Accountability in a time of excess

If any lesson is to come out of the current financial crisis, it is that the pipedream of corporate social responsibility needs to be shelved.

By all accounts, the mood at the customary annual gathering of corporate movers and shakers at the Swiss ski resort of Davos in late January and early February was sombre, even funereal. Public sentiment outside was turning restive, as tough questions were being posed about the turmoil in the world economy. And the conclave, which has had little difficulty all these years recycling the same nostrums as the solution to all problems, for once had no answers. It could warn against the dangers inherent in abandoning the free-enterprise model and pour subtle disdain at the undeniable drift towards economic nationalism. But it could not quite come up with a credible antidote for the economic woes that were an obvious outcome of the hard-edged pursuit of the free-enterprise model.

India had the stellar representation at Davos 2009 that it has in recent years become used to, consistent with its status as a country with a fast-growing tribe of billionaires. India also had the confidence that the shockwaves emanating from the US – which has rapidly transformed itself from global economic leader to the capital of chaos – had not yet dealt their full impact on its shores. But it just narrowly managed to avert a major public-relations disaster. B Ramalinga Raju, the former chairman of the once globally toasted enterprise, Satyam Computer Services – now the first in India to be caught using the creative accounting that was once thought to be the exclusive province of US corporations – had been scheduled to address a Davos session on the education of new entrepreneurs. What he might have taught them must, unfortunately, remain in the realm of speculation, since Raju had to make a detour into one of Hyderabad's most prominent jails, where he has since been detained to answer the charges of fraud to which he has already admitted.

Sifting through Raju's messy accounting will take many months, and there will remain the task of redressing the losses suffered by numerous investors who were taken in by the hype surrounding Satyam. That was one form of social commitment that Satyam did display: to enrich the small investor, who puts his meagre savings into the scrip and is handsomely rewarded in quick time. Those who dumped their Satyam holdings in time cashed in, but far too many have been left holding worthless paper. As such, the company's net contribution to social welfare has to be counted as negative.

The other kind of social commitment was also important, by which Satyam ploughed in a part of its annual profits into overtly charitable activities. Typically for an Indian company that sets great store by its lineage, the charity was named after the Raju paterfamilias, and represented as the fulfilment of his ideals. And in the case of the Byrraju Foundation, the ideals were, quite simply, "to build progressive self-reliant rural communities". As the Foundation's still-extant website puts it, the idea was to adopt "a holistic approach", which would involve "services in healthcare, environment, sanitation, primary education, adult literacy and skills development". The Foundation ostensibly worked, at the time the website was last updated, in "200 villages in 6 districts of Andhra Pradesh … positively transforming the lives of nearly 3 million people".

The annual budget of the foundation has been in the range of INR 300 million, of which the Raju family has contributed roughly half from the profits that its companies earn. What, then, is likely to be the status of the transformative experience that "nearly 3 million" people have undergone as a consequence of the Raju family's munificence? First, it needs to be asked how far these were designed for sustainability, rather than as a means of gaining a tax break and simultaneously acquiring a social aura. Second, questions could be raised about the reality of the "transformation", since it has been financed through funny money and accounting fraud. Finally, the public needs to know whether Satyam's experiments in corporate social responsibility will now have to be retrieved from the dust, through government intervention and an infusion of tax-payer's money.

Internalising externalities
Corporate and private philanthropy became a matter of public interest just when the fundamentals of economic policy were beginning to alter. Early thinkers on development believed that redistribution of assets was a basic requirement for both efficient growth and equity; there was no conflict seen between the two. Over time, when the actual experience was evaluated, it was thought that equity often worked at cross-purposes with the efficiency imperative. Rather than seek to transfer as much of the national pool of savings into its coffers, the government, it was thought, would be better advised to leave more of the social surplus in the hands of those who earn it. Aside from ensuring efficiency, this would also, given the right kind of incentives, encourage private contributions to the creation of social infrastructure and human capital – activities that were conventionally considered to be alien to the interests of private enterprise.

Since this new tack on development came to be accepted, there has been a burgeoning of wealth and income at one end of the global scale. Those that already have, have been treated generously. A case has been made, with great persistence, that the years of so-called globalisation have made a significant dent in poverty, though this is far from being agreed. There is, however, little dispute over the reading that inequality has increased enormously, both between countries and within them. The rich have indeed become vastly richer.

Rising inequality did not become a touchy political issue so long as the overall momentum of growth was sustained. But today's impasse in the growth process, and the evident confusion that it has engendered, make a reassessment imperative. This is all the more urgent since the promised turnaround in public revenues from the growth of the private sector has not quite materialised. The ratio between taxes and gross domestic product in India fell during the early years of globalisation, and recovered marginally in the early years of the new millennium. It has since resumed a downward course. Meanwhile, public expenditure in all vital social sectors – education, health and infrastructure – has languished at near the levels prior to globalisation, or well below.

Though briefly eclipsed in the years following World War II by the imperatives of the welfare state in one quarter of the world and the developmental state in another, the belief that the freedom to do business is the fundamental requirement for human progress has re-emerged as the dominant global philosophy over the last two decades. This is an axiom purportedly handed down by Adam Smith, the widely revered founder of modern economic theory, though we will have ample reason to question this belief as we go along.

Among the early caveats entered in the story of private enterprise was the notion of 'externalities'. Every economic agent's actions involved certain events and occurrences that lay outside his range of interests and capacities. For instance, the pollution that a factory emits would be a negative externality. The private agent would have no incentive or reason to tackle this externality, since it would increase his costs without adding anything to his economic gains. Today, climate change is the externality that confronts human society on a planetary scale, underlining the fact that some form of social control is not just necessary, but a survival imperative. There are also positive externalities – or unintended social benefits – arising from an individual agent's actions. These include, for instance, the employment generated in a backward economic region or a contribution to the development of economic infrastructure. Clearly, these would be in need of encouragement.

