Archive for the ‘trade’ Category
The development goals of many underdeveloped nations are seriously hampered by illicit flows of money. The money sent into those countries in the form of aid and foreign direct investment is, in many cases, dwarfed by the money that flows out as a result of money laundering, bribery, and dodgy transfer pricing. Some estimates put that outflow as high as a trillion dollars. And a lot of that money flows through, between, or within corporations.
I recently took part in a panel discussion on this topic, part of a larger event put on by a group called Academics Standing Against Poverty (ASAP).
Here are a few of what I take to be the key points, not necessarily in order of presentation, from my discussion of the topic:
Corporations have two different categories of responsibilities when it comes to curbing illicit financial flows. First, they are of course responsible for their own behaviour. Under this heading, corporations have three key obligations. First is not to game the system to avoid taxes. Minimizing taxes — even going to significant lengths to avoid taxes — may seem to be part and parcel of a manager’s obligation to maximize profits. But there is no general obligation to maximize profits, and certainly no such obligation to do so ‘at all costs.’ Even the weaker duty to ‘put shareholders first’ is a vague enough concept to be consistent with a principled stance against aggressive tax avoidance, even where taxes can be avoided legally.
A second direct obligation has to do with transparency about transfer pricing. When goods or services are being sold between branches of a multinational, the prices charged should be fair and should be rooted in a clear methodology. And total taxes paid internationally should be reported in a company’s audited annual reports. Even when gaming the system is legal, it is dishonourable.
Third, companies should have zero tolerance for bribery. Besides being corrosive to local economies, bribery is often just a lousy competitive strategy: it involves payments that cannot be guaranteed to work, and when they don’t work there is of course no recourse to the courts. Businesses generally know this, but sometimes see bribery as a necessary evil; they need to work to make it less necessary.
In addition to these direct obligations regarding their own behaviour, big companies arguably have some responsibility for the indirect effects of their operations. Major corporations support entire ecosystems of smaller businesses — suppliers, subcontractors, agents, and so on. And activities within that ecosystem can be a major source of illicit transfers. Corporations should assume some responsibility for illegal and unethical activities in their shadow. This should at least mean setting clear standards for the behaviour of the companies with which they interact, and sharing best practices. Companies are starting to do this with regard to bribery, but they should consider extending that to other areas.
Next, a point with regard to how businesses interact with governments. The least controversial, over-arching norm for business is to play by the rules of the game. Normally, governments set rules and as long as businesses play within those rules, they are at least coming close to meeting their obligations. But not all governments are equally capable of setting and enforcing the requisite rules. And the absence of clear rules doesn’t imply an absence of obligations. So, for example, the fact that the government of a small developing nation hasn’t passed regulations (as Canada and the US have done) that set standards for fairness in transfer pricing doesn’t mean that a company can be complacent.
Finally — and this bit of advice is aimed at development advocates — it is important to avoid thinking of transnational corporations as the enemy. My sense is that a significant subset of folks who are concerned with development are focused on the negative side-effects of corporate involvement in developing nations. What we need to do, though, is to harness the power of corporations rather than regretting it. Business corporations, in addition to being potent organizations, have a vested interest in reducing poverty worldwide. Anyone living on $1.25 a day makes a lousy customer and a lousy employee. Of course, corporations face a collective action problem when considering how to reduce poverty. No one corporation can do much on its own, and it’s a challenge to find ways to get long-term interests in poverty reduction to override short-term interests in profits. But still, the development community needs to see corporations as important partners. We can’t let a culture war over capitalism get in the way of helping the world’s poor.
The video of our panel discussion is now available, here:
A couple of weeks ago, I spent 5 days contributing to the economic wellbeing of a developing nation. To be more specific, I spent 5 days in Mexico, at an all-inclusive resort on the Mayan Riviera. I’m a lucky, lucky man, no doubt. So in what sense does my vacation count as “contributing to the economic wellbeing of a developing nation”?
Now, to be clear, this is a personal example, and so there’s reason for me to worry about the clarity of my own thinking (even now that the margaritas have long-since worn off.) Am I just congratulating myself in order to get past the uncomfortable feeling that many people from affluent nations feel at enjoying luxury while visiting a nation rife with poverty? After all, the tourism industry is often portrayed as one that helps mostly-white Northerners visit places where they pay mostly-brown inhabitants of southern climes to call them “sir” or “ma’am” — with the profits going largely to the mostly-wealthy shareholders of the cruise-line or resort chain.
But is that portrayal of the industry accurate? Let’s take a very rough look at the economics, here.
