Tag Archives: Rule of Law

Democracy Rules: Why Business Thrives in Democratic Societies

Villagers protesting in Wukan in 2011. (Photo: AP)

Recent data suggests that in countries which have made the transition from “Not Free” or “Partly Free” to “Free” (according to Freedom House) the average rate of GDP growth increased from just over 6% to over 14%.  Countries categorized as “Free” also seem to draw more overseas investment: while  the total level of US foreign direct investment (FDI) in “Free” countries is well over $250 billion a year, FDI in “Not Free” countries remains under $20 billion.

For some, though, China’s recent success stands as a counterpoint to the idea that democracy is better for business and economic development.  Multinational corporations as well as local companies have fared extremely well over the course of China’s last 30 years of economic development, which was accomplished under an autocratic regime.  China’s economic triumphs indeed deserve recognition, but weak rule of law seems likely to inhibit continued growth.

By most accounts, more than 90,000 protests occur in China every year, a manifestation of popular discontent with corruption and other instances of officials disregarding the rule of law.  The villager revolt in Wukan at the end of 2011, for example, highlighted the role that corruption plays in issues such as income inequality and access to capital.  In Wenzhou last summer, a high-speed train crash that killed at least 40 people can be traced to improper implementation of safety protocols.  Instead of investigating the incident and punishing those responsible for the lapse, officials attempted to cover up the wreckage, literally.  And while local officials deny it, the practice of police abducting “suspects” without due course is reportedly widespread.  Add to this numerous labor strikes, and many companies are naturally concerned  about their ability to maintain the productivity of their workforce.

Issues surrounding intellectual property (IP) rights are also a major threat to many companies.  This goes beyond pirated movies and fake Puma sneakers (or “Pumba” sneakers as I have seen in local shops).  When foreign companies do business in China, they often run the risk of having their patented technology copied, reproduced with minor alterations, and then re-patented.  This naturally leads to a loss in competitiveness resulting in reduced revenues.  Foreign companies have often invested in Chinese projects only to be shoved out by local competitors who have managed to replicate proprietary information. Such behavior has led to some major losses and many businesses rethinking whether or not it is worth it to do business in China.

Foreign investment is not the only victim of lax regulation regarding intellectual property.  A recent article exploring the topic suggests that the value of a Chinese start-up’s IP is generally discounted by between 33 percent and 50 percent.  Weak institutions for protecting property deter investment in new ideas and reduce the drive to innovate.  Why spend time, energy, and resources to engage in productive innovation when there is no guarantee of being able to profit from it?

Such disregard for laws and regulations has a direct impact on investors, both foreign and domestic, who fear their money may be squandered.  The general consensus is that China must now transition away from its export-based model and foster a more robust domestic market.  However, would-be entrepreneurs — the agents of growth and development — are effectively denied the ability to convert their assets into capital, and so are unable to turn ideas into reality.  Domestic companies and start-ups are also hindered by regulations put in place to prop up the state champions that have driven growth over the past three decades.

Unlike China, democracies are built on institutions that help to foster an environment conducive to enterprise, where citizens and businesses are able to voice their opinions and contribute to the development and enforcement of laws and regulations.  Democratic societies are also more transparent, allowing for greater accountability and more effective and fair enforcement of the law.  When officials are accountable to the public, they have a larger stake in tackling issues such as corruption that inhibit economic growth.  Additionally, wider access to information helps to arm businesses with the knowledge they need to make important decisions and conduct effective strategic planning.

Recently, questions have arisen about whether or not China can maintain its high rate of growth.  In a recent discussion at the Carnegie Endowment for International Peace, Justin Lin of the World Bank stated that he is confident that China has the potential to continue growing at rates of over 8 percent for at least 20 more years.  However, in order to do so, the reforms that Deng Xiaoping initiated in 1978 must be completed. This process includes the removal of market distortions that support state-owned champions, the development of a reformed financial system that allows local entrepreneurs to access capital, and much stronger rule of law. Without such reforms, growth may falter in the face of problems related to the rule of law and corruption.

