Democratic deficit and the uneaven playing field

This is the next chapter in my series on Social Risk, enjoy.

What do “doing business” and the degree of democracy have to do with each other?

Well for one there is no doubt that companies that operate in environments where there is none or very few institutions in place to ensure a stable business environment often find themselves in situations where ethic and morality is strained. Just take a look at Shell in Nigeria (Oil drilling), H&M in Bangladesh (Clothing factory) or Maersk in China (Container factory) and one will know what it means to operate in such an environment.

To some degree the democratic deficit is self-imposed or reproduced through the understanding that we are “all on the same boat together”. Businesses blame the business environment, Governments blame international society, NGOs blame international business and the population blame politicians. So what we need is stable democracies that are characterized by good governance e.g. institutional structures in which the individual´s rights and freedoms are respected are a prerequisite for sustainable development. This means improvements in two areas:

  • That Rule of Law is upheld, ensuring a level playing field.
  • Democratic structures in place that ensures that can ensure that power is distributed and not centralized to a few individuals.
  • Cooperation should be undertaken with NGOs and civil society forces that work to achieve openings for democracy. In other cases, such as where civil society is small or non-existing, the focus should be on communicating an awareness of democracy, human rights, gender equality and market economy

In Sub-Saharan Africa, a region where economics determines politics of the day and where a culture of democracy has been absent and if present is under the will of a few elites. Even the smallest democratic opportunities are economically conditioned especially during elections because of poverty, corruption, illiteracy, unemployment and not least a playing field which has been all but level.

As we have celebrated the Arab spring there is no evidence that these old structures are so easily dismantled. We hoped for free-elections and a greater degree of transparency would be present, but it has done little in terms of growing a culture of democratic thinking in the region. For example, the political move by Mohammed Morsi to centralize power around the president in Egypt or the lack of security and move towards radical Islamism in Tunisia. The lesson is that democracy is fragile and needs to be supported by strong institutions that can balance the pursuit for power by individuals with the principles of democracy.  

The Social Democratic concept of democracy views political institutions as a means to offset the natural power of concentrated wealth that accrues in capitalist economies. However, during the economic crisis it has become apparent that individual states can’t handle the burden that they have been put under alone and have to seek assistance from others. In Africa for example there is no strong institution that can rescue countries in need so there are basically left to their own devisees, while we in the western world can draw on intergovernmental institutions like the EBC or others. In essence this means that the developing world is left with institutions like the IMF, EU, EBRD and the World Bank that impose strict guidelines for economic behavior and limits the ability for democratic processes. This again leads to a greater gap between the ones that have and the ones that don’t both on a region by region level but also between individual states creating tensions and eventually conflict.

For companies a democratic deficit means an uncertain future business environment. It means increased risk of catastrophic collapse and it means that what you might think is yours today might not be so tomorrow because there is no state to guarantee tour basic rights.

Links

http://www.economist.com/node/21555927

http://www.africanexecutive.com/modules/magazine/articles.php?article=5441

http://www.princeton.edu/~amoravcs/library/framework.pdf

The “goodness”-industry on the social media battleground

“Keeping your friends close but keeping your enemy even closer” seem to be the mantra that NGO should be following when battling it out on the social media scene.

Kony 2012 viral video

How come that millions can be mobilised in just a few hours on a problem in Africa that have mostly been forgotten for the past 20 years. The Kony 2012 campaign to get rid of the Uganda warlord has at this time (17 o’clock local Copenhagen) reached 55’000’0000 views. More people than all the Scandinavian countries put together and far more views than even the best rock bands can hope to achieve even with the best of songs. How come that in a time where politics and politicians seem further and further away from the people that have elected them, is possible to create a social movement in a matter of hours.

For one it cause is uncontroversial. We can all agree that the rape of children or being forced take up arms against your own family and mutilating others are bad. And when we even have a personification of there atrocities in the form of a concrete named person it makes it even easier for the many to come together. In contrast it would be much harder to create one consistent image if we had had to relate to multiple issues like the ones in Libya, Syria or even Iran. So hating Kony is easy because it does not force us to make nuanced decisions or relate to alternatives that might distort our image of evil.

