Tag Archives: Rule of Law

New Tool Puts Spotlight on Rule of Law for Business


By Patrick Kilbride and Terri O’Connor, Coalition for the Rule of Law in Global Markets, U.S. Chamber of Commerce

It’s a brave, new, global world for business.  Plenty of opportunity; plenty of risk.  As e-commerce, free trade agreements, and modern infrastructure have opened the world’s markets, many companies have found that on the frontiers of trade there are not always a lot of rules.  And where rules exist, they are not always enforced.

In markets where transparency and accountability have been scarce and investors have feared to tread, the U.S. Chamber’s Coalition for the Rule of Law in Global Markets is striding in, spotlight blazing.

This new tool for business is featured in the 2013 Index of Economic Freedom released by The Heritage Foundation and the Wall Street Journal.  Myron Brilliant writes for the U.S. Chamber of Commerce, “Companies look to invest in markets where they have confidence in the integrity of public and private institutions and where there is fairness, enforcement, and proper adjudication of the law.”

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The Path Towards Democracy in Burma

President of Burma U Thein Sein at the US-ASEAN Forum (Photo: The Nation)

In his speech at the July US-ASEAN Business Forum in Siem Reap, Cambodia, U Thein Sein explained that Burma “has embarked on a democratic path” and is “moving toward a new democratic era.” He went on to outline the reform efforts his country is presently undertaking, efforts that give reason for optimism following April’s dramatic electoral victories for Aung San Suu Kyi and the National League for Democracy.

In addition to promises of regular and free elections, increased media freedom, and constructive engagement with leaders of ethnic minorities, President Thein Sein announced plans “to transform [Burma’s] centralized economy into a market-oriented economy.” At this same event, US Secretary of State Hillary Clinton said that President Thein Sein is a leader “who has moved his country such a long distance in such a short period of time.”

Moving forward, a successful and sustainable transition in Burma requires that economic growth be widespread and that economic opportunities arise for more than the well-connected few. However, numerous key institutions that are necessary for the realization of this goal are either weak or completely missing in Burma today.

Paramount among these institutions are private property rights and the rule of law. If these institutions, which are fundamental for the development of a market economy, are not substantively reformed and strengthened in Burma, its economic and democratic transition will prove unsustainable.

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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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