countries with nations with comparable levels of GDP but less inequality. In most such pairs—Norway or the Netherlands compared to the United States or United Kingdom, for instance; or Estonia compared to Russia—less legal corruption goes along with a smaller gap between the 1 percent and everyone else.
No one openly champions “legal corruption” as a good way to run a country, but one reason it is harder to denounce than it seems is that many of the reforms that enable legal corruption were actually intended to make economies more transparent, more fair, and more effective. That is true of the privatization drives that sometimes devolved into giveaways, and it is true of deregulation efforts in areas like finance or telecommunications. Liberalization doesn’t have to be legally corrupt, but because it is often about opening vast new economic opportunities, it can easily become so, especially if governance is weak.
That’s why what looks, from the outside, as if it must be a nakedly corrupt decision—for instance, the Telmex privatization or Russia’s loans for shares—is at least sometimes the work of reasonably honest and genuinely well-intentioned market reformers. That was true, astonishingly, of Russian reforms at the outset and it is certainly true of financial deregulation.
But legal corruption gets more complicated and more compromising once you start dividing the spoils. Eventually the material gap between the true-believing technocrats and the businessmen their reforms enrich becomes an obstacle and a temptation for even the most upright civil servant. The widening financial divide becomes even harder to tolerate as the reformers realize that the wealth their programs transferred has made the beneficiaries not only rich, but politically powerful, too. It was this heartbreaking epiphany that corrupted many of the Russian reformers and persuaded them to try to make themselves into oligarchs. Those who didn’t often regretted it. The Western-educated wife of a former Soviet leader who took significant personal risks to enact his reform plan told me, as her husband was leaving office, “I could have charged $100,000 for one-hour meetings with my husband. Now I wish I had.” Her plan, she hastened to add, would of course have been to donate all the money to her charitable foundation.
In Western countries with significant legal corruption, that financial gulf creates a revolving door between the regulators and the regulated. One study of the SEC found that, between 2006 and 2010, 219 former SEC employees had filed almost eight hundred disclosure statements for representing their new clients’ dealings with the agency, their former employer. Nearly half of these disclosures were filed by people who had worked at the sharp end of the SEC’s relationship with business, in its enforcement division.
It is easy to understand the appeal of switching from gamekeeper to poacher—in 1980, the top regulators earned one-tenth the incomes of the leaders of the businesses they policed; by 2005 the ratio had jumped to one- sixtieth. Moreover, if the revolving door were locked, the gamekeepers might be even weaker. Given the income gap, how many members of the Harvard class of 2012 will choose government service, especially if there is no opportunity to switch to a more lucrative private sector role later on? And at a time of increasing economic complexity, what chance does government have of keeping up with business if the best and the brightest go to the private sector?
Finally, the age of globalization has brought one more twist to the story of rent-seeking and how it has helped to create the super-elite: like so much else, rent-seeking has now gone global. That’s not entirely a new story—multinationals have long paid bribes to secure contracts abroad, and some of the most lucrative examples of historic rent-seeking have involved overseas concessions, like the East India Company’s right to trade in India granted by the British Crown, or the Hudson’s Bay Company’s rights to the Canadian fur trade.
But the international ripple effect of rent-seeking is today even more extensive. A fortune created by rent- seeking in one country can have a powerful effect thousands of miles away. Britain’s football clubs and, increasingly, its newspapers are being bought up by emerging markets oligarchs, particularly Russians. Between 2008 and 2011 the second-largest shareholder in the
Even rent-seeking plutocrats who’ve made their fortunes the old-fashioned way—by being authoritarian despots—have been cheerfully courted by the global plutocracy. That was the case with Saif Gadhafi, who, just two years before protesters bloodily overthrew his father’s four-decade-long dictatorship, was courted by a private equity tycoon over Saturday lunch in his magnificent home on Park Avenue and gave speeches at Davos and at the Council on Foreign Relations. The London School of Economics accepted a ?1.5 million gift from the Gadhafi family and awarded Saif a degree; the Monitor Group, one of the most respected and internationally minded consultancies, became a paid adviser to the regime for a yearly fee that reached a yearly peak of $3 million.
Legal corruption is going global, too. The threat that business, particularly finance, might move to another country was one of the most powerful arguments in favor of deregulation, especially before 2008. Witness, for example, the 2007 McKinsey/Bloomberg/Schumer report prepared by McKinsey for Michael Bloomberg on the threat that other, less onerously regulated financial centers, particularly London, posed to New York’s pole position as the world’s preeminent financial capital. One of the key recommendations was that the United States shift to the British “light touch” regulatory philosophy.
As rent-seeking wealth spills across borders from the country where it was granted to other parts of the world, as rent-seeking plutocrats do deals with one another, and as economic rules go global, the question Professor Rajan asked of the Bombay Chamber of Commerce may need to be adjusted. He asked his Indian audience if their country was at risk of political capture by rent-seeking national oligarchs. An equal, and probably greater, danger is the rise of an international rent-seeking global oligarchy.
SIX
PLUTOCRATS AND THE REST OF US
If you really wanted to examine percentage-wise who was hurt the most on their income, it was Wall Street brokers.
He was remembering now why he didn’t like the rich: their self-pity. Persecution was the common ground of their conversation, like sport or the weather for everyone else.
A stranger to human nature, who saw the indifference of men about the misery of their inferiors and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine that pain must be more agonizing and the convulsions of death more terrible to persons of higher rank than to those of meaner stations.
DELIVERING HAPPINESS
If you ever have to work at a call center, make sure it is Zappos. The online retailer has built a business around the idea of, as founder Tony Hsieh put it in his bestselling advice book cum autobiography,
