Rule of Law Makes Good Business

Four billion people, more than half of the Earth’s population, live outside of the rule of law according to a 2008 report by the United Nations Development Program.  Lack of rule of law is connected to human rights abuse, crippled democracies, and wasted national resources, a nexus that activists, NGOs and governments call attention to every day, often achieving significant change.

But the voice of the business community, one of the most powerful advocates for improving the rule of law in emerging markets, often goes unheard, left out of traditional coalitions for reform despite natural synergies on a range of issues. One of the most obvious is corruption. Corruption not only corrodes the institutions key to the functioning of a democratic state but it also perpetuates inefficient systems for conducting business and trade. It impedes starting a business, purchasing property, settling disputes, and managing risk. It spooks potential foreign investors and business partners.

A recent event co-sponsored by the U.S. Chamber of Commerce and Freedom House connected the dots, as speaker after speaker focused on the essential role of rule of law in the growth of entrepreneurship, civil society and democratic institutions.  John G. Murphy, Senior Vice President for International Policy at the Chamber, noted that the presence of rule of law is high on the list of  guidelines the U.S. Chamber advises those considering international investments.  He explained that the U.S. Chamber’s Coalition for Rule of Law in Global Markets, an coalition of businesses addressing rule of law in emerging markets, identified five factors regarding rule of law that most concerned the business community – transparency, predictability, stability, accountability, and due process of law.

Freedom House, a non-government organization defending human rights and democratic change through supporting political rights and civil liberties, produces a methodical annual survey on Freedom in the World  that shows how more countries have been slipping in their civil and political rights than improving over the last decade. An examination of Freedom House’s data shows how drivers of decline have been limits on freedom of expression and decline in rule of law.  In the past 10 years, 18 countries have shown significant decline in rule of law. Decline in due process and the use of torture has been the largest subset of issues. The relationship between Freedom House’s surveys and the World Bank’s Ease of Doing Business surveys shows that there is a correlation between freedom of expression and ease of doing business.

“Stable transparent governments based on respect for human rights and rule of law tend to foster environments that are good for establishing and having better operations for private enterprises,” said Ambassador Mark P. Lagon, President, Freedom House during a presentation at the event.  Lagon continued to point out that the top half of countries in the world for ease of doing business, there is a strong correlation with the free category of Freedom House’s surveys.  Furthermore, rule of law is the most reliable indicator for a free category in Freedom House’s survey. Lagon challenged businesses to work collaboratively with civil society actors on rule of law and freedom of expression.  Furthermore, he urged businesses to see pressure against civil society actors as an affront to rule of law ultimately impacting their business interests.

Ziad Haider, Special Representative for Commercial and Business Affairs, U.S. Department of State, remarked, “It’s a no brainer that the fact that one trillion dollars being paid in bribes each year has a dramatic corrosive effect both politically, socially…but also economically.”  The U.S. government has been leading the charge on anti-bribery measures with laws such as the Foreign Corrupt Practices Act, enacted in 1977. These laws when first introduced were seen as disadvantageous to U.S. companies but as the international norm vilifying corruption has grown it is clear that corruption is a major challenge to business globally: addressing corruption benefits business at all levels. Haider continued to say that the enforcement of the FCPA is of primary importance to the U.S. government. “[Corruption] ultimately does affect your bottom line,” Haider concluded speaking to U.S. Chamber member companies in the room, expressing the need to collaborate with U.S. business and U.S. government bodies tackling corruption.

Rod Hunter, Vice President for International Affairs, the Pharmaceutical Research and Manufacturers of America (PhRMA) mentioned that strong trade connections require strong national institutions to ensure that the quality of products brought to the trade market are good.  Hunter argues that in a consumer market such as pharmaceuticals, it is not until after a product is consumed that one can really judge the value of it.  For example, the FDA has 4,000 reviewers for new drug applications while China and India have less than 300 reviewers. Furthermore, the talent that these types of regulatory positions attract varies greatly depending on the attitude toward these positions and whether or not they are seen as vital to ensuring consumer confidence.

UPS connects trains, planes, ships and trucks internationally. Laura Lane, President, Global Public Affairs, explains that spreading UPS values throughout its operations is key. “For us, rule of law is everything. We can’t do business unless it’s the right kind of business to do,” Lane explains.  “We’ve walked away from business if it compromises our values.”  UPS looks for three critical areas to determine whether to expand into curtain markets: Is there a trade agreement in place? Are there electronic trade processes in place at border to move products efficiently and limit corruption? Is rule of law and the institutions that support this present in the country?

“When you’re doing due diligence, there are checklists …It’s easy to check the box but then you’ve got to sink your teeth into is the practice and the action of these governments within the market. Do they really follow suit in what you read in the books,” Charles R. Johnston, Managing Director for International Government Affairs at Citibank explains.  Johnston said companies need to know that there is due process and there are transparent regulations in the market.

Ultimately, it is stable democratic institutions supporting rule of law that instills the confidence needed for multinational companies to invest and expand into emerging markets.  Both international and local businesses have a vital role to play in advocating, building, and supporting these structures.

Laura Van Voorhees is a Program Officer for Global Programs at CIPE.