The media also plays a significant part in the success of the campaign. We have witnessed activist consumers before, like in the case of Dow Chemical in Vietnam or Shell and the dumping of Brent spare in the North Sea. But with social media and the possibilities within viral videos, it is possible to communicate easy, fast and not least with a great deal of media richness to a very big audience. Within normal communication you substitute speed with quality and the amount of information you can put into one piece of communication. However, with the use of social media one can distribute information with high levels of richness at a fraction of what the cost of the media just ten years ago. The trade-off is that within the 30 minutes that you have to communicate, one often does not have room for more than one overall message. (e.g. Evil vs. Good/Innocence)

Social media might make it easy to get your message out. However, it is just as easy for competing communication and not least your competitors to try and top your latest viral campaign. One element of communication, that many forget, is that they are working on a competitive market. That even though that the viral message is out there for all too see, it have to compete with many other messages that in its characteristics looks very much the same as any other consumer market.

The interesting thing about the Kony 2012 campaign is that the video does not just need to survive in terms of competing with other messages out there, but also attacks that is meant to destroy your campaign all together.  Already there are organisations like Red Cross, Action aid Denmark and others who have attacked the campaign for exploiting the African conflict to their own ends. In effect attacking the production of another provider in the “goodness”-industry.

On the commercial market it is only very seldom we see these kinds of initiatives and responses to a product launch. But in the world of NGO, CSO and governmental aid organisations it is more the rule, that when a competing organisation launches a fundraiser or mobilisation campaign that it is immediately attacked. Not from the intended target, but from organisations in the same line of business.

I have no idea if the Kony 2012 campaign will be successful and if the warlord in Uganda will be put to trail. But it is amazing to see that the main challenges does not come from Kony himself or from struggles to get room in the complex media picture, but that it comes from organisations that have basically the same purpose and reason for operating.

These links are just a selection on what is out there primarily debating the sender rather then the message.

What is Money? – And the consequences of inflation

It would seem that the whole world evolves around the subject of money for as long as anybody care to remember the world have focused on getting money or capital. Even in the Soviet Union there was a relentless pursues for getting capital, by boosting their own money (the Ruble) they tried to get their hands on as much foreign capital as possible. In the end they, as we all know, failed to get their hand on enough of the stuff to keep their communist paradise working but that just support the fact that the world is just hungry for the stuff.

There is of cause an alternative to money. If you chose to live and work in a isolated place were all exchange is made based on a economy based on the things you produce you really do not need to invent money. However, we have chosen to invent money because it is the easiest way to exchange wares and information. It also makes things less complicated, while we think that the globalised world of economics is a complicated system think of it if we had to exchange everything with a proportionate amount of things. How much coffee in Africa would you be able to buy for a Danish cow and how much of the cow would be given to the transporter? If you made paperclips how many would you have to pay the people who made them at your factory and what would they be able to buy for those clips in their local bakery? One could only imagine how cumbersome bartering as it is called would be if we implemented it on a large scale.

So money makes things easy. They are tokens of what we as people appreciate as value. This does not mean that we from time to time will accept other forms of currency. Like the exchanges seen on black markets around the world were exchanges are made in natural resources. An example can be the cigarette economy we see in prisons or in the post World War 2 or the exchange we make with the neighbour when we exchange a favour.

So the main characteristics of money are:

  1. It is generally accepted as payment for other things.
  2. It is a way of measuring the price of other things
  3. It can be saved, so you can keep the value it represents until later
  4. It is relatively easy to transport
  5. The unites of money are, or should be, standard and easy to recognise
  6. The supply of money must be controlled

It is the last of these very true statements about money, which I think is the most important because it controls all the others either directly or indirectly.

At the time when money was born we used Silver and Gold as the medium of exchange. The king or government who controlled the flow of money could make coins that could be used for exchange but which also carried a real value in themselves, namely the value of the gold or silver that made up the coin in the first place. However, what happened was that in time of trouble kings and governments tried to forge the coins by using less of the valuable metals. This practice worked well as the king could mint more coins this way and by that ‘inflating’ the value of his fortune. This lasted until somebody found out that this practice was undertaken and people adjusted the price according to what the king had done. But as it was difficult to say exactly what the amount of gold or silver that was exchanged in the coins it was more like a qualified guess of what the inflation was. So even f the king started to print money with the right value it would continued to be undervalued for a period of time until the price could be adjusted and the market had confidence in what the king was doing. We actually used gold as the standard to determine the value for money all the way until after the Second World War, which can serve as a witness as to the confidence that people and governments had in the standard.

What happens when you have more money than needed in the system? Well basically it becomes worth less. Like in our barter economy if you have too many paperclips in circulation the price will start to drop. This is exactly what the central banks of Europe and the US is doing when they keep the interest rates down. As money is flowing out of the system because of the crisis they are pumping money in by printing more money than is flowing out. So what will this mean to you and me.

