.

In the developed world, on the other hand, trends seem to be turning towards more government activism to address corruption—which is blamed more on business than on the state. If, as we expect, these trends continue for a prolonged period, they will reduce the overall standard of living of the developed world. History clearly shows that socialism may increase equality, but it also has decreased economic growth almost everywhere that it has been thoroughly implemented for a prolonged period.

Investors will have to watch the political climate more closely than ever—in the developing world, to find those economies and markets moving towards greater stability and the rule of law; and in the developed world, to find which industries will be facing regulatory pressure and which will be given a pass, as well as which countries are moving towards higher tax, higher regulation regimes—which will stifle stock-market appreciation. Currently, the substantial problems of Europe and the increasing implementation of socialism and government regulation there make it unattractive for investment in our view.

For more commentary or information on Guild Investment Management, please go to guildinvestment.com.

Co-Authors: 
Tony Danaher

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