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LETTER FROM THE EDITOR

Distant mirrors for US investors

Commentators in the U.S. press should not have been surprised by the Enron Corporation’s fraud scandal. To take one instance, renowned economist and New York Times columnist Paul Krugman said that Enron – far more than September 11 – would change the way Americans viewed themselves. “It told us things about ourselves that we probably should have known, but had managed not to see,” Krugman wrote.

The rest of the world has regarded US corporations with suspicion for years. In India, Enron is “the Devil,” according to a lawyer who follows that market.

Not surprisingly, therefore, People’s Democracy, the weekly organ of the Communist Party of India, provided a rundown of alleged crimes by the corporation and its cronies there, as well as in the Philippines, in the 1990s. Among other accusations, author Vijay Prashad suggested that an agent of the company had committed industrial espionage and paid bribes to ensure that Enron would win fat power-plant contracts.

Perhaps Prashad’s conclusion – that investigators in Washington “do not bother with this level of corruption” because Enron was acting as “a patriotic US entity out to create jobs for US workers and accumulate wealth to defer the costs of the US’s mercenary army” – is too dogmatic, unless you regard self-interest and profit-making as sins in themselves. Yet the point remains, if mainstream investors in the West would pay more attention to emerging markets – not just as indices for fund allocation, but as dynamic human societies in whose midst familiar “corporate citizens” operate – then they might gain deeper insights about the integrity and the standards of well known multinational firms.

I learned my lesson when I bought a blender at Egyptian duty-free that bore the same German brand name, even the same model number, as one I’d been happy with before in Canada. My old blender had been sturdy and reliable, but the new one cracked after one minor fall off the counter. The damage revealed a thin plastic shell – the reason for the machine’s suspiciously lighter weight. (I still can’t account for the Egyptian version’s higher price.) Evidently, at least one reputable Western company was content to put its name on inferior goods, as long as those goods were for consumption in an emerging market.

But where the specifications of the “product” get woollier, there’s even more room for deception. In the field of legal, accounting, auditing or consulting services, local representatives can often operate like semi-autonomous caporegimes, with little or no accountability to the head office. Whether top management is being duped or turns a blind eye, there’s wide scope for misdeeds in markets that lack an effective regulatory authority, mandatory insurance or funds to compensate defrauded investors. Naturally, the scams don’t need to be as complicated as the ones associated with Enron in the United States.

Funnily enough, the Enron affair stands alone among recent international market shocks as the one that did not produce a backlash in emerging markets. Maybe those markets were already as low as they could go, or maybe the kind of investors attracted to them are more accepting of the “buyer beware” principle.

Still, in being labelled “emerging,” markets like India – or Egypt – are also characterized as a wild frontier, where money is made in a roulette-wheel fashion. By perpetuating that image, Western institutional investors keep themselves blind to the sound investments and above-board deals that also exist in these places. So not only do bad corporate citizens operate with impunity, the good ones are left unrewarded.

NEIL MACDONALD

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