Well if you won a house you will properly be paying less money for it on a monthly basis. By having cheap interest rates you will be able to borrow more money at a cheaper price and thereby you will be able to buy a bigger place to live in. Also other types of loans will be cheaper so you can buy the new Apple IPhone or a new car by going to the bank and getting cheap cash. Some stores even let you lend money at a zero interest if you buy one of their products. But cheap money also leads to higher inflation because just like the kings of the Middle Ages people cant be certain what the real value of the money that they have in hand is really worth.

The consequences of inflation are that the things you need to buy for cash becomes more expensive. So when you go to the supermarket the price for food will be higher, when you want to get something for the wife or you husband it will cost you more. While some of this increase in price can be contributed to the dynamics of the market and society in general one will not be able to explain the whole increase. The testimony that support this claim can be found in the fact that the price for food all around the world is on the increase and have been for some time.

Another consequence of inflation is on everybody that has savings in the bank. If you have money saved you might get every were from 0.2 % to 1 % interest but if the inflation is 4% you will loose money. So what people do if they have enough and can look at substantial loos is to invest their savings either though a pension fund, through investment companies, or make the investments them selves. This works well as log as the market is expanding and everybody is making a profit but in times like these investors can look at substantial looses and even more than they would have if they had kept the money in the bank on a regular account. This can lead to even more speculation and risk taking leading to even greater instability on the market, which again leads to even more money disappearing from the system.

Some would claim that monetary inflation is actually a tax by which government or kings for that matter transfers wealth from its people to itself. Inflation is perhaps the most destructive tax that can be imposed on people but it is unfortunately also the easiest one for a government to impose – it just needs to print more money than needed. It results in the transfer of enormous amounts of wealth from the hands of people to the hands of those speculators shrewd enough to take advantage of the price volatility inflation causes in the markets.

Inflation is a strike against the welfare state. In most western countries a large majority of employees work for the government either directly or indirectly. All the funding for the states activities comes from the taxes it is able to impose on its citizens so there is a clear interest for the state to decrease the wage demand from the public servants and the money they spend on behalf of taxpayers. However, when the wages in the private sector increase as we could see post 2007 then there becomes a demand from the public servants to get paid more. The money to fund this increase can either be found in continuing to have a significant wage gap between the public and private sector, by increasing taxes or by decreasing government spending. But many governments have opted to do neither because it was politically unsound so what they have done if they could was to increase inflation either though printing or though borrowing. This is what we have seen in Greece, Italy and the US who have resorted to systems were they are spending significantly more than they GDP would normally allow for.

So what can governments do? And this is where it becomes tricky and more a thing belonging to ideology or theology. One ideology would prescribe to cut government spending at all costs and decrease the budget to what is actually is coming in in the form of tax revenue. Another group would go the other way and use money to boost the market and crate jobs feed by government activity like infrastructure or better education etc. The thing is that we do not really know the dynamics of a globalised economy at the scale we see today. There is no theory that will prescribe what to do if we want to keep our welfare state in some form of working order and keeping an society which can provide the benefits which we have fought hard to get over one hundred years.

The Danish Minister of Aid greets black Africa

Sometimes it is amazing how little some people have between their ears when they get so powerful that they loose any connection with reality. I have taken and example from the Danish news was the minister of aid is touring Africa in an effort to boost aid and FDI interest.

In early July, Development Søren Pind (Liberals) was on a visit to southern Sudan to celebrate the African country’s newfound independence. On the way he was also in Uganda for a visit were the picture was taken. The visit required a small chartered plane that took off and landed from more remote landing strips.

At the exit the ‘feudal lord’ greeted the masses with a Tintin style salute not knowing that there was a photographer present. Sometime it is said that a picture says a thousand words and maybe it does I will leave it for you to judge.

When Governments operate through Tax havens

Logo of the African Development Bank (AfDB), p...

Image via Wikipedia

Should the market emulate the state or should the state act more like the market? This has become a hot issue as the became apparent that the new African Guarantee fund will be established in the tax haven rather than in Kenya were it will operate in practice.

The African Guarantee Fund or AGF is supported by Denmark, Spain and the African Development bank and contains around 50 million USD at the moment this figure is however expected to grow to 300 million in three years time. It is expected that AGF will invest in small and medium size companies (SMEs) who need access to credit. The back will operate through other banks in the region and not have direct relations to the customers.

The controversy comes from the way that the bank is going to e operated as AGF is set up as a company limited by shares under the business law of Mauritius, a country that have no urgent need for a access to the bank services. A branch of AGF will be established in Nairobi, Kenya, from where the staff of the company will conduct the business. A second branch is likely to be set up in a West African francophone country within a few years. AGF will operate as a non-bank financial institution with a Board of Directors responsible for the overall management and a Chief Executive Officer heading the operations.

