The IFC Review of Private Investment in Developing Countries IFC 6 _1 S p r i n g 1 9 9 9 V _ . ' '% # ,.,,..- n , 7n~~~~~- j Z~~~~~~~~~~~~~~~~~ox * t~~~~0 IFC 1 ~~~~~~~~~~~~~~~~~~~The IFC Review of Private Investment in Develping Countries *FC IFC is a member of the World Bank Group supporting private sector development in member countries through investment, advisory services, and technical assistance. T F e International Finance Corporation el l# 2121 Pennsylvania Avenue, NW IFC ll_ Washington, DC 20433 USA www.ifc.org E d 1 t o r ~~~~~~~~S p r i n g 1 9 9 9 V o I .3, N o .2 Ed ito r Rob Wright D e s i g n Patricia Hord.Graphik Design In this issue 1 Caspian Sea oilr trade finance in Korea. 2 The Hell of Corruption a||1 Those clever devils who said corruption wasn't all that bad l*_ for developing countries were wrong -really wrong. It is - l* deadly for the private sector. Successfully fighting it,_ l jo~~iurnalist Philip Segal writes, helped put Hong Kong and Singapore in business. 8 Just What the Doctor Ordered Private sector health care U s s making a big contribution around the developing world. _ IFC is there to help. _ 14 Echoes of a Bank Bringing first-class financial services to West Africa. 18 Louis V. Gerstner_ . _ _ Chairman & CEO, IBM Corporationj 22 Francis Fukuyama Think globally, write interestingly. | ~~~~~Cover ad pp. 35 illustraions: h dRImag1Odel Bank Into the Caspian The Caspian Sea's oil reserves are considered to be at least as large as those in the North Sea that currently supply about 8% of the world's oil. But they were barely touched during the Soviet era, and the surrounding countries remain some of the poorest in the region. To help them move forward, IFC and the European Bank for Reconstruction and Development are together lending $400 million to com- panies developing the Chirag oil field in the Caspian Sea off Azerbaijan. It is the first stage of a planned $10 billion, 4 billion-barrel mega- project that is expected to become one of the largest private investments in the former Soviet Union. The loans to BP Amoco, Exxon, Unocal, Lukoil (Russia), and Petrolleri (Turkey) have multiple goals. They will be used not only to refurbish existing offshore platforms but also drill new wells and construct undersea pipelines in the Caspian, new terminals, and new storage facili- ties in both Azerbaijan and Georgia. The loans will also finance completion of two existing onshore oil pipelines running from Baku across Russia and Georgia for export from the Black Sea ports of Novorossiysk and Supsa. In Azerbaijan, the project is expected to start an oil boom whose tax revenues will increase the national budget by 40% over the next 11 years. The related pipeline development should also help Georgia attract more foreign investment than it has received since independence in 1991. But why continue with the effort at a time of depressed oil prices, when many companies are pulling out of the Caspian? "We knew when we started this project that the short-term fall in oil prices would have an impact, but both IFC and EBRD still view it as a landmark for the region," said IFC's Dimitris Tsitsiragos. "The companies involved view this as a 30-40 year investment. We want this project to serve as a model for future financing in this region. Without the involvement of IFC and EBRD, I don't think any oil company would have been willing to commit funds there." - Linda McCormick Asia Pieces of the Puzzle IFC is back in the wholesale lending business in South Korea, teaming with top US, German, and Japanese commercial banks on new trade finance projects worth a combined $250 million. The efforts supply one piece of a complicated, still fragile comeback puzzle in the world's eleventh largest economy. In each case, the model being used also has potential applications for re-igniting trade flows elsewhere in Asia. The first move came in June 1998, when IFC agreed to establish a $100 million trade enhancement facility in cooperation with Japan's Sumitomo Bank. Six months later IFC announced a similar agreement with Bank of America (BoA), with both deals aimed at reviving the export trade that has long been the main engine of Korean growth. In each case IFC is guaranteeing 40% of the foreign bank's exposure up to $100 million, thus helping it provide selected Korean financial institutions with the letters of credit, confirmations, and bankers' acceptances local companies need to purchase the imported capital goods and raw materials demanded by Korean exporters. Such financing declined by 36% between 1997 and 