Letter to the Editor

Marching toward a Global Business Standard

The latest issue of Transition (February 1998, p. 113) featured a number of articles dealing with the effects and lessons of Asian development. Some personal reflections: While the crises in Thailand, the Republic of Korea, and Indonesia certainly have common elements—most notably the marked absence of Western-type standards of corporate governance, transparency, and business regulation—their stories are quite distinct. The Thai case exhibited a classic “mania” or “bubble”; Korea, the crash of a headlong export drive that too often ignored profitability; and Indonesia, widespread corruption that underscored profound political problems. 

Why did the other East Asian countries (including Malaysia) do better than this afflicted trio? Largely, I think, because the institutional frameworks within which businesses operate are reasonably congruent with what I would call the “global business standard.” This includes the rule of law, disclosure requirements, conflict resolution, auditing, the treatment of minority shareholders, and so forth. Not since 1914 has trade been so free and capital so mobile. In gauging risks and rewards, investors pay great attention to the degree to which each country’s institutional environment approximates this global business standard. Expectations of boundless market expansion may lead investors for a while, and often for years, to do business where institutions clearly do not meet the global standard. But the crisis shows that idiosyncratic corporate governance brings with it serious risks, and that these risks are being perceived more clearly now, as other parts of the world—for example, Latin America—move closer to the global standard. 

The record of economic and business performance shows that the global business standard is a powerful underpinning for job and wealth creation. I believe that the standard may become a twenty-first century analog to the gold standard of the nineteenth century. The increasingly prevalent standard may seem to be the hallmark of a ruthless system that penalizes the populations of countries whose governments choose not to conform. No doubt, pressures for more impersonal, more transparent rules of the game will be resisted. The Korean chaebols are likely to resist change every bit as forcefully as do some of the newly privatized former communist enterprises. And in China, resistance to the transformation of state enterprises is intense. But market pressures to meet global standards will not relent; indeed, they will intensify, and the winners will be companies and countries that move away from their idiosyncrasies. As this happens, not only will improved corporate governance increase prosperity: governance, in the broader, national sense, will benefit. 

Meeting the global business standard need not demand political homogeneity. Indeed, the pressure to meet this standard will fuel political reactions. But while assertive nationalism is likely to continue to be part of everyday life in the next century, it might not preclude simultaneous progress toward better institutional business frameworks. 

Three additional thoughts: 

1. The current crisis is a painful but perhaps salutary wakeup call: it may shock Thailand, the Republic of Korea, Indonesia, and other countries into creating more impersonal, transparent, institutional frameworks. 

2. Another possible benefit of the crisis is that it has put a dent in the notion that authoritarian and corrupt regimes should be acceptable when they “deliver the goods” in terms of economic growth. Transparency and authoritarianism seldom go together. 

3. The global business standard will test not only the governments of developing countries but all governments that are wed to idiosyncratic institutional frameworks. The crisis sends a message to Japan and Europe as they struggle with their structural problems. 

And now a “pop sociological” note about the role of lawyers in the coming century. Cultures exhibit different styles when dealing with economic and business issues, and thus leaders from different occupational streams are at the center of the decision-making process. In Germany these will be bankers; in France, graduates of grandes ecoles, usually with an engineering bent; in China and in Russia, engineers; in Japan, administrator graduates of Tokyo University; in Korea, perhaps the military. My point is that the global business standard approximates Anglo Saxon best practice and in Anglo Saxon countries, in the United States in particular, no important decision affecting business could conceivably be made without the central involvement of lawyers. Hence, my conclusion: as governments and corporations move closer to the global business standard during the next decades, lawyers are likely to play an ever more prominent role worldwide. 

Guy Pfeffermann, Director of Economics Department, International Finance Corporation.