Let’s say a vacation package — flight plus accommodations at an all-inclusive resort — costs something like $1500 per person, just to pick a round number. Where does the money actually go? Who does it help? By vacationing in Mexico, am I helping Mexicans, or just the shareholders of some American or Canadian corporation?
A big chunk of that $1500, maybe a little less than half, goes to the airline. Aha! Profits for the airlines!
But wait a minute. Profit margins in that industry are razor-thin — in some years, negative! So most of the airline’s half of that $1500 isn’t actually going to shareholders in the form of profits, but is instead going to cover the airline’s costs, including fuel, salaries, etc.
The other half ($750) of the total price goes to the resort. How much of that is profit? One source (a few years old) puts profit margins in the resort industry at about 8%. Let’s be generous and round up to 10%. That means $75 profit, which leaves $675 for various costs — including the cost of food, labour, alcohol, maintenance of buildings, and so on. And it’s a truism of economics that $675 in costs for them is $675 in income for someone else.
And so, overall, only a tiny sliver of the money paid for such a vacation goes to the shareholders of the airline and of the company that owns the resort. Most goes to employees, and suppliers, and employees of suppliers, and so on. About half of that stays in Canada (home of the airline) and almost half stays in Mexico (where the employees and key suppliers of the resort are). By my very rough math, I contributed nearly $700 to the Mexican economy, and more specifically to the income of low-wage Mexicans. And it’s a kind of help I’m very happy to give.
So the questions for discussion: “Is my math at least roughly right?” and “Is this the sort of math those of us who aspire to ethical tourism ought to be doing?” Of course, I’m setting aside for now the environmental impact of such a trip. I’ll leave that for a future blog entry. But at very least, it seems to me that a rough assessment of the economic impact of a vacation is a pretty good starting point.
One of the most amazing — and perhaps depressing — facts of current American politics is that the Occupy Wall Street folks and the American political right are apparently unified in their support for a “buy American” policy. The need to appease the political right is reportedly the entire reason for the “buy American” provision in Obama’s new jobs bill. The very same sentiment is embodied in the recent 99 Percent Declaration. (See Point #14: “End Outsourcing.”)
The “buy American” thing is just a special case of the more general plea we often hear to “support your local economy.” But maybe even less well-justified. And more cynical.
There are plenty of reasons to worry about the “buy American” slogan. For a start, it’s the slogan for the kind of protectionism that is generally understood to reduce economic efficiency (and hence to reduce human well-being). Bigger markets are generally better, and the right solution to the negative side-effects of globalization isn’t to build walls around your economy. Plus, protectionism tends to result in arms races, in which Country A erects trade barriers, to which Country B responds, and so on and so on. And in some cases, “buy American” (or “buy Canadian” or “buy UK” or whatever) is a thin disguise for xenophobia, and perhaps racism. As in, “Buy American rather than from…you know…foreigners.“
But the flip-side of the consumer-oriented question posed in the title of this entry is the question faced by businesses (and this is, after all, a blog about business ethics.) Should businesses play into the protectionism implied by the “Buy American” slogan? As I’ve pointed out before, one of the most general obligations businesses have is not to reduce the efficiency of markets, for it is that very market efficiency that provides the moral underpinning for their general pattern of aggressively competitive behaviour. So businesses generally have a responsibility not to play upon consumers’ lack of economic sophistication, or their xenophobia. So, on the lips of a captain of industry, “buy American” betrays either a lack of understanding, or a cynical willingness to damage the public good in order to turn a profit. What it betokens on the lips of politicians or protestors, I leave for others to speculate.
Today happens to be World Standards Day, a day that honours the work of the thousands of experts involved in setting the huge range of voluntary international standards that regulate production and trade in a globalized economy. Depending on your view of globalization, it’s a day either to be celebrated or mourned.
The standards in question include various standards established by groups like the International Electrotechnical Commission (IEC), the International Organization for Standardization (ISO), and the International Accounting Standards Board (IASB).
I’m currently reading a very good book on just this topic, namely The New Global Rulers: The Privatization of Regulation in the World Economy, by Tim Büthe and Walter Mattli. The book examines the wide and growing range of international, private (i.e., non-governmental) standards being set by groups like the IEC, ISO, and IASB. As Büthe and Mattli point out, such standards are a double-edged sword.