1998, when many foreign lenders cut their ties to Korea's commercial banks, stifling the production of goods for export. Almost bankrupt in December 1997, Korea is now showing signs of life, with economic growth expected to be positive this year. The stock market is way up, interest rates are way down, and Korean sovereign debt has regained investment grade status. But all is not rosy - unemployment is still growing and expected to get worse as the large conglomerates known as chaebol carry out the reforms that could mean the difference between long-term economic recovery and ruin. President Kim Dae-jung has vowed to rein in the chaebol, putting in place laws and policies to try to force them to cut their debt loads sharply. Staying the course of reform will likely make the difference over the long haul. US Deputy Treasury Secretary Lawrence Summers has warned South Korean government and business leaders against complacency, saying, "There is an important difference between recovering from a heart attack and changing your lifestyle to be sure you never have another one." In another show of support, IFC will also be guaranteeing $50 million of the 'forfaiting' transactions in Korea of Germany's West Merchant Bank. This form of trade finance allows firms exporting into Korea to receive payment at a discount without risk from Korean buyers. By its involvement IFC is encouraging West Merchant Bank to undertake a larger volume of transactions than it would on its own. -Linda McCormick Impact * Spring 1999, Vol. 3, No. 2 9~~~ C 0 *ee -9 *D S w Vi Vr w Sy ' E t ~~~~~~~ t 4B V~~~ 4' 7 'r -Ft;_sH -_.>S-~S' A . 0 X S i 4 ~~~~~~~~~4 . ISAW C, ;'Xue,eg>wt#aII ; ! '4 I- > .S< ",t-'4'4 z, : 9, E L 't ;;'- .S I ; ; ' ~~i C tt% Lk_,9 W j ' - s - ^~~~~~~~~~~~~~* r*' St a hese are not good days for the old region are reconsidering the merits of this argument, just as aca- argument, widely popular even five demics are concluding that corruption is not such a great eco- years ago, that a little corruption in nomic lubricant after all. developing countries is probably good Tunku Abdul Aziz, a former Malaysian central bank official and , for greasing thie wheels of commerce. now a board member of Transparency International, a global nongovernmental organization set up to expose and battle cor- Of all the testing grounds for this theory, often associated with ruption, maintains that the old argument excusing graft "proved academic thinkers such as Nathaniel Leff and Francis Lui, Asia to be nothing more than an elaborate prop for what was basical- was supposed to be the most fertile. Advocates said it showed ly a morally indefensible and decadent heritage." Attempts to that "good corruption" could benefit a country, and that doing explain corruption away on cultural terms were "grounded in business with an emphasis on connections worked just as well as complete and utter disdain for transparency and accountability or better than the openness, in those matters that have public interest implications," Aziz accountability, and said in a recent speech. competitive bidding practiced by leading Even in countries closer in spirit to the West that appeared to be Western companies. adopting free-market reforms, the evidence is that competitive- ness and corruption do not mix. Take the unwary foreign ~ Now, with parts of Asia investors who thought Westem capital would forever avert its beginning to recover from eyes from Russia's failings and thus help keep the country's of the fastest destructions of nuclear arsenal safely at bay. They have learned a painful lesson. wealth seen anywhere in "The best and the brightest on Wall Street lost billions betting the world outside of that Russia was too nuclear to fail," US House Banking wartime, many Committee Chairman Jim Leach said at IFC in December. in the "What they didn't realize was that it was too corrupt to succeed." Good Examples In the new global financial environment, the idea that corrup- tion makes the business climate more attractive is fast losing favor with academics and businesses alike. There is much to learn in this regard from Asia's own two great success stories that have proved that theory wrong: Hong Kong and Singapore. The message of their successful campaigns to eliminate corrup- tion is clear: zero tolerance. Once corruption takes hold, these economies have found, it can rage out of control and threaten the entire fabric of a society, weakening development prospects in a disturbing, dangerous way. Working instead to cut out cor- ruption at the roots brings great