Waiting for a Change in Ukraine

European Commission President Jose Manuel Barroso, right, with Ukrainian President Viktor Yanukovych at the Commission headquarters in Brussels, March 1, 2010. (AP Photo/Yves Logghe)

Aleksandr Sologub has been waiting for over a decade for concrete progress in Ukraine’s effort to win some sort of acceptance by the European Union. For Sologub, who heads the Center for Social Partnership NGO in the western Ukrainian city of Vinnytsia, such a move would mean potential access to markets and standardization of now-haphazard regulations that could greatly benefit the mainly agricultural region where he is active in promoting entrepreneurship.

So it was in a tone of great disappointment but little surprise that Sologub discussed the December decision by EU leaders to postpone an agreement leading to free trade and improved political ties with Ukraine. Speaking on the sidelines of a CIPE-organized training seminar for business association leaders in Kyiv, Sologub echoed the sentiments of many of the participants. “Whatever else Ukraine may be, it is part of Europe. That is where its economic future is,” he said.

In announcing the decision, EU leaders made clear that the “association agreement” – which had been successfully negotiated – would be put on hold until Ukraine’s government demonstrated a willingness to uphold the rule of law and halt politically motivated prosecutions. The EU’s move had been expected, especially after the October conviction of former prime minister Yulia Tymoshenko on charges that she abused the powers of her office.

Tymoshenko, the principal rival of Ukraine’s current president Viktor Yanukovych, argues that the charges are politically motivated. Her conviction was condemned as unfair or politically motivated by leaders from Moscow to Brussels to Washington. Observers, including Sologub, expect no change in the legal status of Tymoshenko or other convicted opposition figures until this autumn’s parliamentary elections. “We are waiting for a change,” said Sologub. “I think that is what the EU is waiting for, too.”

Economically, the EU decision comes at an especially precarious time for Ukraine, as detailed in a recent presentation at the Carnegie Endowment for International Peace. Politically, Ukrainians are fairly evenly divided on whether it is preferable to be aligned with the EU or a Russian-led Customs Union that includes Kazakhstan and Belarus, as shown in a recent public opinion survey in Ukraine by the International Republican Institute. Those divisions fall largely along geographic lines, with people in western Ukraine – like Sologub – favoring the EU, and those in eastern Ukraine feeling a greater affinity with the Customs Union.

The upcoming election cycle, which promises to be just as rough and tumble as earlier contests held over Ukraine’s two decades of independence, may provide a forum for discussing the EU decision. With 450 seats up for grabs and parties likely to spend hundreds of millions of dollars, hopefully there will plenty of opportunity for real discussion about Ukraine’s economic future amid the political attacks.

Justice in the kingdom of Kandahar

An Afghan man drinks tea as he listens to conversation between U.S. Army soldiers of 2nd Platoon, Charlie Company, 1st Battalion, 17th Infantry Regiment of the 5th Stryker Brigade, and other villagers, Tuesday, May 18, 2010, in Afghanistan's Kandahar province. (Photo: AP)

As you read this post, over 12,000 NATO troops are fighting pitched battles with hardened Taliban fighters for control over Kandahar province. The New York Times is reporting that Western forces have “seized the initiative from the insurgents” and are assuming the commanding heights of the province. The overarching goal is to use every instrument of NATO power – military, economic, and political – to clear away insurgents, hold the population center, and build institutions and infrastructure. But I want to step away from all of that for a moment. Though this part of the conflict is significant, it’s also all-too-distant from everyday life. It’s really in the everyday struggles that this war will be won or lost.

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Going Around the Law

I never went to a law school in the United States – but I would imagine that they essentially they teach you about law, its interpretation, and its enforcement.  Not so in Ukraine – there, legal complexities of the system lead to something different.

Last week I was in Kyiv, Ukraine where we held a rather interesting seminar at one of the country’s top universities.  After the seminar, I got to spend some time with law school students and learn a little bit more about their education.

They were quite open about the problems of Ukraine.  They were even more open about the quality of their education.  Especially after I highlighted some of the numbers from the Doing Business Database, where Ukraine ranks 181 in the world in dealing with construction permits as well as in paying taxes, 141 in registering property, and 134 in starting a business.

“This is not a problem,” I was told. 