On one hand, they facilitate the international flow of goods and services, making it easier for companies to ship products overseas or set up branch offices in foreign countries without learning entirely new, idiosyncratic local standards. And (being established by international groups of experts) they do this without the direct participation of governments that may not have the financial or technical capacity to set such standards. On the other hand private, international standards don’t bring benefits equally to all: not all companies are equally-well equipped to switch from older national standards to newer international ones, and some countries’ internal regulatory regimes make the switch even harder. And regardless, as Büthe and Mattli point out, adopting new standards always brings costs, including things like the costs of training, the cost of redesigning products, and even paying licensing fees for proprietary technologies.
It seems appropriate, at this juncture — while the Occupy Wall Street movement is a) lamenting the nature of government-industry interaction, and b) deciding whether it is or is not part of the anti-globalization movement — to give some serious and well-informed thought to the desirability of regulatory regimes that are both non-governmental and international.
This is the second in an occasional series on the relationship between ethics and economics.
Today’s topic is the market. ‘The market’ isn’t anything magical. It’s just the term we use for the abstract entity that is the aggregate of all actual markets for particular goods — the sum total of the market for cars plus the market for poetry plus the market for pedicures and so on. Seen another way, the market is just a whole bunch of people (and organizations) buying and selling stuff from and to each other.
The market is ethically significant. And in general, that significance is positive: markets are generally morally good. There is an ethical justification for markets, such that, with some exceptions for particular goods, where markets do not exist we wish they did.
Reasonably-free markets have three basic moral virtues. One is freedom. In a free market, each of us is free to buy whatever we want, within the limits of our ability to pay. That’s not the only kind of freedom anyone could hope for. The sense in which everyone is “free” to buy whatever model of car they want is not very compelling for those who cannot afford a car at all. But scarcity is a basic fact about the world, and the freedom to make one’s own choices within the confines of such scarcity is hardly trivial.
The second virtue of free markets is efficiency. For very many goods, reasonably-free markets are not just one way to provide those goods: a reasonably-free market is the most efficient way to provide those goods. I’ll have more to say about efficiency in a later instalment in this series. But very briefly, we can begin to understand efficiency as a moral value if we consider its opposite, namely inefficiency. Inefficiency means wastefulness, or getting fewer outputs from more inputs. Almost no one is in favour of inefficiency. And in a world where many people see their basic needs go unmet, inefficiency is a great evil.
The third great virtue of the market is its ability, famously described by Adam Smith, to turn self-interested behaviour on the part of one person into (reasonably) good outcomes for others. Smith’s point wasn’t that people are selfish, nor that they should be. His point was that everything you own, everything around you, exists because someone made it. And chances are that — hand-made gifts aside — they made it for you not because they love you, but because they needed to make a living. The market turns my needs into a way of satisfying yours, and vice versa. And it generally happens without someone putting a gun to our heads to make it happen.
But markets also have moral failings. One is the very lack of coordination that I referred to as “freedom” above. That lack of coordination means that markets are notoriously bad at providing for the production of genuinely useful public goods, like highways and lighthouses and police forces and so on. For such goods, it’s much more effective to have some central authority, preferably with coercive powers, collect taxes in order to build them.
Markets are also much better at providing what people want than it is at providing what they genuinely need. So markets produce junk food and video games and porn in abundance, but relatively little delicious health-food and educational games and poetry. Of course, in casting the former as “bad” products and the latter as “good” ones, I’m merely appealing to popular stereotypes. In reality, there’s very little rationale for thinking video games are better than poetry. That’s just an elitist bias. But still, it probably is fair to say that there are products that are out-and-out socially bad: it’s no great bragging point for the market that it has brought us so many brands of cigarettes, for example. So if — and this is a very big if — we were much more certain, and much more unanimous, than we are about what things are genuinely good in life, then it might make a lot more sense just to have governments direct the making and provision of those things.
One of the key starting points for any sane consideration of issues in business ethics is the realization that the market serves a moral purpose. It’s an imperfect mechanism, to be sure, but its value for promoting human freedom and wellbeing is such that what we ought to think in terms of balancing various market virtues and vices against each other, rather than thinking in terms of the market as an alternative to important human values.
A couple of people have asked me recently about what business ethics issues arise in the wake of the Japanese earthquake, tsunami, and nuclear crisis. As far as I’ve seen, the media hasn’t paid much attention to business ethics issues, or even on businesses at all, in their coverage of the disaster(s). But certainly there are a number of relevant issues within which appropriate business behaviour is going to be a significant question. Here are a few suggestion of areas in which the study of business ethics might be relevant:
1) The nuclear crisis. Although their role has not been front-and-centre (unlike, for example, the BP oil spill), at least a couple of companies have played a significant role in the crisis at the Fukushima I Nuclear Power Plant. The reactors there were designed by General Electric, who surely face questions about the adequacy of that design and the relevant safeguards. And the plant is owned by the Tokyo Electric Power Company (TEPCO). TEPCO has been criticized for its handling of the disaster, including its notable lack of transparency. TEPCO also faces a difficult set of questions with regard to the ongoing risks to employees, including those who have vowed “to die if necessary” in order to protect the public from further risk. (For more information, see the wikipedia page about the Fukushima I nuclear accidents.)