benefits: increased investment, more stability, and a greater basis for the high-value, service- oriented economies in which education and income levels rise dramatically. Ž * Look at Hong Kong: During the 20 years that elapsed from the time that it got serious about fighting corruption until the onset of the Asian financial crisis, it changed from a poor developing economy to a sophisticated first-world financial center. Now home to Asia's largest stock market outside Japan, businesses perceive Hong Kong to be even less corrupt than the United _ Vi _ States, according to Transparency Intemational's 1998 Corruption Perceptions Index. * Impact * Spring 1999, Vol. 3, No. 2 In his 1988 book, Controlling Corruption, one of the first to tackle tion: Companies cut in a member or friend of the Suharto fami- the issue head-on, author Robert Klitgaard called Hong Kong's ly, but business still got done. The result Independent Commission Against Corruption (ICAC) "probably was that Indonesia got power plants the largest and most famous anticorruption agency in the devel- built, but at a vastly inflated cost. oping world." That agency's former head, Peter Williams, well Almost no private power contracts t remembers Hong Kong's bad old days. He had first-hand experi- were put out to competitive public ence of corruption entrenched at the highest levels of power. tender, which is why ' Xx "The result is virtually the setting-up of an alternative, illicit form Indonesian power is so of government," Williams wrote. "The officials impose their own much more expensive illegal rules of conduct on the public, and the lawful rules of the than power in the v government for which they work are blatantly ignored. When rest of the world, corruption reaches this stage, the situation is certainly grave, and including the inevitably produces a crisis in which either drastic countermea- Philippines, where v sures are imposed or society lurches further downwards." public tenders are f' 4 standard procedure Who would want to invest under those conditions? Not many, now. according to figures assembled in a 1996 World Bank study. 1f These found that countries with high but "predictable" levels of corruption had a gross investment-to-GDP ratio of 19.5%. For countries with low predictability but a still high level of corrup- tion, the ratio was just 12.3%. Unsurprisingly, countries with the highest ratio were those with low corruption and high pre- dictability (28.5%). "In our research on emerging markets, corruption is the single most important factor contributing to political instability and economic decline," adds Marvin Zonis of the University of Chicago's Graduate School of Business. "Corruption is a misal- location of capital, where resources are directed for noneconomic purposes. Corruption inevitably leads to political decline." A Poor Excuse Corruption also eventually inspires people to take to the streets. Why? Not only because it can be bad for the long-term stability of political systems or companies. Those it hurts the most and the soonest are not the rich and powerful. They are the hapless consumers in the country in question-especially the poor, - ; who suffer the most when prices of essential goods rise. - x/ George Moody-Stuart, a long-time consultant in African agri- culture and the author of the 1994 book Grand Corruption, Moreover, one Indonesian power joint venture between US argues that "once the possibility of personal gain becomes a fac- sponsors Mission Energy and General Electric was obliged as tor, it rapidly becomes the only factor that matters, pushing part of its contract to buy its boilers from a foreign company for aside cost, quality, delivery, and other legitimate considerations which one of President Suharto's sons was the local agent. The in the awarding of contracts. The result is that the wrong sup- increased cost to the project, passed on to the consumer, was pliers and/or contractors are selected. And the wrong goods are $20 million, the Wall Street Journal reported. purchased." Why else, he asked, would it be the case that "half the roads in Africa break up after two years?" Worse still for the companies involved, cronyism also blocked the growth of a healthy financial sector. In the words of Or look at the Indonesian power industry, which operated in Indonesia's former environment minister Emil Salim, "inade- what was supposed to be a model of the "good" kind of corrup- quate enforcement of the Central Bank regulations has created Impact * Spring 1999, Vol. 3, No. 2 an environment where rules covering