Removing Cash is effective Anti-Corruption management

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scott-schaefer-politics (Photo credit: ScottSchaefer)

How do you systematically combat corruption when it seems to be found everywhere? In many countries around the world corruption is part of how business is being done, how you deal with officials and how you get things done. In a lot of places you will hear that it is part of the culture that there is nothing one can do about the phenomenon because the system as a whole would not work if there were no one to skim the cream so to speak.

In my mind there is at least one successful way that will insure the reduction of corruption significantly and that is by removing cash as the main means of payment from society. Cash is the fuel that ensures that corruption can flow freely and if one is able to reduce the amount of cash one can combat the most visible forms of corrupt behaviour and maybe even affect other forms of corrupt behaviour higher up the favours-for-cash food chain.

Corruption is operationally defined as the abuse of entrusted power for private gain (Transparency International) and can be found in two forms:

  • “According to rule” corruption – Which is corrupt behavior that ensures that people of power uphold the laws and rules that they have been entrusted with because to their position in society. F.eks. getting permits within a reasonable timeframe or speeding up bureaucracy.
  • “Against the rule” corruption – Is when a member of the public is able to ensure that a government official does not enforce rules. f.eks. A fine or penalty.

The cost of corruption is four-fold: political, economic, social, and environmental and the more advanced society becomes the more advanced is the corruption that one finds. From police officers taking small bribes to make up of the lack of adequate pay to election fraud through paid ballots.

It is my argument that societies that are not very advanced and therefor have a high degree of cash or natural economy, will be more prone to the two forms of corruption that ones where electronic transfers are more common. Another argument for removing cash in order to reduce corruption is that cash is most common at the bottom of the “food chain”. By cutting off the supply to higher levels in the chain and more damaging types of corruption one is able to reduce the impact as a whole.

We now have low-cost technological systems that can ensure that there is a less of a need for cash in society but more importantly these systems can be made available in developing and emerging markets thanks to telecommunication and improved systems of control. Systems like the ATM or home banking have found its way into the mainstream of all societies around the world and at affordable prices for everybody. Especially if one takes into account that a more transparent system will ensure that the cost of a credit card, interconnection and security systems are covered by the positive impact.

There are of cause challenges to reducing cash and as a technology it cannot be replaced in some parts of the society simply because it is the cheapest alternative. But by strategically targeting government and educational institutions, banking and international business there will be significant gains to be had through relative small investments for all parties involved.

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Volunteerism vs. Entrepreneurship

There aren’t enough good things to be said about young people doing voluntary work in areas of the world where educational and competency resources are scares. Volunteers help build schools in Costa Rica, they teach children and young people how to read and write in India and they help build NGO’s in South Africa. Further more they are motivated, able and make it possible for good projects to be realised because they do not require a big overhead.

For many volunteers it is a experience of a lifetime and expands not only their personal understanding of how the world works but also gives a opportunity to contribute in a very real way. In short volunteers makes a real difference for people for very real people.

However, when it comes to the development of a flourishing private sector, economic growth and sustainable development there is no substitute for the entrepreneur. To some extend the entrepreneur is competing against the volunteer at least this can be the case in some sectors. For instance when it comes to education there can be competition in the areas of higher education and specialised courses that could prevent higher quality firms involved in education creating a sustainable business platform. Or when takes up cleaning and reconstruction it could mean the “creative destruction” that Schumpeter talks about never happens simply because of the hit-and-run nature of volunteering.

I write this not to put down volunteering it is just stating a fact that if you compete against zero wages and zero profit you will almost certainly loose as a up and coming small business. So while we hail the volunteer we might consider that by doing good now one might be doing harm in the long-term separating people and society from creating and shaping their own future.

It is the nature of the entrepreneur to take a chance and to some extend take in a significant risk in order to gain first-mover advantage and maybe conquer a whole market. This risk is that the entrepreneur will loose everything that is invested in the project, but that is at the very hearth. In that way she or he is at the very front of what society needs in order to grow. Believing in something, taking a risk in order to accomplish the goal and harvesting the fruits of the hard work. And by doing that he or she is creating jobs, paying tax, creating new markets and innovating society.

