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American businesses may say they believe in democracy, but they are not putting their money where their mouth is, according to a report by a Washington-based think tank. Democratic countries in the developing sector, such as Poland and South Africa, are losing out in the race for American export markets and American foreign investment. Dictatorships such as China or semidictatorships such as Indonesia are winning. And the trend is growing. As more of the world's countries adopt democracy, more American businesses appear to prefer dictatorships. If trade and investment strengthen developing countries, then U.S. businesses may be weakening the very countries they say they most want to help. These are the conclusions of a report recently released by the New Economy Information Service (NEIS), a think tank set up to gauge the effects of globalization. 

"The democratic countries in the developing world are losing ground to more authoritarian countries when it comes to competing for U.S. trade and investment dollars," NEIS said. "This finding," it said, "raises the question of whether foreign purchasing and investment decisions by U.S. corporations may be inadvertently undermining the chances for survival of fragile democracies." NEIS compiled the report using U.S. government and World Bank figures on >trade and investment. It borrowed political ratings compiled by Freedom House, a human rights organization that ranks countries as "free," "partly free" or "not free" based on the level of their political rights and civil liberties.

In 1989, when the Cold War ended, democratic countries accounted for more than half--53.4 percent--of all U.S. imports from Third World countries, not counting oil. Today, with more democracies to choose from, the democratic countries supply barely one-third--34.9 percent--of U.S. imports from the Third World, it said. After the same decade, democracies got 28 percent of American manufacturing investment in developing countries, up from 26.2 percent when the Cold War ended. This slight improvement--1.8 percentage points-- paled beside the 5.7 percentage-point growth in U.S. investment reported by dictatorships, especially China. 

China, which ranked 18th among recipients of U.S. investment in 1989, is in fourth place now, ahead of long-established democratic partners such as Argentina and South Korea. The NEIS report asked why dictatorships are outbidding democracy for the American market, but said it does not know. "We are left with as many questions as answers," the report said. "Something is going on, and it's worth pursuing," said NEIS Executive Director David Jessup. "We can't say that U.S. businesses have an absolute preference for authoritarian countries. I doubt that the issue of democracy-or-no-democracy is on businessmen's minds when they make an investment decision. But maybe it's an unconscious preference." 

Wages tend to be lower in dictatorships than in democracies, giving businesses in dictatorships an advantage on selling exports abroad. The investment question is more complex than that, Jessup said, but the report suggested a combination of factors--lower wages, easier environmental laws, bans on labor unions--that give dictatorships an edge. Such rulers tend to be strong leaders who can provide quick decisions, deliver results and stamp out opposition. These qualities can appeal to many business leaders, who themselves operate in a non-democratic structure. 

When Indonesia overthrew its dictator, Suharto, and installed a less authoritarian leader, investors tended to sit on their hands. One currency expert, Ron Leven of J.P. Morgan, was quoted as saying that "democracy is a desirable form of government, but it's not necessarily the most efficient form of government." There is an "amorality" here, said Thomas I. Palley, assistant director of public policy at the AFL-CIO and a member of the NEIS team. "Profits and morality don't mix very well." 

Palley noted that dictators, not having to answer to voters or a legislature, can often deliver investment incentives--such as tax breaks, freedom from environmental laws and a docile work force--that are powerful lures for foreign corporations. But the U.S. government is part of the reason democracies come up short in luring investors, Palley said. "It says that, if you deal with these guys (dictators), you make them more open. This provides the moral reasoning that businessmen want." 

The result is a boom in investment and trade with China in the interest of "engaging" the Communist regime there. Four countries--Brazil, Mexico, Malaysia and China--account for 67.6 percent of all American investment in Third World manufacturing. According to Freedom House, China is "not free" and the other three are only "partly free." Meanwhile, such "free" countries as Taiwan, Thailand, Chile, Costa Rica, the Philippines and Bulgaria lag far behind. Because of Mexico and Brazil, the "partly free" countries lead the other two categories among America's economic partners. 

Over the past 10 years, both the "partly free" and "not free" countries have gained in their share of the American market, NEIS said, while the "free" countries have gone steadily downhill. If these countries' share of Third World exports have slid from 53.4 percent to 34.9 percent, their share of high-profit manufactured exports has fallen even further, from 56.7 percent in 1989 to 35.1 percent now. It is not as though there is a shortage of democracies to do business with. According to Freedom House, 24 countries--including such Central American neighbors as Panama and El Salvador and ex-Communist industrial nations such as Poland and the Czech Republic--have become "free" countries in the past decade. Another 22, including Russia and Ukraine, have moved up from "not free" to "partly free."

Sooner or later, every self-righteous person comes to ruefully acknowledge that trumpeting one's own virtue is a dangerous business. Anything moral braggarts do, or have done, invites scrutiny. Inevitably, human nature being fallible, something comes to light that exposes them as posers. The socially conscious investing (SCI) movement has long been a good illustration of this, as we are reminded by a lawsuit just launched by Ethical Funds Inc., a Vancouver-based mutual fund company that champions SCI in Canada. Several SCI funds have the major banks among their top holdings.

What happened to the moral outrage about banks closing neighbourhood branches and paying excessively high salaries to their CEOs? Nortel Networks has operations in Indonesia, whose government has spent the past 25 years butchering the East Timorese, and was kept off a 1997 Financial Post list of the top 50 ethical companies because of its interests in Burma, another human rights violator. Yet the biggest SCI fund in Canada, Investors Group's Summa, has profited immensely from Bell Canada Enterprises which, until its recent spin-off announcement, has been committed to holding a 48% stake in Nortel.

What's your opinion of these two cynical articles? Will we ever escape from our bondage to the "bottom line"? Can we ever hope to mobilize "shareholderpower" for ethical purposes?