intra-group lending, loan Looking for Mr. Godber concentration, and creditworthiness criteria were violated with For years, g impunity.ears though, this was a place where the great majority of impunity." the police took bribes while its British colonial governors appeared not to mind. By 1973, however, though still primarily At times, however, corrupt and noncorrupt industries can exist side by side. In Taiwan,China,thebigeconomicsuccessstory a manufacturing center and not in any major way the kind of side by side. In Taiwan, China, the big economic success story financial center it is today, Hong Kong was no longer simply an has been the electronics industry. In contrast, the more tradi- ' ~~~~area where penniless Immigrants from the Chinese mainland tional industries such as chemicals or steel trundle on but do not shed peaginst amhandful ofethy Cious eaiate thrie i th res oftheword th wa elctrnicsdo.Whythe shoved up against a handful of wealthy, rapacious expatriate thrive in the rest of the world the way electronics do Why the traders. The level of corruption its people would tolerate had been exceeded. Take Taiwanese technology companies such as Acer, Taiwan Semiconductor, and Quanta, giants of world electronics that The turning point in the corruption fight came in June of that Semiondutor andQuana, iant ofworl eletroics hat year, when an internal investigation revealed that a senior actually make much of what Dell or Compaq repackage. They erwhnaitmlivsigiorvaedhtasnir actually makper mchoft whating Dell oirCompaqw repacge. thy police officer, Peter Godber, had managed to skim off HK$4.3 tend to prosper without having a chairman who is related to million (today US$550,000), or about six times his total net someone in the government, getting sweetheart credit deals salary during his 20 years of police service. Despite being on the from state banks, or padding their balance sheets with overval- ued, empty fficeropertinsoehal-finisedindstrialpark. exit watch list at the airport, Godber was able to board a plane ued, empty office property in some half-finished industrial park. tLodnwhrheopdoesaehermfHngKg' Without such advantages, they still make capital grow, reporting ILaw returns on equity of as much as 60%. "These are strategic industries," said Jeffrey Toder, head of Because people in Hong- research at investment bank Jardine Fleming in Taipei. But just Iyg fortble but airieasing- as important, they are also industries in which fair competition theirtvie in oublic cor-n is allowed to proceed without the distorting hand of the state or ti becm a pobliti,cal corrupt officials. ruptionbcmapoicl problem, just as it would in the Philippines in 1986 Islands Apart and in Indonesia in 1998. P ~~~~~~~~~~~~Demonstrators soon called i Any place where corruption thrives has much to leam from feortGodr's reun from Hong Kong and Singapore. Once among the world's most cor- Britain for trial. Robert rupt places, they have become two of its cleaner business cen- Klitgaard's Controlling ters. The main reasons these two have succeeded where so many Coituptidn descri thl t others have failed are that their fight against corruption began Corrupton describes the atmos- phere: "The Hong Kong at the top and, just as critical, was removed from the hands of public was out- the police. Both have rules that mandate transparency in ten- raged. Students dering and other procedures and clean law enforcement to make rallied to sure they are followed. r d- Despite overcrowding and an almost complete lack of natural resources (aside from its glorious harbor), Hong Kong has emerged as one of the world's great economic development suc- cess stories, and not by coincidence: It is hard to name a major financial center in which courts are unduly slow or unreliable and where commercial crime goes unpunished. Hong Kong saw that to continue developing economically it needed to move from manufacturing to services, and that to do so, rooting out corruption would be essential. Today manufacturing accounts for just 7% of its GDP, which is dominated instead by services such as banking, insurance, and real estate. Impact m Spring 1999, Vol. 3, No. 2 demand his return for trial. Radical elements accused the gov- gations. Hong Kong's ICAC also has several oversight commit- emnment of complicity in letting the 'big fish' go free." The tees that can and do call for changes in the way the commission implications were obvious. If Godber had been allowed to operates, although these all serve at the pleasure of one person escape, the administration