The way forward, then, was very clear. Leave private enterprise to its devices, but tax the negative externalities and subsidise the positive ones. Over the following years, this minor caveat entered into the free-enterprise model merged with the economic doctrine created by John Maynard Keynes, to create the basis for a new orthodoxy: that public intervention in investment and savings decisions was not merely desirable, but necessary to keep a free-enterprise economy on even keel. In addition, it was seen that without the guiding hand of taxation and public spending, the natural tendency of the laissez-faire economy would be stagnation and unemployment.

There were disgruntled murmurs from the margins, of course. But few serious questions were raised about tax rates as high as 90 percent levied on the top income brackets. Contrary to the urban myth that is widely circulated within corporate India, this seemingly extortionate rate of taxation was not the unique preserve of the fashionably named 'licence-permit Raj' in the country. It was also a part of the US system, the ostensible capital of free enterprise.

Then, around a quarter-century back – beginning with the Ronald Reagan-Margaret Thatcher counter-revolutions in the West – common sense began to be submerged in a reawakened fanaticism of the free market. Suddenly, the government became the root of all evil. It was accused of taxing indiscriminately and sapping the private incentive to invest and innovate. In pursuit of cheap political popularity, it directed valuable tax revenues towards wasteful schemes. It gouged honest effort only to subsidise sloth and dependence. This attack on the principles of the welfare system in the North and the developmental state in the South successfully accomplished a retrogression in human thought by a century, to the ill-remembered days of Social Darwinism. The central policy initiatives resulting from this counter-revolution were a sharp cut in taxes, tilted towards those at the upper end of the scale of wealth, a hike in the compulsory payments required from the working class for the sustenance of the social welfare system, and a cutback in public expenditure in areas that were deemed better served by private enterprise. Though pioneered in the US and the UK, this philosophy was eagerly embraced by acolytes in the developing world, including India.

The full-blown implementation of this agenda was qualified by a recognition that political turmoil would be an inevitable consequence in the developing countries. Governments in these countries were careful to maintain a rhetorical commitment to high levels of spending in the social sectors, though this was seldom matched in practice. Where government efforts fell short of social needs, though, the newly empowered corporate citizens were expected to step up and do their bit. The outcome in India has, needless to say, been dismal. And now, with the free-enterprise model conspicuously failing to deliver what it is ostensibly best equipped for – high levels of economic growth – there is ample room for scepticism about how far it can be trusted for delivering on human-welfare needs.

Everyday excess
Looking back on the doctrinal foundations of the free-enterprise model – as also the axioms of corporate philanthropy – is to understand how theory is often subverted to suit contingent political interests. Adam Smith is widely believed to have been the father of the notion that the free-enterprise economy has a natural tendency towards maximising social welfare. The truth, however, is quite different. Smith was among the most unflinching observers of the cruelty of the free market towards those without means. As he put it in an early draft of the Wealth of Nations, the wage labourer who "bears, as it were, upon his shoulders the whole fabric of society, seems himself to be pressed down below ground by the weight, and to be buried out of sight in the lowest foundation of this edifice."

The Wealth of Nations, as finally published, is replete with passages that affirm – without being quite as graphic – the virtual impossibility that the free market will ever ensure a fair bargain for the wage earner. But in sorting out this moral dilemma, Smith chose to put his faith in the progress that bourgeois society, at the time, seemed unmistakably to be showing. His reasoning, though framed in endlessly circumlocutory passages and much tortuous prose, is relatively simple. Bourgeois society was ruthlessly exploiting the working class, but it was also building some durable social assets for future generations. The enhancement of social productivity would be its own reward. And, in the short-term, the cynical exploitation of those without means was perhaps a necessary evil, because it held out longer-term prospects of better opportunities for all.

Over time, it became apparent that the thrift and diligence of the businessman alone was not sufficient to ensure the welfare of the broader mass of society – nor, indeed, for securing long-term social stability and prosperity. This is where the 'welfare state' principle stepped in, with its commitment to redistribution through progressive taxation. Among the other features of the welfare state was a mandatory arrangement by which active members of the workforce today would pay for the welfare of senior citizens, as also set apart enough from the national pool of savings to provide for themselves in their years of retirement.

A wide range of arrangements was put in place to make these principles practically realisable. But it does not take much to understand that the consumption boom of the last two decades – financed by running down capital and running up debt – has seriously undermined all the premises of this model of the welfare state. Rather than savings, innovation and accumulation, which were the principles of the bourgeois society that Adam Smith celebrated, the last two decades have enshrined excess. Where once it would have been considered the height of folly to sell the family silver to pay grocery bills – for an individual, a household or for a government – by the late 1990s it seemed permissible to sell one's own dwelling not once but twice and thrice over, just in order to meet everyday expenses.

The burgeoning of debt across governments, companies and households inevitably takes a bite out of future generations' prospects and possibilities. The low-taxation regime of the decades of globalisation, far from contributing to greater thrift and investment, has succeeded in mortgaging the future. And corporate social responsibility, which was fashioned as the grand antidote for all of the failings of public policy – and a sure pathway towards social merit for private entrepreneurs – has been as insignificant in relation to the problems it was designed to deal with, as the proverbial drop in the ocean. Its pretensions have evaporated even faster than the plunge in global stock markets.

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Himal Southasian