As part of the analysis that any would be business creator will do is to evaluate if there is a market the product that might be introduced. The analysis will state if the market is either open for more competition or if it is saturated, if it possible to create a business model that can be scaled up or if it is a small business will continue to be small. A true game changer in that analysis would be if volunteering is part of business model used. For most, if not all entrepreneurs it would mean that he or she would find other places or other products to launch simply because you cant compete against zero wage and zero profit.

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Should FDI be linked directly to engagement in CSR activities?

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Companies that engage in foreign direct investments (FDI) in developing countries should at least some degree have sustainability approach to their business processes or should they?

When we do our every day purchases in stores and shops in our local neighborhood there is a high possibility that we will be buying wares produced in a developing country. Some of the thing we buy will be as bought on the open market on the commodities such as a lot of Fruit, Cacao or Coffee etc. while others are produced, manufactured and exported as part of the same corporate supply chain. These production facilities are being put in place in order for the parent company (normally in a developing country) to save costs on procurement, wages and in order to better control their supply chain (upstream vertical integration).

FDI is characterized as an investment that is made in another country or territories, between a parent company and its subsidiary. Normally we will look at two types of FDI outward and inward.

An outward FDI is an investment that is backed by the government against all types of associated risks. This form of FDI is also closely related to governments export subsidies, partnerships like strategic philanthropy Risk and different forms of government aid in relation to establishing corporate presence.

When governments want to attract investments then they can use different forms of economic factors in order to encourage inward FDIs. These can include low interest loans, tax breaks like in special low tax areas, grants, subsidies, and the removal of different forms of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.

Link between CSR and FDI

We would like to believe that we are serious about our efforts to develop and create a basis for sustainable business, but how could we encourage and facilitate such a process. In India there are concerns that the CSR movement will make life harder for companies trying to export seeing CSR as a threat to FDI because it puts pressure on some of the areas were developing countries are actually able to compete such as wages, working environments, labor rights etc.  

“Indian authorities think that the ISO standards could be used by developed countries as a way to decrease trade coming from developing countries. India has appealed that the ISO-26000 should not be deemed an international standard, guideline or recommendation to follow.” India Briefing News

This statement is to a large extent in contrast to the popular thinking that CSR is something that is welcomed in the developing world. The CSR standard is being developed by the International Standards Organization (ISO) to encourage more corporations to implement socially responsible practices in among other places their supply chain.

“The whole idea behind the move seems to be to achieve factor price equalization by imposing minimum wage standards on developing countries,” Biswajit Dhar, director general of Research and Information System for Developing Countries told the Economic Times.

The question is we morally obligated to implement the same standards as we would at home as we do abroad?

What if we turn the tables and tell companies that if they want to benefit from the economic advantages that come with setting up a business in a developing country, they will have to apply the same sustainability standards which are present in the region they come from. So for example if a local garment company sets up a factory in Bangladesh in order to get access to cheap labor it should as a minimum live up to the same standards as it is under in a local context in order for them to export garments back to the country of origin. Or if on IT-company sets up operations in Mumbai, India it would have to employ IT professionals at the same terms that they do it home.   

It’s a tempting thought that some of the social dumping issues that are part of the FDI thinking could actually be tackled through the active utilization of CSR.

Is Eastern Europe the new Asia

In a recent study done by Aeo Hewitt shows that India’s 11.7 percent salary rise in 2010 has outpaced all the other Asia Pacific countries and this high increase rate is going to continue over the next few years.  Together with the India governmental proposal to force companies of a certain size to use 2% of their profits in philanthropic activities this new development could mean a halt or at least a slowdown in the country ability to compete.

While general entry level salaries in Europe and North America have experienced a virtually stop in its growth is the story much different in India. With two digit increases across the board the gap between producing countries and consuming countries have seen a significant decline.  While India is leading the pack there is a general trend in Asia that salaries have increased significantly even when other parts of the world have seen stagnation.

 

It will be interesting to see how this change will impact supply chains across the globe. For Europe it will be more natural and properly cheaper to produce in Eastern Europe and the truck our consumer goods across land. The educational level is relative high and there is a very high unemployment rate especially among young people so if they can get their Governance and corruption issues under control they will have all the opportunities in the world to be the next Asian tiger.