With its headquarters in Kenya it would be natural that the bank would be a legal entity there but this is however not the case. The reason is that the corporate tax on Mauritius is 3% while it in Kenya is 25% (inline with the Danish tax on companies) and therefor it is cheaper to operate offshore maximising the return.

These types of legal set-ups are not uncommon in the world of global business were there the boundaries of companies are fluent and business is conducted on a global scale. Companies have for years been criticised for their tax practices as they often avoid high-tax countries for regions that have lower tax and a more relaxed approach to legislation. The most famous (or infamous) tax havens are Bermuda, The Bahamas, Cayman Islands, Panama, Monaco and Switzerland. The companies that are currently operating through tax havens are big multinationals like Citigroup, Pepsi, Morgan Stanley, Bank of America and Oracle.  Quite a few of these were heavily involved in the financial scandals that lead to the global recession that we are currently experiencing.

The main question is if a Civil Society organisation like AGF, should operate the same way and under the same ethical codex as multinationals that politicians frequently criticise?  One government official from the Danish Liberal Party Integration Spokesman Karsten Lauritzen has rejected criticism that Denmark, which regularly complains about the use by international companies of tax havens, should itself choose to place a financial institution where it pays least tax.

As he puts it “We are not in Mauritius to earn money. The goal is to channel as much money as possible to poor people in Africa, so I cannot see that there is a problem,” He added that the predominant reason for the location was because it was easier and less bureaucratic to set up a financial institution in Mauritius. Which goes without saying when one of the main income sources for the country is to provide cheap and easy access to building offshore companies.

At the same time he basically stamps the Kenyan government and business environment as corrupt and unnecessary bureaucratic.

While some of the stakeholders continue to support the bank project there are critical voices starting to be heard, who really does not like to be associated with this form of speculative thinking. The NGOs are more critical of the banks lack of focus on the poor and people in real need of aid rather than credit than the more complicated tax system in which it will operate though.

But the central dilemma remains the same. If AGF is going to operate on market terms it needs to function as everybody else on the market basically levelling the playing field so to speak. And in this line of business it means that one operate through places were the tax is low and the relative bureaucracy is small translating into less cost and more profit.

On the other hand if one wants to do the ethical ‘thing’ it means that AGF needs to operate outside the market and therefor will not be subjected to the conditions that a only a market can provide. This means that it will not be able to have the same return on investment that other investment banks will be able to provide and therefor it will properly not be financially sustainable in the long run.

The ethics is clear to most. There is a huge difference if a company pays 3% or 25 % in tax and most of us have been critical of big corporations that for years have paid minimum tax while at the same time having huge profits. So when the government does the same by operating a company through a tax haven we perceive this as being unethical and to some extend hypocritical. On the other hand we would like to see that our tax money is put to good use and not eaten up by taxes and other forms of fees along the way.

I think this case highlights a huge dilemma that we are faced with. To what extend should we have an overlap between Government and Private business. With CSR we have already seen a move from regulation by law to self-regulation, self-monitoring and self-reporting. This case shows that the move also goes the other way when governments and CSO starts to operate like business and under the same conditions. While we ‘expect’ companies to some extend to be unethical and hypocritical we maybe in the future that even governments will act in much the same way. The question is if this is really what we want? and does the aim really justify the means even when its for the ‘greater good’?

Connection between Business and Peace

There is a long-lived myth that there is a direct connection between peace and business, but to what extend is this myth really true? I have looked at two different indexes to investigate how close the connection really is.

First of all I have looked at the Global Pease Index that is issued on the Vision of Humanity index. The index looks at 23 different indicators for peace from the level of organised conflict over level of violent crime and weapons exports to perceived level of crime in society. In short is the ten most peaceful and most violent countries in the world comprised by these two lists.

Rank Most peaceful Country Most Violent Country
1 Iceland Somalia
2 New Zealand Iraq
3 Japan Sudan
4 Denmark Afghanistan
5 Czech Republic Korea
6 Austria Congo, DRC
7 Finland Russia
8 Canada Pakistan
9 Norway Israel
10 Slovenia Central African Republic

I guess that none of these countries on the list comes as much of a surprise. As always are the Scandinavian countries scoring high on the list as well as a number of European countries. Only country on the top performer list that is not European is Canada, New Zeeland and Japan that are all considered western economies. In the bottom of the list we find the regions where the world traditionally have seen a lot of armed conflict and in most cases are currently in some state of war.

In the list of countries produced by the World Bank and International Finance Corporation (IFC) we find a similar ranking but of countries were the business climate is considered to be either the best or worst in the world. The indicators that are used range from how easy it is to start a business over taxes to employing workers.

