Warren Buffett is known for his pithy sayings and homespun investment philosophy. One Buffettism states that “it takes 20 years to build a reputation and five seconds to destroy it.”
This is as true in business as it is in government. It requires less time to take down institutions and destroy public trust than it does to develop and strengthen them.
Enter Mossack Fonseca, a Panamanian legal firm specializing in hiding offshore assets. Revelations regarding the firm’s clients and capital flows are the latest salvo on government credibility and citizen credulity.
The recently leaked 11.5 million-document dump known as the Panama Papers – a load of Mossack Fonseca’s private internal documents – is roiling the waters for a handful of leaders who wanted or needed to cache their cash.
One minute a prime minister is a respected leader, then next he is judged a shady figure in the court of public opinion. In Iceland, Prime Minister Sigmundur Davíd Gunnlaugsson had to step aside while Britain’s David Cameron faces media questions and public concern about his wealth, privilege and the economic patriotism of Britain’s upper crust. Neither the British nor the Icelandic leader appear to have acted illegally.
The uniquely collaborative journalistic effort that brought to light the large and shadowy world of capital’s global hiding places was impressive. While the Panama Papers’ effect may be to force governments toward greater accountability and transparency, the likely effect on some governments is just the opposite. It just depends on what type of government rules; it depends on “regime type,” whether a government is a democracy or authoritarian regime.
In liberal democracies like Iceland, there is an established democratic process that provides for the peaceful transition of a government and for increased oversight. Greater openness and responsiveness is likely to follow the recent leak.
In other countries, however, like Russia, an autocratic leader may be exposed, but his power is further cemented. President Vladimir Putin is not going anywhere soon, the leak likely reinforcing his tendency to crackdown on dissent.
Various news analysts – and Russia itself – suggest Putin was the target of the Panama Papers leak, showing he siphoned sovereign wealth and padded family accounts. They argue that these revelations put pressure on Putin’s regime. But the opposite is true.
Putin is perversely strengthened. Russians had always believed the rumors of his $2 billion of personal stolen wealth and could clearly see his administration’s deeply rooted and formal corruption. It reaches down to their daily lives.
Putin argues the Panama Papers are a targeted foreign conspiracy aimed at toppling him and weakening Russia, giving him greater latitude to defend its interests. The leak also gives him personal leverage over those he favors and from whom he demands fealty. Putin just got more power over his now publicly exposed ruling coterie. Their dependence on Putin’s benevolence and favor has just grown exponentially.
For democrats and autocrats alike, there are many surprises yet to come from the Panama Papers leak. The public’s trust in individuals and democratic institutions will be tested. It would be a mistake, however, if citizens’ faith in liberal systems is questioned. It would only embolden those whose rule goes unchecked and strengthen systems that reward despots and demagogues.
Scandal serves cynicism and amplifies anger. Whether real or manufactured scandal, the results are often the same: A crisis of confidence in democratic political leadership and the questioning of individual’s motivations for public service.
The world over, the drumbeat of derision and the calculated cry of corruption are a potent mix. Together they create the conditions for populists to steal the show and further sink – instead of save – institutions that took generations of hard fought battles to build.
Government needs to be good enough – and resilient enough – not only for Warren Buffett and the rest of us to believe in, but in which free people worldwide are willing to invest.
Markos Kounalakis is a research fellow at Central European University and visiting fellow at the Hoover Institution. Contact him at firstname.lastname@example.org. Follow him on Twitter @KounalakisM.