國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
71
being local and at the same time getting the benefits of being national and global, and most important, recognizing the benefits of transparency in relationships. The private sector, in its desire to leverage resources and gain market coverage, will invent new systems depending on the nature of the market. That is precisely what we need. We need the capacity to bring more people into the market system. This means not only gaining the benefits of globalization, but also accepting the disciplines that it imposes. Opaque, local moneylender-based contract enforcement and participating in a national or regional privatesector ecosystem are not compatible. Again, this is a positive situation for both the large firm and the BOP consumers. MNCs and small-scale enterprises and entrepreneurs can co-create a market and the BOP consumers can benefit not only by the quality and choice of products and services available to them, but also by building local entrepreneurship.
7. Reducing Corruption:Transaction Governance Capacity
In this section, we address the ever-present but seldom openly discussed topic of corruption.
Corruption and poverty go together. However, given the advancement of technologies, we can mitigate corruption rapidly. This is what governments can do to facilitate the rapid development of market-based ecosystems and the active involvement of large firms and MNCs in the BOP market.
The private sector, can be a major facilitator of poverty alleviation through the creation of markets at the BOP. Although managers might be convinced about the opportunity, it is likely that there are lingering doubts about the capability of large firms to operate in these markets. The primary source of this concern is corruption. In many cases, the impact of micro regulations and local customs that are opaque to MNC managers might be interpreted as corruption. For example, the criticality of relationships in Japanese and Chinese business, opaque to the Western MNCs, can appear to be corruption. So will local customs and the set of mutual obligations in rural societies. We must understand the difference between corruption and local practice. Alliances with local firms and
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
72
NGOs can provide visibility to these understood but not explicit local practices. Transaction governance capacity (TGC) is about making the entire process as transparent as possible and consistently enforced. We must reduce the frictional losses in doing business at the BOP. The focus of this section, however, is overt corruption. Corruption in various forms adds to this cost burden and business uncertainty. In the previous section, we examined how MNCs and large firms (nodal firms) can create transaction governance capacity (TGC) within their ecosystems.
Most developing countries do not fully recognize the real costs of corruption and its impact on private-sector development and poverty alleviation. The capacity to facilitate commercial transactions through a system of laws fairly enforced is critical to the development of the private sector. It can be called as nation‘s TGC as opposed to the TGC within an ecosystem. In this section, we examine the need for and the process by which countries can develop their TGC.
Are the Poor Poor?
Some basic assumptions have been at the core of the thinking on poverty reduction and developmental assistance during the past 30 years.
• First, poor countries are poor because they lack resources. Aid was, therefore, seen as a substitute for locally generated resources.
• Second, aid from rich countries to the governments of the poor countries for specific projects (typically infrastructure) would reduce poverty.
• Third, investments in education and health care might have the largest multipliers per dollar of investment in economic development. Therefore, aid must be skewed to these sectors.
• The record of aid and loans from the various donor countries and the World Bank, International Monetary Fund, and other institutions is at best mixed. More recently, the development community is paying attention to the role of the private sector in building
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
73
markets.
There have been few voices of dissent to the dominant logic of the development community.
Hernando de Soto, in his path-breaking book, The Mystery of Capital, challenged the assumption that poor countries are poor. Poor countries could often be asset-rich but capital-poor. Assets
cannot become capital unless the country guarantees a rule of law—primarily the law of contracts—whereby the ownership of assets is clear; and because of clear legal title, these assets can be sold, bought, mortgaged, or converted into other assets. It is this concept of legal ownership that converts assets into capital. This is a compelling argument. De Soto also demonstrated in his work that the trapped resources—assets that cannot be converted into capital because of underdeveloped legal framework and institutions—can be significant.
For example, the estimated that the trapped resources of Mexico are about $300 billion. In Egypt, the estimate is about $198 billion. This perspective suggests that poverty is, at least partially, a self-imposed problem in most of the world. Local capital formation and the functioning of markets are stymied by the lack of appropriate institutional arrangements.
We can derive several conclusions from this:
1. All forms of foreign investment in poor countries—whether aid, FDI by multinational firms (the private sector), or philanthropy— are but a fraction of the potential for capital that is trapped in these countries.