2) Disaster relief. There is clearly an opportunity for many companies, both Japanese and foreign, to participate in the disaster relief effort. Whether they have an obligation to do so (i.e., a true corporate social responsibility) is an interesting question, as is the question of the terms on which they should participate. I’ve blogged before about the essential role that credit card companies play in disaster relief by facilitating donations; do credit card companies (and other companies) have an obligation to help out on a not-for-profit basis, or is it OK to make a profit in such situations?
3) Pricing. The topic of price-gouging often arises during and after a natural disaster, though I haven’t heard any reports of this in the wake of the earthquake in Japan. It’s a difficult ethical question. On one hand, companies that engage in true price gouging — preying on the vulnerable in a truly cynical and opportunistic way — are rightly singled out for moral criticism. On the other hand, prices naturally go up in the wake of disaster: picture the additional costs and risks that any company is going to face in trying to get their product into an area affected by an earthquake, a tsunami, and/or a nuclear meltdown.
4) Investment and trade. A major part of Japan’s recovery will depend on investment, both investment by foreign companies in Japan and investment by Japanese companies in the stricken areas of that country. This is clearly less of a concern than it would be in a less-economically developed country (like Haiti, for instance), but it’s still relevant. So the question arises: do companies have an obligation to help Japan rebuild by investing? If a company is, for example, deciding whether to build a new factory in either Japan or another country, should that decision be influenced by the desire to help Japan rebuild?
5) Consumer behaviour. Just as companies have to decide whether to invest in disaster-stricken nations or regions, so do consumers. Do you, as an individual, have any obligation to “buy Japanese,” in order to help rebuild the Japanese economy? Does it matter that Japan is a modern industrialized nation, as opposed to a developing one?
Is making a profit ethically good, or bad, or neutral? Or, better still, are there situations in which making a profit is either good, or bad, or neutral?
Profit is often the subject of criticism. The film, “The Corporation”, has as its main target not corporations per se, but the profit motive in particular. Michael Moore appears in the film, saying that while some corporations do good things, “The problem comes in, in the profit motivation here, because these people, there’s no such thing as enough.”
Now, the idea of profit is often tied up with money, with ‘filthy lucre.’ After all, everyone knows that saying about money being the root of all evil. But in the abstract, profit needn’t be defined in terms of cash. In the abstract, profit is just the “cooperative surplus” that results from a mutually-beneficial exchange. When I buy an apple (for, let’s say, $1) at my local market, both the owner of the market and I end up better off. We both “profit.” My own “profit” is the amount by which I value the apple over the $1 that I paid for it. And the market owner’s profit is the amount by which the sale price of $1 exceeds her own costs (apple + labour + overhead, etc.). And the fact that we both profit from the exchange is precisely what makes the exchange good for both of us.
Now, I think we need to distinguish between our ethical evaluation of profit, and our ethical evaluation of the profit motive. Because even if we agree that profit is generally OK, we can still worry about the things that people (or companies) will do in the pursuit of profit.
I’ll focus another day on the profit motive. Today I want to focus on profit itself. It seems to me that there are 2 kinds of circumstances in which profit itself is subjected (rightly or wrongly) to ethical criticism. One is when profits are excessively large; the other is when profit is gained unjustly. Today I’ll focus solely on the idea of excessive profit.
Several industries are commonly singled out as having unjustly large profits. One is the banking industry. Another is the pharmaceutical industry. Likewise, if we expand the category of “profit” to include individual profit in the form of salaries, then Wall Street is regularly singled out as a place where excessive profits are to be had. The fundamental ethical question with regard to large profits is what philosophers would call a question of “distributive justice.” Basically, is it fair that some people have so much money, while others in the world have so little?
A few points are worth making about big profits:
1) It’s worth remembering that very large corporate profits don’t necessarily translate into large amounts of personal wealth for anybody. Consider the fact that a company that has several billion dollars in profits — a lot of money, by anyone’s accounting — might have hundreds of millions of shares outstanding, spread across thousands (or even millions) of shareholders, and might pay out only a tiny dividend (say, a dollar per share). So a massive profit doesn’t necessarily translate into massive personal wealth for anyone.
