How Business Can Affect Public Policy by John Sallivan

 by John D. Sullivan

John D. Sullivan is the Executive Director of the Center for International Private Enterprise.

Around the world, countries are undergoing transitions to democracy. Although the pattern of democratic development can vary among countries, the democratization process in each fundamentally changes the relationship between business and government.

For example, in Mexico, the recent liberalization of elections has expanded the opposition parties` representation in parliament, thereby ending the domination of the executive branch over legislation and policy. As a result, small businesses that were often neglected during the process of policy development now have new opportunities to make their voices heard. Mexican firms and their business associations are rethinking the ways they represent their interests to government. Similar changes are also occurring in countries as diverse as Indonesia, Bulgaria and Nigeria.

Over the years, CIPE has worked with a variety of business associations and market-oriented think tanks as they have advanced the political and economic reform process in their countries. These experiences in developing a democratic form of business representation to government can impart lessons to other countries undergoing similar changes. Many of the experiences described below are explored in depth in CIPE`s Web site (http://www.cipe.org).

The interests of business

Business is not a monolith. In every country, there exits a considerable degree of difference in terms of interests and policy goals among various parts of the business community. Small firms have very different interests than large multinationals in areas such as labor relations, tax policy and health care. The degree to which business interests are fragmented into divergent camps based on policy issues, cronyism or other factors is one indicator of the degree of distortion in the underlying market economy.

One basic split divides firms that depend upon import protection from those that engage in international trade. In many countries, decades of protectionism have nurtured "hot-house industries" that cannot compete in world markets but enjoy advantages at home. The influence that bureaucrats enjoy under these arrangements fosters corruption. The result is a form of state socialism whose major beneficiary is a well-connected business elite that excludes genuine entrepreneurs and their employees.

Major differences also divide firms that remain in the public sector from those that have been privatized, as well as from those that were always private. Firms lingering in the public sector have incentives to continue lobbying for subsidies, protection and cheap credit. They often use their large work forces to exert pressure against reform. Conversely, private firms tend to support a more open and competitive economy and society.

A final type of split often occurs along the formal-informal or legal-extralegal dimension. In many countries, a vast array of firms whose pursuits are wholly respectable must nonetheless function outside the law.

These splits and others have important implications for how business can affect the policy process. In closed or authoritarian political regimes, a closely connected, crony-type firm has a major degree of influence. However, once an authoritarian regime begins to liberalize, the overall business sector may have many more opportunities to participate in the country`s democratic process.

Uniting business

Although every country and region is unique, businesses can come together to form a nearly unified position based on national goals and a common strategy. In some Latin American countries, business organizations have drawn their membership base from the small business community, companies engaged in international trade, or business leaders who wanted to invest in new technologies.

In a few countries--Nicaragua and El Salvador, for example--the economic situation had worsened to the extent that nearly all business people joined together in their opposition to the status quo, though they occasionally disagreed concerning their goals for the future. Their challenge was to unite many business persons and others in order to argue for opening the economy, reforming fiscal and tax policies, and implementing other fundamental changes.

In Mexico during the 1980s, COPARMEX, the Mexican employer`s association, was one of the few voluntary business associations. It opposed the government`s statist economic policies, as well as firms whose business interests were intertwined with the government and the vast machinery of the Institutional Revolutionary Party (PRI) which had governed Mexico for more than half a century.

Throughout the 1980s, COPARMEX was one of the few groups that lobbied for Mexico to join the GATT, implement fiscal and tax reform, and carry out a privatization program. Today, COPARMEX is the leader in public educational meetings for business persons concerning the role of business in a democratic society, communicating a public policy agenda, and the need for free enterprise.

As Latin America, the Philippines and other countries have abandoned import substitution and adjusted to the international market economy, business interests have had to adapt as well. According to Hernan Buchi, one of the architects of Chile`s economic reform program, some of the strongest opposition to the reforms came from the government-owned enterprises and firms engaged in business with the government. While Chile adjusted to market reforms, however, those firms, too, eventually adapted to the new system.