2. In the absence of enforceable contract law, local commerce is conducted by a vibrant extra legal or informal sector (or the black market). This is the primary face of the private sector in most developing countries. These firms in the informal sector are unable to grow because they cannot attract capital. They remain small, local, and often inefficient.
3. There are contract enforcement systems that are local. Each slum might have its own unwritten but clearly understood rules. Enforcement might be the privilege of the local
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
74
strongmen. This is the ultimate paradox. Poor countries might be rich if we consider trapped assets. They might have a vibrant private sector and a market economy, although this private sector is informal, fragmented, and local. Ironically, these economies tend to be high cost with poor access to credit and inefficient systems of management. However, not all poor countries have a poor legal structure. Some merely lack the capability to enforce the laws. India, for example, is not Congo. In India, contract law is well-developed but enforcement mechanisms are not. What, then, is the problem?
The consultants from McKinsey & Company believe that the laws on the books are not enough. It is how laws are implemented at the ground level through a system of microregulations that matters.
In a study jointly conducted with the Confederation of Indian Industries (CII), the McKinsey consultants found that the cost of micro regulations in the areas of import-export, labor laws, and transactions involving land can be as high as 2 to 3 percent of GDP growth. Microregulations result from bureaucratic interpretation of the laws. The proliferation of regulations can make the system opaque to anyone but the very savvy. De Soto argued that his country, Peru, enacts more than 28,000 pieces of legislation per year at the rate of more than 100 per day. No one can keep pace with that rate of change. Interpretation of the regulations can compromise the timely execution of contracts and the clear establishment of ownership. As a result, corruption at all levels of bureaucracy can become endemic. The consequence of proliferation of microregulations can be the same as not having laws in the first place. An informal sector emerges outside the law of the land.
The private sector businesses remain small and local. For large firms, corruption becomes the cost of doing business. Yet another variant of the same phenomenon is that the laws are under developed.
As a result, bureaucrats have a significant influence on the interpretation of the law (or the desires of the state). In spite of this, business can flourish. China represents a case in point. Oddly enough, in China, the bureaucrats are also the entrepreneurs. It is in the interest of the bureaucrats to guarantee a level of certainty in the interpretation of the contract—implicit and explicit. In the
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
75
absence of laws and institutions that govern contracts, aligning the interests of the private sector and bureaucracy seems to have worked in building a vibrant economy in China. However, the poor in villages might be paying a price. For example, in the absence of institutions and laws, farmland can be appropriated by bureaucrats for other uses without a legal recourse for the farmer.
Given these variations, what is the secret for the evolution of a market economy in the BOP markets? What are the essential requirements for active private-sector involvement in development?
I believe that the key lies in a nation‘s TGC
Transaction Governance Capacity (TGC)
Fundamental to the evolution of capital markets and a vibrant private sector is the need for a transparent market for capital, land, labor, commodities, and knowledge. Transparency results from widely understood and clearly enforced rules. Transactions involving these rules must be clear and unambiguous. Ownership and the transfer of ownership must be enforced. Under such a system, assets can become capital. Investors will seek the best opportunities. TGC is the capacity of a society to guarantee transparency in the process of economic transactions and the ability to enforce commercial contracts. This is about reducing uncertainty as to ownership and transfer of ownership.
Transparency in the process reduces transaction costs. Clearly developed laws, transparent microregulations, social norms, and timely and uniform enforcement are all part of TGC. My argument is that TGC is more important than laws that are not enforced. BOP consumers live in a wide variety of countries with varying degrees of TGC. Consider the spectrum:
1. Countries that are arbitrary and authoritarian. Laws do not exist and the laws that do exist are not enforced. Congo is an example of this situation. Private-sector development, in the Western sense, is very unlikely here. The only FDI that is likely is focused on the extraction of mineral wealth.
2. Countries where laws and institutions of a market economy exist. The private sector is
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
76
vibrant. Still, the country does not reach its potential. India is a case in point. Alternatively, the GDP growth is great, but the underlying legal systems are not fully developed. China is an example.
3. Countries with well-developed laws, regulations, institutions, and enforcement systems. The United States is an example.
We can look at the spectrum of TGC, as shown in below figure-11.
Figure-11, TGC Specturum.