2) Although many of us have intuitions that say that large disparities in wealth are unjust, it has proven incredibly difficult to translate those intuitions into anything like a coherent ethical theory. Despite our best efforts, we simply have no sound explanation of a) why it is that differences in wealth (fairly acquired) ought to be considered unfair, or b) just how large a difference has to be in order to be considered unfair. The lack of such a theory doesn’t negate our intuitions, but it should give us pause before we assert that particular disparities are “obviously” or “grossly” unethical.
3) It’s worth noting that what I referred to above as our “intuition” about injustice might also be referred to as a form of envy. And envy is far from admirable. As philosopher Anthony Flew once pointed out*, “this envy which resents that others too should gain, and maybe gain more than us, must be accounted much nastier than any supposed ‘intrinsic selfishness’ of straight self-interest.”
Amidst the upheaval in Libya, questions arise about foreign companies doing business there. Many firms, of course, are pulling out and evacuating any employees currently on the ground, for obvious reasons related to safety. But there are apparently still a few reasonably safe places in Libya, places far from the major cities that are the focus on the current fighting. And certainly business done from afar is still an option. So, that leaves companies with choices. Should Libya be considered entirely off-limits? At this point in the conflict, various governments have issued orders that put restrictions in place. But that doesn’t mean that Libya is, from a legal point of view at least, a no-go zone. (Canada’s government, for example, has clarified that Canadian firms are still allowed to do business in Libya, generally, but not with the Libyan government or with the Libyan Central Bank.)
I’m sure many will be tempted to say that foreign companies should pull out entirely. But then, it’s not clear that such a blanket prohibition does much good for the people of Libya as a whole. Note, for example, that Libya currently imports about 75% of its food. Stopping doing business with Libya would mean starving its population.
Of course, even before the current crisis, Libya was a dubious place to do business — at least some kinds of business. Note, for example, that a Canadian company has faced questions about its role in building a fancy new prison for the Gadhafi government. (From the Globe & Mail, see: SNC-Lavalin defends Libyan prison project.)
(An interesting side-note: SNC-Lavalin was recently ranked as one of the best-governed corporations in Canada. Note also that the companies shares are down, apparently because of worries not just about Libya, but about the entire region. About a quarter of the country’s income comes from the Middle East and Africa.)
Building a prison for use by a dictatorship is exactly the kind of project that is likely to draw fire. But that’s not entirely fair, either. As the G&M notes, Libya has been under international pressure to modernize its prisons. And if it is a legitimately good thing for a dictator to upgrade his prisons, then it’s hard to claim that it’s unethical for a company to make a profit by helping him do so.
Early this week I attended the annual meeting of the Canadian Philosophical Association, where I gave comments on a very good paper presented by Cristian Dimitriu, entitled “Human rights and development as fair background conditions of international trade.” Basically, the question at issue was whether, in engaging in international trade, it is ethically obligatory for companies to promote human rights. (Note the significance of the word “promote,” here. An obligation to promote human rights is much more demanding than an obligation simply to respect human rights.)
One of the suggestions I offered in my comments was a reminder that commerce, generally, is an adversarial game, and that in adversarial games, we generally have fewer and less-restrictive obligations. Business, like football, is a competitive domain, one in which the normal rules of polite society get relaxed in certain ways. The justification is basically that business, like football, is a game that harnesses competitive behaviour for socially-beneficial purposes. (The clearest enunciation of this view can be found in Joseph Heath’s essay “An Adversarial Ethic for Business or When Sun-Tzu met the Stakeholder” [download the PDF here].) Since international trade is, after all, a kind of commerce, then it’s worth remembering that whatever rules and limits it is subject to are part of the set of rules governing an adversarial game.
But international trade is not, of course, only a kind of commerce. It’s also a part of international relations, and governments engage in trade treaties and set trade policies based on a whole range of ethically-relevant considerations, including national economic interests, friendship (between nations), and a sense of obligation to help other, poorer, nations to build their own economies. Consider, for example, the fact that trade policy is one tool governments have at their disposal for enacting what they take to be their national obligations in the realm of international development. That is, one way a wealthy nation can help a poorer nation is — instead of sending them cash — to engage in trade with them.
What this suggests is that international trade involves the intersection of two very different games, with different objectives, and very likely subject to different ethical demands. So, this poses an interesting (and I think difficult) question. How should individual businesses navigate this intersection of games? Do businesses have an obligation to go some way towards fulfilling national obligations, or is that (perhaps by definition) solely the obligation of national governments?