Rank Best Country to do business Worst Country to do business
1 Singapore Chad
2 Hong Kong, China Central African Republic
3 New Zeeland Burundi
4 United Kingdom Eritrea
5 United States Guinea
6 Denmark Sao Tomé and Principe
7 Canada Congo, Republic
8 Norway Guniea-Bissau
9 Ireland Congo, DRC
10 Australia Timor

What is interesting to see is that there is a great deal of correspondence between the two lists even though they do measure different parameters there are some similarities that seem the confirm the myth of a connection between peace and business.

For instance are Denmark, New Zeeland, Norway and Canada on top of both lists as the best performance when it comes to maintaining a peaceful business environment while on the negative list only Congo and the Central African Republic are present both places.

Logic would dictate that there should be a connection between a stable and safe working environment for business to operate in. On the other hand is there many business opportunities to be found in areas were competition is scares and there are little in the way for the corporation that is willing to take a risk.

This could also explain why there are only a few of the really dangerous places on the hard to do business part of the ranking that at the same time is a active conflict zone. So while it is very dangerous to be present in Iraq or Sudan it might not be the worst place to start a business and it might even present some opportunities which other might miss. Not saying that doing business in these areas are easy Sudan is number 154 on the list and Iraq is 166 there are places on the planet were the business environment is worse.

If I should make some sort of conclusion it would be that while peace is good for business it is not a pre-condition. Business can thrive and prosper even though there is armed conflict, we might not think that is the right form of business that the ethics are flawed or have other issues with business, but this is not what we are looking at in this case.

Blood diamonds by any other name

Zimbabwe For year parts of Africa was plagued by civil war and gross human rights abuse fuelled by easy access to capital from the trade of conflict or blood diamonds. In the end it was the developed world’s consumers heavily backed by Hollywood that helped stop or limit the trade. Especially the film “Blood diamond” helped pave the way for a process that eventually led to the relative success of the Kimberly process. The Kimberley Process is a voluntary group of diamond-trading countries and civil society actors set up to prevent the trade in conflict or blood diamonds. It claims to controls more than 99 percent of the world’s diamond market.

However, this work is now in jeopardy because as most intergovernmental institutions it has a weakness which it can’t overcome namely it is based on voluntary participation and the ethics of its members.

Zimbabwe have for a long time been in violation of the almost all Human Rights charters that the UN has ever published. It has oppressed its own people to such a degree that what were ones know as the “breadbasket of Africa” now can’t even feed its own population. In order to raise hard currency the country has started to exploit the rich diamond fields in the eastern parts of the country. There have been accusations and charges of human rights abuses and looting by the army and government officials, especially at the notorious Chiadzwa field.

The trade of diamonds would be fine if it had not been for this systematically exploitation and oppression of the Zimbabwean people and not least the workers in working the fields.

Now the Kimberly Process Certification Scheme has sent the Zimbabwian government a letter that permits the African country to continue conducting supervised sales of diamonds mined at the controversial Marange fields according to a senior government official.

Deputy Minister of Mines Gift Chimanikire who took office in mid 2010 said that Harare has received the letter allowing it to trade diamonds mined between 2006 and 2009.

“We have been … waiting for a go-ahead,” Chimanikire told the German Press Agency dpa. “We are working on modalities to have the sales as soon as we can.”

The material weakness of the Kimberly process is to my mind very clear. It will rather support an oppressive regime than blacklist Zimbabwean traders even though there is plenty of evidence that supports systematic violations is taking place. The alternative would be that the market is flooded by conflict diamonds outside any regulatory control.

But the problem is that the Kimberly process by doing so is lowering the standard for what other countries can do to its own people and still claim to be ethical. The question what how this will impact the image of the Kimberly process and its claim of legitimacy as a certifying body?

According to themselves is “The Kimberley Process Certification Scheme (KPCS) imposes extensive requirements on its members to enable them to certify shipments of rough diamonds as ‘conflict-free’ and prevent conflict diamonds from entering the legitimate trade. Under the terms of the KPCS, participating states must meet ‘minimum requirements’ and must put in place national legislation and institutions; export, import and internal controls; and also commit to transparency and the exchange of statistical data. Participants can only legally trade with other participants who have also met the minimum requirements of the scheme, and international shipments of rough diamonds must be accompanied by a KP certificate guaranteeing that they are conflict-free.”

After allowing the Zimbabweans to trade diamonds from a period in its history were there were no controls and no transparency will the Kimberly process be able to claim that these are truly ‘Conflict free’?