Corruption and Crony Capitalism Kill

By William K. Black

The recent Turkish earthquake, as with its modern predecessors, has shown that the witches’ brew that crony capitalism produces is a leading cause of death and severe injury. Control fraud, the use of a seemingly legitimate entity by those that control it to defraud, exists in all three major sectors – private, public, and non-profit. Crony capitalism typically involves the interaction of public and private sector control fraud. I have written primarily about accounting control frauds, which are property crimes of mass destruction. Anti-customer, anti-public, and anti-employee control frauds can all cause mass casualties. Earthquakes and the tsunamis they produce can kill hundreds of thousands of people. Government programs have been exceptionally successful in reducing the loss of life from natural disasters. Early warnings, evacuation routes, barriers, and training can greatly reduce the losses caused by tsunamis. Seismic building codes, if properly enforced, can reduce direct deaths from earthquakes to exceptionally low levels even in severe seismic events. The saying is: earthquakes don’t kill people; collapsing structures do.

The Long Beach Earthquake of 1933

On March 10, 1933, a magnitude 6.3 earthquake with its epicenter near Long Beach, California destroyed or severely damaged nearly 200 schools. Had the quake occurred during school hours, over a thousand children would likely have been killed and large numbers would have been injured. California school structures did not have to meet any seismic code. Scientists had warned of this danger to school structures prior to the Long Beach quake without producing a policy change, but the quake allowed tens of thousands of parents to see collapsed school buildings that would have obviously put their children at grave risk. They knew that a magnitude 6.3 was powerful, but that earthquakes could be dramatically more destructive. 
The Field Act of 1933
Public demand for change was so intense in California – during the Great Depression, with the State and its localities in financial crisis – that the Field Act was enacted on April 10, 1933. The Field Act originally applied only to new construction. It required school buildings to be built in compliance with a seismic code designed to keep the structures from collapsing even in a severe earthquake. It also created a special periodic inspection process and professional staff designed to ensure compliance with the seismic code. The sponsor of the legislation, Mr. Field, was an extremely conservative elected official. The Field Act was enacted with bipartisan support – one month after Long Beach earthquake. In the 78 years since the enactment of the Field Act, no one has died from a seismic event in a California school covered by the Field Act. The Act has also virtually eliminated serious injuries from seismic events in California schools covered by the Field Act.
Turkey: Control Fraud and Corruption Kill
Turkey has decent seismic codes, largely modeled on California, but its enforcement of those codes is undermined by crony capitalism and poverty. Structures in seismically active regions are often more cost-effective if they meet seismic building codes because they are less likely to be damaged, and far less likely to suffer catastrophic damage, during a moderate or severe earthquake. The cost savings that code compliant buildings can achieve, however, are only likely to be demonstrated in the long-term and only in regions that suffer material earthquakes. In the short-term, it is cheaper to construct buildings that are death traps in a strong earthquake. Honest builders, therefore, find it difficult or impossible to compete with builders that falsely claim to have complied with the seismic codes. This is another example of a Gresham’s dynamic in which fraud drives honest firms from the marketplace. It is essential that the regulators serve as the “cops on the beat” to detect the fraudulent builder during the construction process and to prevent their frauds and the death traps they would otherwise complete and sell to the public. The need is greatest in structures that aggregate large numbers of people, e.g., schools and apartment buildings.
The seismic regulators, however, can fail for many reasons. The poorest homes may be constructed by the owner or the informal economy out of materials that are inherently likely to fail even in moderate earthquakes. The government, private sector, and non-profit sectors can reduce this danger by popularizing inexpensive designs that reduce the risk that the buildings will collapse in a moderate quake. The seismic regulators can also fail if they are denied the resources to succeed, become complacent, or are corrupt. Fraudulent builders have powerful incentives, and no moral restraints, to bribe the seismic regulators. Fraudulent builders that successfully bribe the seismic regulators can gain a decisive competitive advantage over honest builders. Endemic corruption is only possible when those that control the seemingly legitimate regulatory entity use the entity as a means of looting.
The more corrupt the nation, all other factors being held constant, the more likely people are to die in natural disasters. See, generally, Black, W., “Corruption Kills” in “International Handbook of White-Collar and Corporate Crime,” eds. Pontell, H. and Geis, G. (Springer 2007). Nicholas Ambraseys and Roger Bilham published an article with the same title in January 2011 in the journal Nature (Vol. 469). They reported the results of their study that found that “83% of all deaths from building collapse in earthquakes over the past 30 years occurred in countries that are anomalously corrupt.”
The recent earthquake in Turkey continues this familiar pattern. Al Jazeera’s Anita McNaught, reported from Turkey on October 25, 2011 about the failure of the authorities to enforce the seismic codes.
“Turkish authorities are likely to face questions over why they have failed to tighten up construction regulations to make buildings more earthquake-resilient,” McNaught said.
“Experts have continuously told the Turkish authorities that the earthquake itself is not what kills people. It is faulty building construction that kills people,” our correspondent said.
“There have been pleas from all quarters – from people working in civil defence, from academics, from architects and urban planners – for successive governments to tighten up the building regulations. But that involves a huge investment of money.””
Turkey Earthquake Death Toll Nears 300
The Wall Street Journal’s Marc Champion reported on October 28, 2011 that initial inspections are revealing a pattern design and building materials failures in the structures that collapsed. He accompanied one the inspectors, Mr. Tasarsu.
