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Big Business and Democracy (Part 2 of 5)

(This article is Part Two of a five-part series on "The Clash of Capitalism and Democracy in East Asia." For an introduction to the series, please see Part One.)

Simon Caulkin of The Observer recently wrote that IBM's world sales of $71.9 billion "were greater than the GDP of all but 40 nations -- about the same as the Philippines and half as much as Iran or Ireland. And IBM is just 18th among the world's biggest corporations. The real leviathans -- Mitsubishi and Mitsui, with sales of more than $180 billion each -- just miss the world's top 20 nations, not far behind Indonesia and Sweden."

With this rather scary fact in mind, let's examine a hypothetical situation. Let us assume that Mitsubishi was considering investing in a small, relatively poor, developing nation, which we will call "Pretopia." Pretopia, after years of authoritarian rule, is taking its first steps towards a market economy. The nation needs foreign investment, but it is wary of outsiders, both nations and companies, who seek to take advantage of the nation's situation solely for their own gains.

We shall also assume that Pretopia is a budding democracy, where the vote is guaranteed to all adults, and elections are free and fair. Economic ministers, who were appointed by the democratically elected leader of Pretopia, design an economic regulatory environment. One of the items they have decided upon is that no foreign nation shall own a majority stake in a local company. The ministers believe that the disincentive to foreign investment is outweighed by the consideration of preventing mass capital flight and repatriation of profits from cash-starved Pretopia. Another important regulation is Pretopia's high corporate tax rate. The tax rates under the former authoritarian regime were close to 90%, so its 50% tax rate seems like a comparatively positive incentive to local businesses, but not to foreign businesses, which are accustomed to much more friendly environments.

Mitsubishi is not entirely happy with this regulatory environment, for obvious reasons. It sees a great opportunity for investment in this budding market economy. It wants to earn money in Pretopia, and repatriate those profits back to the home office in Japan, but the regulatory and tax framework prevents them from doing so. Furthermore, without being able to own a majority stake in the company, Mitsubishi must leave the final decision-making power of their new company in the hands of Pretopians, who may not share the same goals as the Board of Directors of Mitsubishi.

What does Mitsubishi do? Certainly, they could merely walk away and decide to take their investments somewhere else. However, considering the enticing possibility of profit, they instead decide to wield their power and influence in order to change the laws. Mitsubishi tells the Pretopian government that it will invest hundreds of millions of dollars in Pretopia, and create thousands of jobs -- if the tax laws are reviewed and rewritten to be more favorable, and if they can have majority ownership. The Pretopian government might refuse these conditions and forego the potential windfall. But it will undoubtedly be rather tempted to accede to the requests of the company and make the changes without consulting the people.

Would that be a violation of democracy? In the purest sense of the word democracy, yes, as there was no public consultation, and economic ministers changed laws based on the promise of increasing the national income. Especially if the government was elected on a platform of strict regulation and high corporate taxes, the ministers have decided to reject the will of the people. (Although few governments are elected on an explicit platform of high taxes, by promising a raft of entitlements, services, and programs, many governments are elected on their implicit promise of high taxes.)

On the other hand, democracy is not such a simplistic concept, and as mentioned in the introduction to this series, a system where politicians and bureaucrats take a poll or hold a referendum every time they need to make a decision would be unwieldy at best. Thus, the "bureaucracy" part of democracy must come into play. The economic ministers, indirectly selected by the national constituency to make decisions on behalf on the nation and in the national interest, make the decision to change the laws to benefit the nation. This mode of governance is completely in line with the definition of a representative democracy presented in Part 1, a balance between bottom-up and top-down governance.

Of course, the government is obligated to stay within a certain limit or guideline of action. The people may have elected the government simply because they wished to place all their trust and faith in that government, but few constituencies are that laissez-faire or indifferent about the way they are governed. If popular opinion was wholly against the Mitsubishi investment, and no amount of government explaining or "bully pulpit convincing" could change the minds of the populace, then perhaps a democratic government has an obligation to do what its people want, even if such action is normatively bad for the nation. It is a decision that all democratic governments must face: how far can a government go to do what is right, when what is right is deeply unpopular? And when the money enters the equation, how does a government weigh whether that money is affecting its decision adversely? (The promise of money is, for the purposes of this example, limited to public and transparent transactions -- we will examine corruption in Part 4.)