The public policy interests of business firms are not fixed permanently. Interests can shift dramatically according to changes in the overall economy, trends in domestic and international markets, and the actions of business leaders.

An interesting case of this type of change occurred in India leading up to and following the economic reform program begun under Rajiv Ghandi and deepened later by the innovative finance minister, Manmohan Singh. Several Indian businesses, especially the larger firms, resisted change and clung to benefits brought by the protectionist measures introduced under Nehru. However, some firms--particularly companies interested in entering world markets and dependent upon imports--began to call for change. Over time, the association of these companies began to grow, and, today, this organization is the Confederation of Indian Industry (CII, see Economic Reform Today No. 3 1997).

Tools to affect change

National business agendas. A common tool to affect public policy is a national business agenda. This agenda identifies policy reforms of the highest priority for the busi-ness community in the near term. The agenda specifies the reform in terms of laws and regulations and offers concrete suggestions for vital changes.

The key to the national business agenda is the notion of participation. For example, the Federation of Egyptian Industry is working on its national agenda that involves the following steps:

Analyzing policies and forming recommendations;
Meeting with members in open forums to discuss alternatives;
Publishing in the media to gain input from concerned parties;
Formulating policy reform programs;
Publicizing the agenda; and
Advocacy directed at the government, including the executive and the parliament branches.
Other business associations have used the national business agenda to build a common agenda for reform. The Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA) has used its agenda for several years to coordinate economic reform (see ERT No. 4 1998). In 1999, this task has assumed critical importance due to the country`s potential to open to democracy. Given the degree of pressure on NACCIMA from both Nigeria`s political transition and its continuing economic crisis, developing and publicizing the national business agenda demonstrates NACCIMA`s remarkable ability in the face of considerable hardship.

Legislative advisory programs. A legislative advisory program is another tool to advance an economic reform agenda. The Center for Economic Orientation (CEO) in the Dominican Republic launched this program in order to assist parliament`s decision-making process. As in other countries, the Dominican Republic`s legislators had few resources to analyze legislation: they had no personal staff and only meager committee staff resources.

As a result, the legislature was at the mercy of the government bureaucracy in terms of estimating the economic impact of legislation. CEO tried to overcome the problem of lack of resources by simplifying the language of formal economic cost-benefit analysis and publicizing it among legislators and the general public. The project has been extremely popular with the government and the public.

A number of business associations have adopted a similar type of program including, at various times, the Superior Council of Private Enterprise (COSEP) in Nicaragua, the Polish Chamber of Commerce and Industry, and the Confederation of Private Bolivian Businessmen (CEPB).

The following features can increase the effectiveness of a legislative advisory program:

Credibility. Each legislative advisory program should be based on sound economic analysis, and background papers should be readily available for technocrats and others to study carefully and critique.

Simplicity. Summaries should be written in clear language and stated in terms of the country`s general interests, as opposed to the interests of one particular group, such as business or labor.

Availability. Summaries should be printed and disseminated to a broad audience. Where possible, arrangements should be made with the media in order to provide even wider coverage.

Policy dialogue with government officials. In many countries, bureaucracies represent formidable obstacles to reform. In their attempt to affect public policy, business organizations should try to influence government personnel, as well as legislators.
For example, in India, although economic policy changes have been made, in state-level government officials need to be convinced that the reforms will benefit their communities before they will drop their entrenched opposition. The New Delhi-based PHD Chamber of Commerce has organized 31 business-government dialogues throughout northern India to reach state-level government officials, senior business people and academics. The seminars are held in order to:

instill a "can do" rather than "can`t do" attitude among government officials;
eliminate the "anti-profit" mentality from Indian politics;
expedite permits and licenses by creating one-stop shops in state offices.
While changing attitudes and mind-sets can only occur over the long term, the PHD Chamber has already reported some successes.

