Democracy Revisited

In a post I wrote yesterday prompted by the recently released report on Democracy in Cambodia, I concluded that the status of democracy in any given country would not really effect foreign investment so long as investor protections remained in place and money continued to flow. After some more thought and conversation, my reasoning stopped shy of complete.

The Cambodian Center for Human Rights report covered a wide range of issues, but there are three in particular that I think have a direct bearing on investment in a country. Specifically, (1) the freedom of the press, (2) the ability of lawyers to speak and act without fear of reprisal, and (3) parliamentary immunity. I’ll take each issue in order.

First, the freedom of the press. A free press is a major tool in the investigation and disclosure of corrupt practices in business. In the United States, for example, the majority of corporate scandals over the last several decades were uncovered by the press, not by the SEC or other government regulators. Foremost to mind is the HP pretexting scandal. This was a case where a reporter smelled something fishy and dug deeper and uncovered major ethical tightrope-walking by the director and board of a major corporation. Without the ability of the press to point out wrongdoing and to properly report it, the business community loses a major aid to good governance. In Cambodia, the problem for the press would not come from reporting corrupt practices in a run of the mill corporation, but in one connected to the government, either through direct government investment, interest, participation, or affiliation. If the press cannot investigate wrongdoing in all companies alike for fear of reprisals, and the government itself won’t do anything to investigate, then there is a major inequity existing in the corporate world. This potentially creates a major disincentive to enter the market for foreigners.

Second, lawyers and, by extension, the judicial system in general. Not only do lawyers need to be able to act without fear of reprisals-so as to pursue wrongdoing on both a corporate and ministerial level-but the courts need to be free of corruption and government influence. When foreign investors who have lived under the Rule of Law enter a market where law is something cast aside at whim, they experience extreme uncertainty and are unable to predict business and legal outcomes. This acts as a major deterrent to foreign investment, particularly as there is no assured method for fair and unbiased dispute resolution (topic of a future post).

Finally, parliamentary immunity. Unless lawmakers are allowed to voice their opposition to policy, to behavior, and to ideas without fear of prosecution or reprisal, the act of legislation quickly becomes one of rubber stamping. Debate and reason and consideration are all necessary parts of developing a legal system that is capable of providing for disparate viewpoints, backgrounds, and heritage. Without debate and opposition, law making becomes tyranny. Without debate and opposition, there is no one to protect the interests of the minority, or of the person or business who does not have access to the minister of such-and-such a ministry. This is especially vital in a situation where the law itself is subject to arbitrary application and interpretation based on the controlling party and certain under-the-table payments.

Now, all of that said, it is unclear to what extent the “impingement” of democracy in Cambodia actually results in these negative consequences. From my limited exposure, the press in Cambodia have never played a major role in corporate politics, nor has the judiciary ever been considered anything but corrupt. Perhaps the only de facto effect here is on the parliament. By taking legal action against major opposition party leaders, the current government has created a situation in which parliamentary figures should have reason to fear reprisals for their words. This will lead to chilling of debate and opposing opinion and then to rubber stamping. However, the net effect on investment-particularly when the current government is keen on encouraging foreign investment-still seems limited.

So in the end, my conclusion isn’t really any different, just more considered. The theoretical problems caused by recent governmental actions are perhaps undesirable, but in reality, there is very little effect they will have on the status quo for foreign investment.