Ethical Issues In Business - The Private Sector ,The Rule Of Law And Development

By The Honorable L. Ronald Scheman

Economic development. The matter has been analyzed in hundreds of books, pondered by thousands of committed experts and has been the dubious recipient of billions of dollars poured in by international banks and concerned governments. Nonetheless the elusive goal continues to defy solution.

When one clears away the static from the over-studied subject, I suggest that the problem can be reduced to three core issues: Education, job creation, and respect for the rule of law. In my experience the local private sector in each country is both the key and the obstacle to these issues. The determination and attitudes of the private sector to press their governments to adopt appropriate policies and cooperate with progressive leaders in their own society is what matters most to achieve them. In referring to the private sector, however, I cast a broader net. Everyone in a society who is not government is part of the private sector in one form or another in their lives. Private enterprise and initiative apply equally to the local union leaders and university professors as it does to business. All private citizens, when they have a vote, share the responsibility to demand performance and accountability from their government in these areas. Let us see how this plays outin the issues individually.

First, education. An educated citizenry is central to development. Without education there is no accountability in government. Without education there will be no job creation. Without education there will be no competitiveness in the global marketplace. Without education there will be no sensitivity to environmental concerns. And most of all, without education there is no escape from poverty.

A recent World Bank Report commented that “Rich countries are rich largely because of the skills of their population and the quality of the institutions supporting economic activity.” It is not only countries. Every successful enterprise or organization recognizes that human capital is equally if not more important than financial resources to success. Every investor looks first at the people who are running the enterprise. So they look at the skills of the workforce of a country.

Education for developing countries, however, is far more than building schools and training teachers. The desire for education, a commitment rooted deep within a society’s value system that I call the ethic of education, is critical to converting education into productivity. It is not what students learn in the classroom but how they use what they learn that makes a difference. It is not abstract knowledge but the passion to create and to innovate that makes the difference in global competitiveness. This emanates from the attitude of a society toward education. Young people gain a love of learning based largely on the attitudes of parents and the society as a whole.

This is the private sector. Here, the impetus resides in the role models set by the successful people of a country. Two developing countries with among the highest per capita income in the world today, Israel and Taiwan, have virtually no natural resources or oil wealth. Their great wealth is the brains and hands of their people. Today both Israel and Taiwan have Gross National Product larger than any country in Africa or Latin America except for Brazil and Mexico. In Latin America, when Intel chose to locate their first major plant in the region in Costa Rica it announced that it did so because of the education system and the skills- base of the Costa Rican society.

For each developing country, education is basically an internal matter. Sadly the record is one of centuries of neglect. No amount of outside assistance and foreign aid can replace local commitment. The task of the committed people in these societies is prodigious. Their generation did not create the education gap. Yet it is their burden to address and overcome it while at the same time struggling to build the physical infrastructure to compete in global markets. Both of these tasks must be achieved amid pressures from instantaneous communications that are unprecedented in history.

The pressure on governments, and the leadership, to close this gap must emanate from the private sector. The tools of rapidly evolving technology in the field of education have opened huge opportunities. As the flow of information across borders accelerates, so the sources of education become accessible in the most remote areas. Such technology emanates from the private sector and is applied best by the private sector. It takes the will and the resources to do the job. The commitment and support of the citizens and the private sector are crucial to insist on it happening.

The second basic component for development is the generation of productive jobs. Only the private sector can generate the investment needed to create productive jobs, to keep up with new technology, and to operate efficiently in the increasingly competitive global economy. Government cannot do this. Government may create jobs through public works and subsidies so long as they have the resources. But the thin tax base of the developing countries makes this a boom and bust scenario. Only jobs that produce value added goods that meet the test of consumer acceptance are sustainable.

Two issues predominate in this regard. Government policies toward investment, along with policies that promote an environment that rewards instead of punishing individual initiative. The paradox of the private sector, however, is that the leaders who have managed enterprise and accumulated wealth by careful planning and efficient management of their own resources disregard these principles when it comes to helping government address the needs of the society for job creation. Instead of being open to investment and technology, all too often they are the champions of protectionism and closed economies. The suspicions of the body politic of the motivations and commitment of the private sector to their own society, the self-dealing in the banking system, and capital flight all conspire to foment a political environment that is hostile to private initiative. The fault falls squarely on the local entrepreneurs for either perpetrating or ignoring the consequences of these actions.

