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The Capitalist | Are economic strength and moral values somehow connected?

The Capitalist | Are economic strength and moral values somehow connected?
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First Published: Wed, Mar 18 2009. 10 53 PM IST

Updated: Wed, Mar 18 2009. 10 53 PM IST
What makes a country strong? Is it merely economic growth? Or are there factors that go beyond mere finance?
Also See Corruption and the Strength of Nations (Graphic)
It could possibly be all of them. However, there does appear to be some connection between economic strength and moral values. In fact, that is what one is led to believe if one looks at some of the numbers given in the table. The analysis covers the least corrupt companies as ranked by Transparency International, as well as five countries that are relevant to the emerging world order: the US (the wealthiest country in the world), China and India (the future engines of growth for the world), Russia (the dark horse which could still trump every other country), and Germany (the powerhouse of the European Union).
Look at the per capita gross domestic product (GDP) of each of these countries and then compare it with the purchasing power parity (PPP) GDP as well. The ratio between these two numbers points to the strength of the nominal GDP compared with PPP. It does appear that this ratio corresponds very closely to the corruption rankings as well.
In almost all the countries listed in the table, this does appear to be the case, except, may be, for Singapore, where the per capita PPP is higher than the per capita GDP, even though it ranks among the least corrupt countries along with Finland, Switzerland and Germany. Does that mean the Singapore currency is undervalued, which is why the PPP of this country is higher than the actual GDP in nominal terms?
Some economists believe that a higher PPP number (compared with GDP) could actually be a reflection of both corruption, which weighs down the local currency substantially, as well as the over-exploitation of labour. Thus, labour gets paid less in countries where PPP is higher (than GDP) than in countries where that is not the case. That, they say, is also a form of corruption where labour is not allowed to get its due, both in terms of wages as well as social security benefits, including decent medical support and schools.
Either way, India fares poorly on both the corruption index as well as the ratio of GDP to PPP. It appears to boil down to terribly poor governance, and a willingness to both exploit people and to squander their money.
Clearly, India’s policymakers have a lot of explaining to do.
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Poor governance? You bet it is
Suddenly, the taint of poor corporate governance is not merely on Satyam Computer Services Ltd, but also on the government of India. The focus is now on India’s public sector units that are listed. The government allowed them to get listed partly to raise funds as well as to push forward its liberalization agenda.
Unfortunately, many of these companies—such as Oil and Natural Gas Corp. Ltd (ONGC) and Bharat Petroleum Corp. Ltd (BPCL)—are still treated as government departments, without any regard for corporate governance. This is what Goldman Sachs analysts Nilesh Banerjee, Kartik Bhat and Durga Dath also said in their report. Their remarks were mild, but the government felt stung. It claims that it had publicly disclosed these facts and, therefore, could not be accused of corporate misgovernance.
Somehow, the government’s spokespersons appear to have misunderstood the meaning of corporate governance.
Huge drain: An IndianOil petrol pump in Orissa. State-run refineries sell products at a discount to market rates to keep inflation under check. Indranil Bhoumik / Mint
Take the facts: ONGC sells crude oil to government-controlled refiners such as Indian Oil Corp. Ltd (IOC) and BPCL at a discount to market prices to minimize the losses these refiners would suffer primarily because the government wants to offer items including kerosene, petrol and diesel at subsidized prices to consumers. Unfortunately, the subsidies are often greater than the discount at which these refineries get the oil from ONGC. Usually, these “losses” are “reimbursed” by the government by offering the refining companies oil bonds of equivalent value, but which they have not been able to encash easily. Had these oil bonds been encashable, these oil refining and marketing companies would have enjoyed better market capitalization. Likewise, by forcing ONGC to sell oil at a discount, its shareholders were deprived of their earnings.
As Ajay Jugran, managing partner of Lawcombine, a Gurgaon-based law firm, puts it, the Securities and Exchange Board of India (Sebi) committee on corporate governance “drew from the Gandhian principle of trusteeship and the directive principles of the Indian Constitution, and defined corporate governance as ‘the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders’. Therefore, while decisions taken with requisite majority may be legal, it would not suffice for a company to claim adherence with corporate governance by merely disclosing majority decisions as fait accompli for the minority to accept or sulk about, particularly where the majority decisions belie business sense or are based on extraneous considerations bordering on the political”. It would be like declaring, “I shall rob you”, and then claiming that since the disclosure has been made, there is no case for impropriety.
Legal experts also talk about the need to rigorously enforce the convention of not allowing voting rights to parties whose own interests are being debated. Normally, at board of directors’ meetings, those directors who have a personal interest in a resolution that is being considered are not allowed to vote. The same convention should be made applicable to shareholders as well, because brute majority without protection of minority shareholders’ rights can result (and has resulted) in daylight robbery.
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At a loss to explain huge forex outflow
Like India, China too is no longer a stranger to sharp forex outflows. Last week, researchers at Standard Chartered Plc. were at pains to explain a sudden and severe foreign exchange outflow in the fourth quarter of 2008.
The amount is large—close to $240 billion (Rs12.32 trillion now)—and has still not been fully explained. It came to light from the recent data released by the US Treasury in January, and could most probably be due to trade financing, says ‘Euromoney’. Since the government was involved in such deals, the need to keep this under wraps is not surprising.
This could be another lesson for India’s government-owned trading firms such as MMTC Ltd and Food Corporation of India. It further underscores the old Gujarati saying: Jyan raja vepari, tyan praja bikhari (Where the king is a trader, his subjects get impoverished).
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
Graphics by Paras Jain / Mint
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First Published: Wed, Mar 18 2009. 10 53 PM IST