must be rotten right up to the top. - the chief executive of Hong Kong. This was all that Murray MacLehose, the new, unusually activist Like Hong Kong, though, Singapore has thrived as a haven for governor appointed in 1972, needed to snap into action. Four businesses looking for a place in which contracts can be enforced, months after Godber's disappearance, MacLehose formed the and where the police do not have their hands out for bribes. Independent Commission Against Corruption, took it out of the Companies have flocked there to make electronics, to trade cur- hands of the police, and had it report directly to him. The new rency and equity futures, and to sell insurance, enabling organization had tremendous powers of search and seizure (some Singapore to mount a serious challenge to Hong Kong for the of which are now subject to court orders), and anyone disclosing title of Asia's premier financial center outside Japan. And, as any- that an investigation by the ICAC was under way was liable to where that has successfully battled corruption, the fight contin- prosecution under the anticorruption statutes of the day. In ues. In 1996, Singapore imposed a five-year ban on five foreign 1975 Godber was apprehended in Britain, returned to Hong companies, including Pirelli and Siemens, after they were alleged Kong, and jailed. Eventually the ICAC would arrest 260 other to have bribed a government telecommunications official. Hong Kong policemen, and a long, sordid chapter in local histo- ry came to a much-deserved end. With its proximity to a fast- But as successful as these two Asian examples have been, the changing China and sound infrastructure supplemented by a great power that Hong Kong's and Singapore's anticorruption cleaned-up business environment, Hong Kong soon saw its agencies have means they are not a model for everyone, accord- economy surge. ing to Transparency International's Nihal Jayawickrama, in a paper presented at an anticorruption conference last year. Hong Kong will need to maintain its reputation for taking on anyone suspected of corruption if its antibribery effort is to Although "Hong Kong did not have a democratically elected remain effective in the eyes of local residents. But its recent government," he wrote, "this apparent autocracy was balanced decision not to prosecute a controversial and politically well- by an elected legislature, an independent judiciary, a vibrant connected media tycoon, Sally Aw, partly on the grounds that press and an active and articulate civil society." In the case of many people would have lost their jobs had she been convicted, Singapore, though, Jayawickrama saw even more risk in imita- has already prompted legal scholars and legislators to ask tion: "Singapore is a city-state administered by a relatively whether Hong Kong now has one law for the rich and one for authoritarian leadership, intolerant of dissent from any quarter. everyone else. It is extremely vulnerable in that its strength lies in a single 'pillar'- the financial integrity and supreme professionalism Something to Sing About of its leadership." Singapore's story is similar, if less dramatic. Its anticorruption agency, the Corrupt Practices Investigation Board (CPIB), oper- Enter the OECD ates apart from the police and is based in the prime minister's As admirable as Hong Kong and Singapore have been in tack- office. Founded but dormant under British colonial rule, it only ling bribery at home, like most of the world's countries they started gaining power as an effective anticorruption tool in the have been lax in limiting what their companies do abroad. 1960s and 1970s. But it has a Since 1977, with the exception of the US, the general rule was critical difference from its that acts of corruption that were illegal at home were permissi- Hong Kong ble outside a country's borders. That has now changed with the counter- February 1999 enactment of an international framework for out- part: lawing the bribery of foreign officials signed by the 29 country Singapore members of the Organization for Economic Cooperation and asks its citizens to Development. How active the signing countries will become in trust that its anticorruption agency is doing a using it to prosecute their bribers is an open question. Many sus- good job and does not communicate with the pect they will be fairly slow to act. public. The CPIB prefers secrecy, whereas Hong Kong's ICAC has a community relations A telling precedent may come from the US Foreign Corrupt department and depends heavily on public Practices Act, which