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Google Calls China’s Bluff

It is the 21st century equivalent of a showdown at the OK Corral – Google has called out China for allegedly hacking into the email accounts of Chinese human-rights activists and engaging in disruptive cyber attacks against Western companies that do business in China.  The myth that Western and Chinese companies are treated equally in China has now thoroughly been discredited after having been damaged by the Chinese authorities disapproval of the Coca-Cola/Huiyuan merger last year.  Now news reports are coming out detailing the attacks against a law firm and companies that are suing the Chinese government like Cybersitter for infringing on it’s IP.

Google’s announcement has unleashed a firestorm of debate, claims, and counter-claims from the companies involved as well as netizens around the world.  Chinese officials have stated that perhaps Google is just not prepared to compete in the Chinese market, contrary to the fact that Google has gone from a 15% to 30% search share over the past five years all the while having to jump through more regulatory hoops than its domestic search rival Baidu.  Perhaps most tellingly is the reaction in the real world – citizens have been leaving flowers and wreaths at the entrance to Google’s China headquarters, mourning the loss of their limited freedoms.

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International Standards—A Double-Sided Coin

Several weeks ago, the Tunisian government announced the passage of a new law which aims to harmonize Tunisia’s anti-terrorism and money laundering legislation within an international legal framework. As Tunisia seeks to further open its economy to outside private sector investors, this law stands to tighten regulations against those seeking to circumvent the system through money laundering—be they terrorists or criminals. According to Minister of Justice and Human Rights, Bechir Tekkari, “The law is essential to keeping abreast of the international standards that Tunisia has willingly adopted to enhance financial transparency and get in step with international standards.”

For decades Tunisia has been striving to create an open economy and it has largely succeeded; it now boasts the most competitive economy in Africa and has established very strong trade relations with Europe. In this respect, Tunisia’s efforts at marketing itself as a bastion of economic liberalization in a globally integrated market have paid off.

Yet, despite the openness Tunisia exudes, it still has a long way to go in other areas. The dearth of freedom of expression and association in Tunisia are profound, and tight controls over opposition parties are commonplace. The impunity that well-connected elites share in economic matters also has ramifications for the rule of law, governance and market competition.

It is in consideration of this entire picture—the good with the bad—that the adoption of “international standards” by any country must be measured.

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Obama in Russia: Institutional Reform and Economic Development

When President Obama traveled to Russia to meet with President Medvedev for their first summit, he made a concerted effort to reach out to ordinary Russians – business leaders, academics, students, civil society activists, and the population at large – to remind citizens in both countries that the US and Russia share numerous common values, concerns and strategic interests.   One of the highlights of that effort was an important speech Obama gave to the graduating class of the Higher School of Economics (HSE), one of Russia’s top academic institutions.  In that speech (which, as has been reported, did not receive the media coverage within Russia that had been hoped for), Obama spelled out clearly the links among democratic governance, the rule of law, the fight against corruption, and economic development.

While underscoring that there is always room for improvement in the US, as in all countries, and diplomatically avoiding taking a critical stance toward his Russian hosts, the President pointed out that in the US, “the rule of law and equal administration of justice has busted monopolies, shut down political machines that were corrupt, ended abuses of power.  Independent media have exposed corruption at all levels of business and government; competitive elections allow us to change course and hold our leaders accountable.”  Further, as Obama noted, development “depends on economies that function within the rule of law,” and to ensure success in the information age, citizens must “have the right to do business or get an education without paying a bribe.”

These sentiments were also captured in a report from the Russia-US Joint Working Group on Investment and Institutional Integrity, an initiative of CIPE and OPORA (the Union of Business Associations of Russia), which provided its report to Obama during his appearance at meeting of civil society leaders held on the same day as the HSE speech.  The Joint Working Group, comprising 12 experts from business, academia, civil society and former policymakers from both countries, includes Elena Panfilova, who heads the Russia chapter of Transparency International.  Panfilova had the honor of presenting the report, and she has discussed the Group’s findings in a recent interview (Russian only).

The Group’s report, available in both English and Russian, spells out cooperative efforts between Russia and the US to strengthen governance, integrity, and transparency in Russia.  One of the central ideas guiding the report was to link the investment and international business climate to the fight against corruption, an idea Obama spoke of at HSE as well, when he declared that “Governments that promote the rule of law, subject their actions to oversight and allow for independent institutions are more dependable trading partners.”