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Sunday, November 27, 2005

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CORPORATE RESPONSIBILITY & GOVERNANCE
 
The profit motive may be universal but virtue is not
Martin Wolf
11/27/2005
 

          The world we live in offers vast economic opportunities. But these are not limited to production and trade in what we consider good. They include production and trade in "bads": narcotics; counterfeits; stolen artefacts; arms; slaves and organs. And with these go their consequences: money laundering, corruption and political subversion.
Governments are trying to separate the Siamese twins of licit and illicit trade, in order to kill off the latter. They are failing. This is the thesis of a remarkable new book [Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy (New York: Double Day, 2005)] by Moises Naim, the editor of Foreign Policy. Today's world, he argues, offers growing opportunities for profit in illicit activities. The metastasising networks of brokers, financiers and corrupt officials and politicians are very successful in exploiting them.
Consider some of the evidence.
lSeizures by drug-enforcement agencies nearly doubled in volume between 1990 and 2002, but the street prices of illegal narcotics seem to be as low as they have ever been.
lTraffickers are estimated to move at least 4.0m people a year as slaves and are helping to move a far greater number of people as illegal migrants.
l Traders in small arms have supplied almost 50 wars since 1990, while the network controlled by Pakistan's Abdul Qadeer Khan promoted nuclear proliferation.
lCounterfeiters supply perhaps 8.0 per cent of the world market in drugs (beneficial, ineffective and lethal), faked parts and copies of branded products, to an aggregate value of some $500bn (288bn, euro428bn) a year.
lPirates distribute tens of millions of illegal copies of DVDs, software and books.
l Money-launderers pass perhaps as much as $3,000bn through the world's financial system.
What unites these activities is that they are immoral, illegal and highly profitable. Today's world makes very valuable a host of things that cost little to supply. Intellectual property right regimes turn goods that are cheap to make -- a medicine, a DVD or a bootlegged software programme into items of high market value. So do prohibitions on the sale of narcotics, arms, endangered species or the services of prostitutes. So, again, does the cachet of Luis Vuitton or Rolex.
The biggest underlying source of opportunity, however, is the combination of borders with the ease of crossing them. What makes borders permeable is licit commerce, legitimate movement of people and new communications technologies. All countries are now neighbours. What makes borders economically significant is the gulf in real wages and incomes across them. These gaps create huge incentives to move people, providers of illicit services, such as prostitution, and highly demanded, albeit illegal, products, such as narcotics, across borders.
It is Mr Naim's contention that dynamic entrepreneurs have been seizing these opportunities on a growing scale. "For if nature abhors a vacuum and greed is part of human nature, then greed too abhors a vacuum. That is why profit opportunities never go untapped for too long, not even when it is illegal to seize them."
Since the early 1990s, argues Mr Naim, illicit trade has transformed itself: it has grown immensely in value; it has extended its scope in terms of both products and activities; and "the different illicit trade specialities of old have come together, with brokers and intermediaries taking the ascendancy over suppliers".
Illicit trade intertwines closely with licit activities. This is most true of money laundering. The abolition of exchange controls, more competitive financial markets and information technology have all made money laundering easier. Floods of illicitly earned wealth flow not just through offshore financial centres, but through London and New York as well.
Illegal activities do not merely subvert governments, but have, in many cases, become their principal businesses. Transdniester, an enclave of Moldova, is "a family-owned and operated criminal smuggling enterprise", writes Mr Naim. He lists parts of Colombia, Russia, Afghanistan, Mexico and many places in Africa and Asia as locations where "traffickers of illicit goods who are connected to larger global networks have a defining role in economic, political and military affairs".
How, if at all, are the growth in illicit trade and its most malign consequences to be managed? I stress "managed", not eliminated. One must start with a truth: as Mr Naim notes, "no government agency can fight the law of gravity". If millions of people are desperate to buy and millions more desperate to sell, the trades will happen, whether we like it or not.
The first response, then, is to stop indulging in unbridled moralism and concentrate on harm reduction. It is what most states have, rightly, decided to do with alcohol. It is what they should do with narcotics and prostitution. We should focus efforts on the most harmful trades -- nuclear proliferation or large-scale coercive trafficking in children and women.
The second response is to abandon infantile "wars" on suppliers. There is no war on drugs. There is, instead, a war on poor suppliers that raises the profits to be gained from the trade.
If illicit trade is to be reduced it can only be by lowering its profitability. If one wanted to halt illegal immigration of workers, for example, the only plausible mechanism would be harsh penalties on those who employ them.
The third response is to design enforceable property rights. Regimes that reward inventors with temporary monopolies will, for example, be unworkable if the monopoly cannot be protected.
The fourth response is to make governments work better. We have to "defragment" bureaucracies, both within countries and among them. We must also make international co-operation more effective. To achieve that we must be more successful in tackling state failure, capture of weak states by criminals and pervasive official corruption.
Mr Naim reminds us, rightly, that the profit motive is universal. So, then, are the forces that underpin all illicit trades. Tighter barriers to supply of undesirables are not themselves the solution; by raising the return to circumvention, they are, too often, the source of the problem. Since we cannot compel universal virtue, we must concentrate our efforts, instead, on reducing the profitability of the trades that are most destructive. Not least, we must recognise our enemy: he is not "them"; more often, he is us.
Under syndication arrangement with FT

 

 
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