Our small, new, and struggling Pretopia is not just a hypothetical example. The situation described can apply to any number of East Asian nations at one point in their development, including South Korea, Taiwan, and even Japan. Mitsubishi and Mitsui combined are about the size of Russia, more than large enough to push around even East Asia's relatively large "Tiger" nations.

Currently, though, most of East Asia is past this problem, since most East Asian nations are either too large (Japan) to be affected by the pressures of one company, or do not worry excessively about the public reaction of illicit cooperation (Indonesia). The potentiality for the above-mentioned kind of conflict these days may exist more in Eastern Europe and the former Soviet states than in the Pacific Rim. But with Vietnam, Laos, and Cambodia all struggling with the problem of how to attract investment, and intimations toward democracy in all three (to widely varying degrees), this problem may resurface in East Asia in the near future.

The potential influence of cash from outside investment is a common scenario, but not necessarily the most frightening. A more extreme way that big business can undermine democratic processes is by threatening to withhold vital national services. As Caulkin points out, the US computer company EDS (the 67th largest company in the world) has its software installed throughout Britain's government computers. Without EDS, "many of the computers of Britain's civil service would grind to a halt. It is inconceivable that the civil service could ever reconstitute the knowledge to run its computers again. In effect, EDS...has been incorporated seamlessly into the machinery of government."

To take a far-fetched example to its end, what would happen if EDS decided that Britain's corporate tax structures were not advantageous enough for the company? What if it essentially threatened to shut down its software -- and with it the government itself -- unless the government passed tax reform? Naturally, there would be legal avenues for the government. Many government contracts stipulate that a company cannot use its position or such illicitly sought gains, at heavy legal penalties. But if a company that is inextricably intertwined with the very core of day-to-day governmental operations decides to play its hand to the fullest, at that point, the contract would be useless, as would the inevitable offers from other companies. The potential for immediate, tangible, and unfixable damage would be tremendous.

Given the possibility of such catastrophic damage, any government, especially smaller, weaker, newer governments where rule of law is less predictable, would be tempted to cave in to the demands of the business. If the business' demands and bargaining position were wholly unreasonable (e.g., if the company that supplies the coffee for all government offices says "make our CEO the next President or no more coffee"), then perhaps the government would be willing to fight. But would a government expend a great deal of its time, money, and political capital to fight a company legitimately threatening to shut down the government to gain a 2% tax cut?

Given the powerful and omnipresent position of such computer companies as Microsoft, Oracle, IBM, and Sun Microsystems, any one of these companies alone could be in the position to push smaller governments for friendly legislation. These companies are accountable to no one but their shareholders, and very few Filipinos own shares in Microsoft. If Microsoft used an implicit threat to demand legal changes that were bad for the Philippines, but good for Microsoft, the corporation could abuse its position to overpower the democratic will of the people.

Yet governments need to use computers and software purchased from private companies. They need to purchase defense hardware from private companies. The same holds for food distribution, transportation, trucking and all sorts of other industries vital to the interests of a nation. So is there a preventative remedy for this kind of potential abuse?

The fear of corporate abuse leads some governments to maintain "public ownership" of key industries like power, water, sewage, and even finance. Since government by its very nature has less of an incentive to be efficient, deregulation of these and other important industries is sometimes vital to the growth of the nation, even though such deregulation may open the government to the possibility of corporate abuse. (We will look again at deregulation in Part 5.)

Many East Asian nations are now grappling with the deregulation quandary, including Japan, whose Prime Minister Ryutaro Hashimoto famously commented that he would bring about deregulation or "explode into a ball of fire." In addition, South Korea and Indonesia also face difficult decisions about deregulation in the wake of the IMF conditions for aid. Korea seems to be following the IMF recommendations, and fact, Kim Dae-Jung was elected partially on his platform of IMF cooperation. Indonesia, led by Suharto, who has no such obligations to his electorate, seems to be fighting the IMF reforms that would hurt his family interests.

Governments cannot and should not allow themselves to be held hostage to business interests. And governments considering deregulations cannot and should not allow themselves to make their decision based on the remote, although ever present, threat of evil corporate plots. Governments must provide plenty of disincentives for corporate abuse, but still must cooperate with the companies that are the backbone of the economy. Balancing big business and democracy is a battle that all governments must constantly fight.

Part 1: The Clash of Capitalism and Democracy
Part 2: Big Business and Democracy
Part 3: International Institutions and Democracy
Part 4: Corruption and Democracy
Part 5: Blending Capitalism and Democracy

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