Except for a few outstanding instances, there is in the developing world little evidence that the private sector is prepared to actively promote efficient management to strengthen the infrastructure of government. The total absence of schools for public administration in most developing countries is one piece of evidence. In this world of intense social pressures, a government must have the courage to foster public understanding of the policy issues that underpin an economic environment that will attract investment. Once again, it cannot be done without the active support and commitment of the citizenry and the private sector.

The third indispensable requisite for development is respect for the rule of law. Here again the private sector stands front and center. Lack of respect for the rule of law comes in many forms. While corruption is the most frequently cited , it is found in far more mundane activities: Cheating on taxes, disregarding the need for an independent judiciary, condoning deceptive accounting practices, disregard for the rights of minority shareholders. For responsible citizens the recipe is simple: Pay your taxes, support education programs, invest in productive enterprise not protectionism, insist that your government respects an independent judiciary, and cease to bribe lawmakers to pass laws favoring protectionism.

Each of these issues relate to a respect for the rule of law in the larger sense of fostering opportunities for growth and skills within the legal framework and establishing a society in which citizens feel they are being treated fairly. The biggest enemy of economic growth and globalization is not young radicals marching in the streets but the private sector that vocally condemns the corruption of government but then panders to and corrupts government officials in order to maintain laws that will insulate them from competition.

Curtailing corruption is not an abstraction. Corruption has two parties, the corruptors and the corruptees. The two are inseparable. Both parties share the responsibility. The most pernicious consequence of disrespect for the rule of law is the insidious way it pervades and corrodes a society. Anyone who disregards the law is tacitly giving permission to everyone else in the society to do the same thing. When poor people see the wealthy people involved in corruption or cheating on taxes, it corrodes the trust that is vital to confidence in the fairness of the society. The popular telenovelas (soap operas) of Latin America illuminate the real cost. Spouses cheat on each other, the husband cheats on his business; the business partners cheat on the government; employees steal from their employers, maids steal from the household; local bullies steal from the maid.

For the private sector, the most important element for democracy and open markets is confidence in the integrity and fairness of the laws. This requires the institutions for accountability. However, this cannot be attained if the private sector reneges on its obligations to pay taxes. When government officials responsible for processing millions of dollars annually are underpaid, there is an old saying that applies. “If you pay your employees peanuts, expect monkey business.” Where the mechanisms for accountability are negligible, public officials have little fear of being caught. Ironically the private sector itself becomes the principal victim of this failure. Whether a local entrepreneur or a major multinational manufacturing company, the same corrupt practices permeate their own companies. They foment a corporate culture of self-aggrandizement and disloyalty.

These observations about corruption are not meant to be simplistic. The problem is not limited to developing countries. It is as old as human history. The framers of T he United States Constitution argued for strong government institutions to protect against the “greed, avarice and obstinacy of their fellow citizens.” (Federalist Papers, Number 18.) The problem for developing countries is the disproportionate amount of corruption that is tolerated by and colluded with the private sector. As the corruption index of Transparency International demonstrates, in many developing countries, almost everyone is involved in one way or another.

In sum, the principal burden to impel a society toward economic development rests primarily with the values and attitudes of its citizens and the private entrepreneurial sector. The essence of development is accountable domestic institutions managed in an environment of respect for the rule of law. The local institutions must exist; they must be effective; and they must be respected. No amount of outside assistance and foreign aid can help accomplish that. Nor can governments do it alone. It redounds into the lap of the private sector.

While the challenges facing the private sector are complex in the developing countries, it is critical that they set the tone and attitudes that will enable development. It is the private sector that must press for the policies and financial framework to create an educated, skilled workforce. It is the private sector that must promote policies which attract investment and new technology to foster job creation and competitiveness. And most important, it is the private sector that must set the tone and example for respect for the rule of law.

Ignoring these three basic needs — respect for the rule of law , establishing accountable government, and endeavoring to educate its citizenry — is a luxury the private sector of any country, but especially that of a developing country, can ill afford.

About the author: The Honorable L. Ronald Scheman is the former U.S. Executive Director of the Inter-American Development Bank. He currently serves as a senior advisor to Kissinger McLarty Associates. He is the Author of Greater America: A New Partnership For the Americas I n The Twenty -First Century . This article is in the Summer of 2008 The Ethical Standard of The Free Enterprise Foundation.

Go to Summer 2008 Ethical Standard from Ethical Issues In Business page 6