The author is coordinator and member of the Management Collective of Action for Economic Reforms.
In his syndicated column titled “Reckonings,” Paul Krugman quoted the now-classic statement of Gordon Gekko, the cunning corporate raider in the movie Wall Street: “Greed is good. Greed works, greed is right…and greed, mark my words, will save not only Teldar paper but the other malfunctioning corporation called the USA.” That statement is real-world stuff. Wisely unstated (as befits shrewd business), such greed lies at the core of the behavior of many corporate executives who aggressively pursue super-profits for themselves and for the companies they run. Although Gekko’s line has punch and has become very quotable, its message is not new. It merely echoes a basic creed of liberal economics that the “unrestrained rivalry of egotism” is good not only for the individual but for society as well.
But the unregulated pursuit of selfish interest has led to an increasing number of brazen business abuses (the Enron scandal being a prime example) and the widening gap in incomes between the super-rich and the poor. The public has also demanded that the private sector conduct business in a way that is sensitive to the environment, core labor standards, human rights, and the provision of other public goods. In short, the private sector is facing strong public pressure to become socially responsible. Corporate social responsibility (CSR) has become a new buzzword.
STATE regulation AND voluntary action
Some corporations exercise CSR to gain advantage over their competitors. Perhaps because a growing number of consumers, especially in developed countries, seriously take into account CSR concerns.
But it is naive to think that corporations by themselves can reform and exercise social responsibility. And though CSR should be driven by voluntary action, public policy is instrumental in shaping corporate behavior. As Mary Robinson, United Nations High Commissioner for Human Rights, once said: “Voluntary initiatives are no substitute for government action.”
This is not to say that voluntary action and government regulation are poles apart. Public policy can create conditions for self-regulation to flourish. Similarly, voluntary action can lead to the institutionalization of best practice in the public realm. The challenge is to bring out the “complementary synergies” of voluntary action and government regulation.
The common perception is that corporations are greedy. But we can also grant that corporations (and individuals) have “fellow feeling.” Adam Smith in The Theory of Moral Sentiments points out that rational man has two sets of propensities: The first is that of “fellow feeling,” which is the propensity to be social. This however is constrained by the propensity to be selfish. In the Philippine context, a “socially irresponsible elite” (a term fondly used by columnist Calixto Chikiamco) predominates the entire social fabric. Such propensity requires the creation of the “rules of justice and the rules of morality.”
Limited State Agenda
Under present conditions, setting the rules to make corporations socially responsible is bound by a “limited state agenda.” We can cite three factors, off the bat, that account for the “limited state agenda.” The first is globalization. Tension exists between economic integration on the one hand and national sovereignty and social cohesion on the other hand. For example, intensified global competition predisposes the National Government to think twice before it upgrading social and environment standards lest these be seen as disincentives by current and would-be investors.
The second is a recognition of some objective or intrinsic problems concerning collective action. Arguably the biggest obstacle is the inadequacy of information together with the high cost of obtaining the relevant information. Interestingly, market mechanisms and outcomes are also hindered by the information problem.
The third factor is country-specific: The Philippine state is weak. Elite factions dominate the state to serve their narrow interests. In the process, the rules of the game are broken and enforced without fairness.
That the Philippines is a soft state should not mean that we should just give up and forget about overhauling the Philippine state. Some have offered a seemingly appealing argument that liberalization (as well as its corollary of a minimalist state) is the preferred strategy since the state is hopeless. But this makes things worse: The state is left to deteriorate even though liberalization makes it imperative that we have strong regulatory institutions.
Putting in place competent and fiercely independent regulatory institutions is a necessary condition to induce responsible corporate behavior. This will continue to be a protracted process, for many regulatory agencies are either captured or immobilized by the elite.
Moving away from a soft state to a hard state will pass through stages. It is politically feasible in the immediate term for the state to play a facilitating role in strengthening private sector self-regulation. The advantage of self-regulation (or, to use the jargon, market endogenous regulation) is it suits the environment of dynamic change, innovation and learning by doing.
The State as Facilitator and Enabler
But with an entrenched “socially irresponsible elite,” self-regulation can become effective only if the state shows its credibility and capability to check private sector abuses. To put it another way, even within the context of self-regulation, the state must always be ready to summon its powers, including coercive ones, to punish bad behavior and civilize the market.
At the minimum, a necessary condition for effective self-regulation is an environment of enhanced rules on corporate information disclosure. The companies should, for instance, be required to report on their implementation of social (including labor) and environmental standards. Barriers to citizens’ access to relevant information must likewise be dismantled.
Building a strong consumer movement is also urgent, but this is mainly the responsibility of civil society. We should however guard against “civil society failure.” Recent experiences have shown that a few civil society organizations are themselves guilty of political partisanship, rent seeking and/or populism. What is alarming is that consumer advocacy on a few critical occasions has been hijacked by vested interests.
The scope of the “limited state agenda” is not that rigidly defined. It can be the minimalist paradigm as first articulated by the classical liberals and now pursued by the Washington Consensus. But like a rubber band, it can be stretched to include activist types of intervention such as reducing income inequality, creating safety nets, promoting technology and protecting the environment. A state agenda on CSR should take into account the types of interventions enumerated above.
Policy Tools
Economic policy instruments also serve CSR goals. In this regard, the government must pay more attention to incomes policy and industrial policy. Incomes policy is an appropriate means to address CSR concerns, especially on protecting labor and consumers. Also under the rubric of incomes policy is the state’s role in facilitating social dialogue, even forging a social contract, involving business, labor, and civil society in general. A well-crafted industrial policy can create backward linkage that will benefit small and medium enterprises. It can have a decisive impact on the generation of employment and the promotion of social equity.
Incomes policy and industrial policy are integral parts of managing the economic fundamentals. Yet, the government no longer uses them in a conscious and coherent way to meet macroeconomic and development objectives. Apparently, the neo-liberal model has made incomes policy and industrial policy unimportant.
Fiscal policy appears to be the least controversial instrument in promoting CSR. Specifically, fiscal incentives are given to private entities that contribute to positive externalities.
But even here, the government needs to exercise caution. Giving generous tax incentives can upset the government budget and lead to fiscal degradation. Not all socially responsible actions of the private sector have to be reciprocated with material awards. The government must always appeal to the private sector’s propensity to “fellow feeling.” Business has to be reminded that it is the driver of CSR.
This brings to mind the story of a former director-general of the National Economic and Development Authority (NEDA) who was approached by a business club that proposed to provide basic education in exchange for tax credits. The former NEDA head was appalled since this association maintains the public image of “enlightened business.” Quietly, he concluded – based on that one and other similar experiences – that so-called enlightened business is just another variant of the socially irresponsible elite.
The path of true CSR in the Philippines – an uphill one at that – must be relentlessly built, even if incrementally. This paper has surveyed a wide range of policy options to promote CSR. The danger with a long list is that it can overwhelm and confuse the policy makers and the reformers among them. One should desist from using simultaneously all the approaches and instruments in a limited time frame.
In practice, the required set of policies is narrow. The challenge is to identify the key link, and the rest will be a matter of sequencing. On a general plane, what we know is that the right mix of regulation, incentives, voluntary action and even direct state action will shape the “rules of morality, justice and other virtues” to impel the Philippine elite towards genuine social responsibility.