has been in place since 1977. Some US cooperation in the form of tips to pursue investi- companies at first resented it, just as some in Europe resented Continued on page 25 Impact * Spring 1999, Vol. 3, No. 2 L~~~~~~~~~~~~~~7 I::- 11 111 IF;S_~~~~~~~~~~~~~~~~~~~~~~~~~~~~I jt ¶: pi tH* ;eA Just What t er rocto ~~~~~~~~~~~~~~~Af L Prescriptions for Private Health Care in Developing Countries Sally Gelston, IFC Corporate Relations Unit enyan shopkeepers Aloysius and Residents of their village, Muranga, were impressed by the unex- Josethine Mukami Maina Warui are pectedly quick response of AAR's ambulance and subsequent glad they joined their managed health complete payment of Alcysius' month-long hospital stay. "They care organization when they did. A kept waiting for the bill to come, because insurance companies mere six months after the couple had here typically do not pay. When the bill never arrived, they enrolled in AAR Health Services, decided to join AAR, too," Mrs. Maina Warui said. thieves brutally attacked them at home in a robbery attempt, leaving Word spread quickly. Two years later, some 50 families in and Aloysius unconscious and near death around Muranga have joined AAR as a result of the Maina with a concussion and fractured skull. Waruis' experience. Their choice mirrors a shift occurring in much of the developing world, where people are opting for new His adult son ran to the nearest pay phone to summon help private health care offerings that improve on the shortcomings from AAR, 100 kilometers away in Nairobi. Within an hour an of older systems, whether private or public. In many cases, cash- ambulance arrived with a doctor and two nurses inside. "They strapped governments are tuming to the private sector to pro- saved his life because they came immediately and started treat- vide a higher standard of health care, thus easing the burden on ment," said his wife, who suffered less serious head wounds in overstretched public facilities, and the changes are often imme- the attack. diately apparent. Impact C Spring 1999, Vol. 3, No. 2 The Challenge Increasing access to quality medical care is one of the greatest challenges in development. In recogni- tion of the potential pri- vate contribution to this sector, IFC has financed 16 health-related projects in the past two and a half years. Since mid-1996, it l has approved transactions in Argentina, Brazil, Costa Rica, Kenya, Mexico, Slovakia, South Africa, Sri Lanka, Turkey, West Bank and Gaza, and Zimbabwe. The combined project costs total $343 million, of which IFC agreed to pro- vide $135.3 million from its own resources and those Mexicare: IFC-supported CIMA helps in Hermosillo and of the financing partners it attracts. other Mexican cities. Privately financed systems such as these can make a crucial contri- presence of metal rods used to correct the scoliosis from which bution, sometimes even the difference between life and death, by she had long suffered. The collision bent these rods, puncturing increasing the range of products available in the local health care a lung and causing other serious injuries. She was airlifted to market. But to truly benefit a local economy, private care must be Houston, where her longtime doctors had high praise for the affordable to a large segment of the community. emergency care she had received in Mexico. Although the acci- dent left her paralyzed below the waist, Creel is convinced his Access can take widely different forms, depending on a country's niece would not have survived without the higher caliber of level of development and the insurance systems it has in place, care CIMA brought to Chihuahua. as shown by the three IFC-supported projects featured in this article. While private systems are usually more likely to reach CIMA -Centro Internacional de Medicina - is a private health the middle and working class than the poorest elements of a care system developed by Dallas-based Intemational Hospital society, their repercussions often reach far and wide. ~~~~~~ __ Mexico: A Lifesaver Name: Centro Internacional de Medicina (CiMA) Jaime Creel is a business leader in the northern Mexican city of Chihuahua. When he joined 14 other local investors in backing Description: Chain of high-quality private hospitals construction of a new CIMA hospital there, he viewed it as a in Mexico and Central America affiliated with Baylor civic duty that would boost quality of life and help attract for- . . C eign investors to his hometown. Like the Maina Waruis in U T Kenya, he never imagined the benefits would hit so