Coalition building. Strategic coalitions are another tool to promote reform. Transitional countries where business sectors are deeply divided have shown considerable interest in this method.

In Romania, the business sector and the business organizations are split along the lines discussed above. The International Center for Entrepreneurial Studies (ICES) developed an innovative program that formed a Strategic Alliance of Business Associations (SABA). During the course of their work, ICES`s experts found that most of the major business associations had become captive to either government-owned enterprises or to firms privatized by the former communist nomenclatura during the early days of transition.

Consequently, ICES began to work with individual entrepreneurs and found that several sectoral associations--such as software--and small business associations located in outlying areas of Romania were pushing for a market economy. However, they were individually weak and unaware of each other`s efforts. During a training program on management, the associations began to coalesce into a group of like-minded organizations with a common purpose. Today, SABA`s members are implementing a detailed legislative advisory program.

Making the case

How business crafts its case for reform can affect the likelihood of future success. Business must define issues within a broad theme that will attract popular attention. Job creation and economic growth are two examples. Currently, there are other highly visible issues--such as corporate governance and combating corruption--which attract a large following both among business persons and the public.

Corporate governance refers to the body of laws and regulations that defines the obligations and responsibilities of corporations` governing bodies. (See the articles by Stephen Davis and Institutional Shareholder Service in this issue for a more detailed discussion of the corporate governance.)

The concept of corporate governance has recently gained new visibility due to the convergence of several factors. In the United States, highly publicized failures in the savings and loan industry prompted demands for reforming boards of directors. In addition, the growing importance of institutional investors, such as pension funds, coupled with the increase in mergers and acquisitions, led to a new level of scrutiny of the performance of CEOs and outside directors. Finally, as more corporations began to realize the need to diversify their boards in order to reflect the changing role of women and minorities in society, they started to pay more attention to a host of issues related to recruitment and director roles.

However, it was the Asian and Russian economic crises that raised corporate governance to the first rank of public policy issues. The interlocking relationships among companies in South Korea, Indonesia and other Asian countries, coupled with the lack of standards and requirement for disclosure, were key factors that contributed to the Asian crisis.

The World Bank, the International Monetary Fund, international investors, and domestic constituencies are currently demanding change. Business organizations in many countries have a unique opportunity to step in and promote reform in order to help reshape the structure of their business environments. If they fail to do so, the environment may be reshaped around them in adverse ways.

Another strategy to advance economic reform is to combat corruption. Transparency International, an international nonprofit organization, is mobilizing a broad constituency behind efforts to reform government procurement systems by advocating a code of conduct for government purchases.

Other nonprofit groups are fighting corruption in their own countries. For example, the Ecuadorian Association of Businessmen (ANDE) recently launched an anti-corruption program that focused on the root causes of corruption. A survey of existing laws and regulations found that many of them were contradictory and overlapping. However, since Ecuador uses code law, courts were not empowered to revise or review laws. Furthermore, the use of court precedents in other cases is quite limited.

Therefore, ANDE proposed the creation of a new court by amending the constitution. It was successful in this effort due to strong public support for combating corruption. The new court is empowered to reconcile or revoke laws that contain conflicts and duplications.

To the extent that business organizations embrace efforts to combat corruption, they can find ways to advance significant policy reforms. The long-term cures for corruption must be found, in large part, by reducing the discretionary power of government officials.

The decisions that business leaders make concerning participating in and shaping the development of democratic institutions have far-reaching consequences. National business agendas, think tanks and other business groups can become major forces in establishing a pro-reform agenda that will shape their countries` business environment for the future.

Different strategies

ANDE`s anti-corruption program and PHD Chamber`s promotion of local-level reform will benefit their members as well as the next generation of business. Each firm and business association will decide on strategies and tactics in response to the kinds of challenges in its own country. As additional countries enter the global market and undergo transitions to democracy, it is becoming increasingly imperative that business leaders respond to these challenges.