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Doing business in corrupt environments

If you can profit from the distortions in certain emerging markets, but protect yourself, then the potential of the market can be yours. If not, it is far better to simply stay home

How do you make money in Africa? The African business environment has been very difficult. According to the World Bank's Doing Business Report 55% of the countries in Africa are in the lowest quartile of its 'Ease of Doing' business ranking.

The most notable exception is South Africa, which ranks a respectable 34 just below the UAE and a few notches below France at 31. The World Bank's Report is based on one thing: law. Laws are just ink on paper. One would think that these laws could be changed easily. Just enact or pass the most economically efficient laws and then wait for the foreign investment to roll in. Sadly it is not that simple.

Laws exist because someone put them there. They remain on the books because someone wants them there. Countries are plagued with inefficiencies and corruption, because government officials realise that a given law or regulation can be a source of income. Once government officials understand that these laws can be a profit centre, the corruption tends to feed on itself. They also have a strong incentive to keep the regulation in place. Bureaucrats become rent-seekers and continue to increase the charges. A reform that gets rid of the law will end their little enterprise, so they will fight tooth and nail to keep the existing system in place. It may kill economic growth, but it helps them. The members of the group profit at the expense of the general economy.

Generally businessmen do not like this type of red tape and corruption. Business is about one thing, investing. All investments are a bet on the future. Since no one knows what the future will bring, businessmen and investors use their past experience to judge risk. When a rent-seeking bureaucrat can either up the bribe or use his discretion to change or not enforce the rules, the risk increases. As the risk increases the returns must as well. If they don't the investment is not competitive with other potential investments and the project will be cancelled.

It is not only the uncertainly that increases risk. Corruption's main impact is more insidious. It lowers the quality of information. It is difficult to know what to pay to whom; to know who will perform or which official has the power to perform. If everyone knew this information, then corruption might be efficient. But since this information is not generally available it distorts the market.

Market distortions though are also an opportunity. If you have access to information that is not available to other players in the market, if you know who to bribe, how much to bribe and whether the official will actually perform, then you can take advantage of this information to get a competitive edge. You can charge higher margins and make fatter profits, often shared with government officials.

Knowing the right person to call is important in any business environment. It is especially important in Africa and other frontier and emerging markets. In game theory these markets are called relationship-based systems in contrast to rule-based systems in more developed markets. In relationship-based systems the trust inherent in a relationship substitutes for the trust inherent in the law and the courts. Relationship-based systems are less efficient than rule-based systems because information, all information, is not available to all of the market players. In essence the relationships are networks, but networks on steroids. There are no alternative methods of conducting business. Of course in corrupt business environments, the relationships are everything.

But how can other investors take advantage of this? Just find the right person with the right contacts and you are all set. In fact many Western firms have done just that. In China for example, Western firms have made a habit of hiring the scions of important Chinese leaders to be sure they have the right contacts.

There is one drawback. You have to be extremely careful in emerging markets to understand that just because someone is making tonnes of money in the country does not mean that a foreign investor will make money. Many foreign investors, especially investors from rule-based or developed countries assume that the corruption and relationships are local issues and that they are somehow protected. Wrong. In relationship business environments the only protection is the strength of the relationship, not law.

The best way to invest is to find a bridge. An excellent bridge in Africa is South Africa. South Africa has sufficient rules to protect foreign investors investing in South Africa, but South African businesses have sufficient connections and relationships to do business in other African countries. To a certain extent Hong Kong and Taiwan offer the same service in China. If you can profit from the distortions, but protect yourself, then the potential of the market can be yours. If not, it is far better to simply stay home.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).


Aadhaar and privacy-I

 Two of the major issues concerning Aadhaar revolve around the benefits of having an identity and the risks of losing privacy. This is the first part of a two-part series

As the implementation of Aadhaar, formally known as UID, gathers steam with the project entering the prototype implementation stage, we have started hearing dissenting voices questioning the need for such an intrusive ID, incurring a lot of public money. Questions are also being asked about the constitutionality of such an exercise. While it is easy to dismiss such objections as being alarmist, it is important to go into some of the issues being raised by the critics, especially in the context of the exaggerated claims of the proponents of Aadhaar.


The ideas around Aadhaar being not new, it is pertinent to review the status of similar schemes in other countries. In the USA, the Social Security Number, initially conceived as a number to track individuals in social security programs, has been in use for more than 50 years. A recent proposal by some US senators to introduce biometric Social Security cards has run into stiff opposition by privacy advocates and civil-society groups. The UK government had introduced a similar biometric national ID scheme some time back. The new government plans to scrap the biometric national ID scheme within 100 days, in addition to destroying all the biometric data that was collected. The exercise was deemed wasteful, bureaucratic and intrusive.


In India, there have been various attempts for the creation of a national ID for a decade or more. However, the issue gathered momentum with the reinvention of the same in the form of UID, which has recently been rechristened as Aadhaar.