The building, like many others old and new, was built as a single unit, but was too long. Inside, it should have been split into a separate skeleton with twin columns every 40 feet, so that each section shook independently when the earthquake hit, he said. “It’s like when three men link together with their arms and then you push them around. They bump into each other and its very unstable,” said Mr. Tasarsu, adding that it is cheaper to build as a single unit.
A big issue is the poor materials and construction techniques used in Turkey, in some cases still today.
As Mr. Tasarsu toured, a woman came out of the van where she and her family have been living, to let him into the yard of her home. The house, a two-story structure, had no columns or frame at all. It was built 40 years ago with concrete walls poured onto stone foundations. Being short and the walls thick, it wasn’t a problem, Mr. Tasarsu said.
A few houses over, a building made the same way had cracks running straight into the foundations, which were made with lightly compressed gray sand and cement blocks that crumbled to the touch. “This place is dangerous,” he said. “It will have to be demolished.”
Prime Minister Recep Tayyip Erdogan on Wednesday attacked such poor construction techniques.
“We see that people pay the price for concrete that virtually turned to sand, or for weakened concrete blocks on the ground floors,” he said. “Municipalities, constructors and supervisors should now see that their negligence amounts to murder.”
Mr. Tasarsu showed why this block may have fallen while those around it stood firm. He pointed to the now crazily bent, exposed iron rods that had been inside the building’s reinforced-concrete beams and columns. The rods were smooth, a type that became illegal in Turkey in 2007. Nowadays, these steel rods are ridged like cable so they grip the concrete and don’t shake loose from it, Mr. Tasarsu said.
He picked up a chunk of fallen concrete and pointed to the small smooth pebbles inside. “They’re almost shiny, probably from a river bed. That makes them slippery—they shouldn’t be used. They should use broken rocks that are rough and jagged,” he said.”
Mehmet Ali Birand, a Turkish writer confirmed these problems and noted in his October 25, 2011 column entitled “Ugly scenes from tent wars” the additional problem of constructing buildings on sites, particularly river beds; that are inherently unsafe.
“Bad buildings will be built in the same place tomorrow.
That suits us. No crying. Because the scenes experienced here are not new. Whenever there was a quake up until now, we always encountered the same picture.
Bad buildings, buildings that are not resilient to earthquakes, apartment buildings erected without inspections, buildings built in high-risk zones, knowing that an earthquake will definitely hit, buildings built on river beds.
You can see it while wandering around the ruined buildings.
Whichever was leveled, when you ask the technical team that is conducting the search and rescue, the first answer is “Proper iron and cement that has to be used in such a building was not used.” They point out that municipalities have issued residence licenses at places where no residence must have been permitted.” –Mehmet Ali Birand
The decisive role of corruption and the perverse incentives (the Gresham’s dynamics) that control frauds produce as causes of Turkey’s preventable deaths from earthquakes is accepted by a wide swath of the political spectrum. Stefan Steinberg reported this in his October 26, 2011 article (entitled “Death toll rises in Turkish earthquake”).
“The principal reason for the high rate of casualties following the earthquake is the lack of proper building standards, a situation that prevails throughout Turkey but is especially prevalent in poor regions such as the province of Van.
All of Turkey lies in one of the world’s most active seismic zones and is crossed by numerous fault lines. Two earthquakes in 1999 killed almost 20,000 people in densely populated parts of the northwest of the country.
Following those earthquakes two major causes for the high number of casualties were identified—the indifference of the government and the corrupt practices of building companies, which sought to maximise their profits by ignoring building regulations and using the cheapest possible materials to construct houses, offices and apartment blocks.
[T]he quake made clear that nothing had changed for the better regarding building practices. Rescue workers discovered that primitive mud huts were not the only structures that collapsed. Among the devastated buildings were apartment blocks of up to seven stories. Scores of such buildings have been reduced to rubble.
Despite the promises by the Erdogan government to learn the lessons of 1999, this latest quake confirmed that corruption and malfeasance continue to plague the Turkish building industry.
According to one Turkish source speaking after the quake, there are seven ready-concrete companies in central Van and three in Ercis that consistently ignore safety regulations.” –Stefan Steinberg
As with the Long Beach earthquake of 1933, we were fortunate that the latest major Turkey earthquake struck on a day when children were not in school. Several school buildings collapsed.
Complacency, the Great Recession, Politics and California: It Can Happen Here
A system can become corrupt with a small “c” well before it becomes criminal. There is reason to be concerned that too many of the California regulators who have implemented the Field Act and protected California’s children for decades are losing a passionate dedication to their mission. I urge readers, regardless of where they live, to read the linked article carefully and to take action now. U.S. residents tend to believe, despite the evidence of the ongoing financial crisis, that U.S. regulators will enforce the law when they find violations. This view has become naïve.
As our culture has become virulently anti-regulatory we have increasingly appointed anti-regulatory leaders who violate their duty to faithfully execute the laws. These anti-regulators ignore the Gresham’s dynamic and assume that private actors will act lawfully and in the public’s interests. They believe that regulation is harmful. The result is that they do no need to be bribed to overlook violations of the law, regulations, or ethics. Recent California experience demonstrates that they will do so even when they are jeopardizing the lives of our children. The anti-regulators are like Uncle Ben’s rice – they come to office pre-cooked. Add a little water and heat and you get mush in three minutes.
California Watch, News Report, Corey G. Johnson, Posted: Apr 07, 2011

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives. 

Follow him on Twitter: @WilliamKBlack

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