Source : Fortune at the bottom of Pyramid, C.K. Prahalad
TGC captures the dilemma that the BOP consumers and the private sector face. A country like Congo will have a long wait before an active private sector will propel the economy. However, both China and India are growing rapidly. They are the only two large countries showing more than 5 percent GDP growth over a decade. Both countries have significant corruption. Estimates of non performing assets on the reports are as high as 50 percent of GDP for China and 20 percent for India. However, they have to travel different roads to become full-fledged market economies. As commercial transactions become large, complex, and multiyear, traditional approaches to bureaucratic interpretation and enforcement in China become problematic. China must develop laws and institutions. India must become more aggressive in enforcement. Political and
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
77
bureaucratic intransigence will hurt investments and growth.
There is a need for us to recognize that economic growth fueled by the market economy around the world is not a single, monolithic problem. Each country has its own road to travel. Easy prescriptions that suggest that enacting laws will suffice are as naive as suggesting that contract enforcement even without laws provides adequate protection. The migration path toward the goal of a fully functioning market economy will be different depending on the point of departure for each country. Private-sector investors seek certainty—enforcement—over laws on the books.
Enforcement allows firms to compute the cost of doing business in a system. That is the reason that most MNCs continue to prefer China over India: a clear preference for enforcement capacity over the legal system on the books. In China, corrupt as they are, the bureaucrats and politicians can enforce a contract. However, the corrupt in India cannot necessarily enforce contracts consistently. The checks and balances built into the Indian polity, especially the press and the multiparty political system, continually unearth corruption in contracts.
Building TGC
TGC is about creating transparency and eliminating uncertainty and risk in commercial transactions.
The specifications for TGC are fourfold:
1. A system of laws that allows for ownership and transfer of property.
2. A process for changing the laws governing property rights that is clear and unambiguous.
Democracies provide a safety net from idiosyncratic changes. For example, in the United States, the process by which new laws are enacted is clear and unambiguous. The process in democracies is arduous and open. This provides a share of voice to all the affected in shaping the laws.
3. As societies become more complex, a system of regulations that accommodates complex transactions.
4. Institutions that allow the laws to be implemented fairly, in a timely fashion, and with
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
78
transparency. TGC is more than laws or regulations. For example, de Soto found that there are 71 procedures and 31 agencies that are involved in legally acquiring and registering land in Egypt. The situation is no different in other developing countries. However, to come to the conclusion that microregulations are the problem would be premature. The United States is full of microregulations, as anyone who has tried to build a new factory can testify. The regulations are even more complex if it happens to be a chemical factory. In addition to regular procedures involved in building a factory, additional regulations for a chemical factory can add to the difficulty of getting a license. Microregulations are an integral part of any complex legal system.
TGC consists of laws, regulations, social norms, and institutions. We need to think of the various components of TGC as a portfolio, shown in below figure-12.
Figure-12,( Transaction Governance Capacity)
Each country and economy might need a different portfolio of the elements of the TGC: One size might not fit all. The goal is to increase the TGC of a society in such a way that a vibrant private sector can flourish. We need to recognize that each country is at a different starting point.
I believe that the real problem is how bureaucracies deal with citizens. Consider a farmer in India, a semiliterate person approaching government officials to register his land. He will be approached by
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
79
brokers, who are the facilitators of the transaction. They fill out the forms for the farmer, lobby with the authorities, and ostensibly make the process easy. The total cost of the transaction for the farmer consists of the fee paid to the broker for his services (an uncertain percentage of the value of the transaction), the registration fee, and the bribes paid to corrupt officials. The process is so opaque to the farmer that the broker and the officials have opportunities to be arbitrary about the quality of the title and the value of the land. More important, they have the ability to decide how long the process will take. They can give this particular case the level of priority that they think is appropriate.
Corruption is about providing privileged access to resources and recognizing the time value of money. Corruption is a market mechanism for privileged access. Bureaucrats use microregulations to control access, transparency, and therefore time.
TGC is about eliminating the opaqueness in the system and providing ease of access. Changing laws and regulations does not help the ordinary citizen if the system is not transparent or if access is not easy. From the point of view of the citizen, TGC must fulfill four criteria:
1. Access to information and transparency for all transactions.
2. Clear processes so that selective interpretation by bureaucrats is reduced, if not eliminated.
3. Speed with which the processes can be completed by citizens.
4. Trust in the system (with its faults). Trust is a result of the first three criteria and is a crucial component of TGC.
The Andhra Pradesh e-Governance Story is a good example of building TGC.