Aadhaar came into public consciousness after the UIDAI was established and the head of a corporate firm roped in as the chairman of the project. Thereafter, there were a series of seminars, analogous to marketing campaigns, advocating the positive benefits of Aadhaar. Some of the champions of UID, being influenced by notions in the IT world, looked at Aadhaar as a panacea for all ills surrounding public service delivery. The chairperson of UIDAI is reported to have even gone to the extent of saying thatThe slogan of bijli, sadak, pani” is passé; 'virtual things' like UID number, bank account and mobile phone numbers are the in-thing. This was almost to indicate the dawn of a new era with different priorities, making the earlier preoccupations irrelevant. Can anything be further from the truth than this?


One of the reasons for carrying this perception is that Aadhaar, though conceived at the government level, is currently championed by technocrats turned bureaucrats. These technocrats, who are significantly influenced by the products and processing in the IT world,    want to replicate the same in the public sphere, often ignoring the complex realities of the real world. While the making of the biometric data and its management by itself has a significant technological content, its impact goes far beyond it as it covers the ordinary citizen and the wide social sector. Focusing too much on technology, the social and privacy issues were probably overlooked at the infancy. While the UIDAI tried to address some of these concerns later through seminars, they were not comprehensive enough to gather diverse public opinion. Even though the initial mandate of UIDAI was to focus on technology associated with biometric data, the casual utterances of key representatives, without adequate awareness of privacy issues, went beyond that to advocate the wider adoption of UID in both public and private spheres.


Two of the major issues concerning Aadhaar revolve around the benefits of having an identity and the risks of losing privacy. Proponents of the benefits are of the opinion that a lot of social welfare programmers intended for the poor do not reach them or are denied to them because of the issues surrounding identity. By fixing the issue of identity using Aadhaar, inefficiencies and irregularities surrounding the delivery and management of social services would be resolved.

This is a claim disputed by most of the social scientists/activists who feel that to be a gross over-simplification of the reasons for failures of social welfare schemes.  For example, in most of the social welfare programmes where multiple agencies are involved, fixing individual identity does not necessarily stop corruption and pilferage.


Before commenting on the second issue surrounding privacy, it is important to understand what Aadhaar stands for. Aadhaar is a 12-digit ID which is unique to any individual in the country (It is 16 digits, but only 12 digits are relevant for identification). Behind Aadhaar is biometric data, that uniquely identifies an individual. As of now, biometric data includes digital data of the face, all ten fingerprints and iris scan. Aadhaar also includes other general details like name, age, sex etc. 


(The author is a Bengaluru-based technology consultant)





7 years ago

It is absurd to qoute Mahatma Gandhi to prove some point. It is absurd to think that whatever he did decades ago against foreign rule is still valid. Those who have some thing to hide, I will be happy if such people leave the country. One should look at the benefits of this by referring to the counrties who have successfully implemented and enjoying the fruits of it. One such example is Singapore. I am sure many will jump at an argument that it is a small country. Does it mean only small countries can benefit from such IDs. The aspects of security are far more important than any individuals privacy. Please remember you need to be alive to enjoy the so called privacy.

Shital S

7 years ago

Privacy is a very important consideration, as a principle if nothing else. As for a biometric card helping social welfare programmes, that's a laugh. Indian administrators at district and village level who are in charge of these programmes are masters of subversion and will find a way to beat the card and pocket the benefits. It's all just a huge waste of money and effort.


7 years ago

I will be the first to give up my privacy for the current idea. I have absolutely nothing to hide and neither what I do as a living being is different than what it should be. I suppose you may be having better idea than UID for a better public distribution. This is your chance to put it across.


7 years ago

I am not sure how secure our data will be? When our so called greats are not able stop the hacking by chinese. We are in good position to collect all the information and give it to our neighbouring threats..... Gr8 going INDIA.....


7 years ago

you are Wong.UIDAI has not been created by an act of parliament.THE PM just did it by fiat which is totally illegal.
once they have this gestapo id then all your movements will be tracked and traced.
have you forgetten that mahatma gandhi started his satyagrah movement against the british fingerprinting all indians 100 years ago.
here take a look these 2 videos

ACLU national id ad

we dont even hae a privacy law.the IT act 2008 makes tapping legal witought any oversight.already you dont require warrant as we dont have right agasint unreasonable search and seizure like in USA,canada,europe.

the Usa ssn card if forbidden by the pricavy acy of 1974 to be used as a national id.25 states have opposed the REAL id act.

also the govt is going to have a NATGRId which will have 21 sets of data of everyone.
the govt is totally gone illegal and criminal

those who give liberty for security neither deserve liberty nor security-ben franklin


7 years ago

Its mere stupidity opposing UID program in the name of privacy concerns. Those who are saying these reasons really don't know about the use of this No and the System. UIDA is not a private agency to misuse the data it collects. its an entity established by the act of Parliament and headed by a union minister rank. If those who are expresing concerns of security should express the same over MOE for it collects similar data to issue passports and Ministry of Finance as it also collects similar data for issuing PAN cards and so many other governament isntitues which collects personal data. UID is going to collect biometric info in addition to the common info collected by other isntitues. Infact some of the state governments have already started collectiing biometric info for different purposes. (Ex: AP is using iris technology issuing ration cards ). So no need to worry about privacy. when compared to the benefits it offers these concerns are negligible.

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