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The Walmart Corruption Scandal: Watershed Moment for Mexico?

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What do children in the final days before Christmas, boyfriends in the first few weeks of a relationship, and bureaucrats undergoing a critical audit have in common? The answer: They all feel the pressure of the watchful eye. In light of the recent Walmart corruption scandal, it is important to realize that developing countries can shield their bureaucracies from corruption's reach. Monitoring by auditors, the press, or an active citizenry can keep governments honest, but only if those at the top of the political hierarchy demonstrate their political will to fight corruption by holding wrongdoers to account.

On April 21, journalistic reports revealed that corruption played a strategic role in Walmart's explosive expansion in Mexico. Suspect payments were made in exchange for environmental impact fees, zoning permits, construction licenses and even falsified zoning maps, including the cultural site of Teotihuacan. In sum, Walmart's corruption scheme helped it become the largest employer in Mexico while hijacking the country's institutions and regulatory framework.

Admittedly, many local governments in Mexico work with a dysfunctional system of rules and procedures. However, the news reports about Walmart's dubious actions make an important contribution. They chip away at the commonly held notion that foreign corporations dealing in emerging markets are the helpless victims of corrupt functionaries. But these news articles have one key limitation -- they do not answer the question: What can be done to protect developing countries' bureaucracies from corruption's reach?

Months before the corruption scandal, one of the authors, a native of Mexico and Yale University researcher, conducted a study in the city of Querétaro. The city's Buildings Secretary had embraced transparency and gave exclusive and unprecedented permission to conduct a study on monitoring of the municipal government's Construction Licensing Office and its issuance of building permits.

The study examined 100 building permit applications for the building, demolition, or modification of shops, restaurants, hotels, hospitals, and the like. Fifty of the applications were randomly selected to enter into an experimental group. Officials were made aware that an independent and technically apt auditor was carefully reviewing all the documentation for projects of this group. However, the officials did not know that another set of 50 randomly selected permit applications were, at the same time, part of a comparison group and subject to external review. The study's design made it possible to see how bureaucrats modify their behavior when subjected to perceived or known oversight.

The results are newsworthy as they shows that monitoring does spur greater diligence, stringency, and honesty among government officials. This is good news for those interested in promoting government integrity in Mexico and beyond. However, it is important to note that these findings ironically were not driven by the audit alone. Added scrutiny by itself is ineffectual. The independent review became effective only after the city's Buildings Secretary heard a midway report of the study's findings and personally called on officials in the Construction Licensing Department to be more careful with their work. It is only after officials felt that there was the risk of a top-down sanction that they began to enforce the law more rigorously. In other words, the watchful eye is best paired with a cracking whip.

We tend to hear a lot about what is wrong with Mexico (corruption, violence, poverty, etc.), but we seldom hear about the signs of hope emanating from America's southern neighbor, the third largest trading partner of the U.S., and the world's fourteenth strongest economy. When it comes to corruption, Mexico is not monolithic and reformers are fighting the good fight.

If there is doubt that Mexico can make it through these tough times, then consider that, only decades ago, New York City was weighed down by intense corruption. The Knapp Commission investigated corruption within the police department. Then, in 1986, the city's housing authorities sanctioned a real estate developer for constructing a 31-story high rise, which climbed 12 stories above what the law permitted. Instead of simply issuing a fine, officials also required that the developer tear down the excess 12 stories at considerable personal cost. This governmental action sent a clear and credible sign that serious zoning violations will not be tolerated and that strict compliance is necessary.

Mexico's new president, Enrique Peña Nieto, is now confronting a similar dilemma. Will he take up the fight and turn the Walmart scandal into a catalyst for reform? President Peña must give life to his anti-corruption agenda. There are 19 stores, including one that can be seen from the top of the archeological wonder and UNESCO World Heritage site, Teotihuacan, that were constructed because Wamart paid bribes. Peña Nieto's commitment to good governance will be tested and measured by how many of these stores are in fact demolished. Decisive action will effectively demonstrate that bribes are neither the grease for the wheels of bureaucracy nor the mortar for irregular constructions.