close to Sponsors: International Hospital Corp. (US); IFC; home so quickly. local investors in each market Only one month after his hospital opened, a tragic auto acci- Cost: $128 million dent outside of town killed Creel's sister and left his 26-year-old IFC Role: Provided $20 million long-term loans, niece Myriam with a spinal fracture. Surgeons at the new hospi- equity, and quasi-equity; advised sponsors on tal succeeded in stabilizing her after hours of surgery and 25 half-liters of blood. Her back injury was complicated by the financial management issues Impact L Spring 1999, Vol. 3, No. 2 Corporation (IHC). IFC has recently supported CIMA with a $20 South Africa: Not for Whites Only million investment. In Mexico, it operates a private hospital in The advent of majoritv rule in South Africa has meant Hermosillo as well as one in Chihuahua. The company is also increased demand for health care services, particularly from the building others in Puebla, Mexico, and in San Jose, Costa Rica. public sector, with all races now gaining access to previously whites-only hospitals. But "the state of chaos in our public sec- Current plans envision a total of 10 CIMA health centers in tor and the tremendous lack of funding" meant the government Latin America with a combined 900 beds. Each will be built could not afford to build any hospitals or clinics, says Ameen with support from local investors, usually prominent doctors and Mohamed, chairman of the new IFC-financed Eerste River business people enlisted to ensure community support. Before Medical Centre. The only such clinic in an area of Cape Town opening, the hospitals enroll their doctors and lead administra- with a population of 400,000, it opened in February, four years tors in a program with Baylor University Medical Center of after the government asked Mohamed's group to build it in this Dallas, where the training focuses on strengthening health care underserved location. The investors include doctors, lawyers, an and administration practices. accountant, and businessmen, all members of nonwhite ethnic "We need to improve our medical organization," Creel acknowl- groups that had suffered from discrimination under apartheid. edged. "To do so, we hope to increase our interaction with The $5 million clinic serves a mostly lower- to middle-class Baylor. Our goal is to become an international-standard hospi- mixed-race population, some of whom live in a formerly segre- tal, not just the best hospital in Chihuahua." gated township and a shanty town. People there work as teach- ers, as blue-collar workers in light industry, and at a nearby "We're changing the paradigm of how medicine is practiced in defense force training base. The highly populated area has Mexico," added Lawrence Meagher, IHC's president and CEO. grown qtuickly in recent years, despite the fact that it had no In his view, "the presence of IFC has been critical" to the project, medical facilities within a 25-kilometer radius. To help finance which he calls an example of "what IFC is all about: supporting the project, Mohamed's group sold a quarter of the medical cen- sectors that are important not just from an economic perspec- ter's shares to some 3,000 nearby residents, promising them an tive but also from a social perspective." eventual 12% return. "What's really been rewarding for us was the excitement we saw when people from the neighborhood Meagher said IFC's financial projections revealed weaknesses in realized they could own shares in the hospital," Mohamed said. his own initial assumptions and models, and helped CIMA rescale its growth strategy and reconsider its implementation The center opened with 80 beds and three operating theaters. time frame. An IFC architect, Geoffrey Willing, also visited the Plans call for eventual expansion to 123 beds and four theaters, construction site in Costa Rica and provided valuable advice. and the group owns adjacent land to accommodate further "We have forged a very positive working relationship and part- growth, if warranted. IFC provided $1 million for a 20% equity nership with IFC," Meagher said. stake in the project, helping the sponsors raise their equity to levels needed at that time to obtain financing from other Hermosillo, Chihuahua, and Puebla are all experiencing rapid economic growth based mainly on labor-intensive manufactur- ing and "maquiladora" light assembly industries. The CIMA hospitals will strengthen the economic position of these cities _ _ _ by helping them attract and retain investors and skilled workers who demand quality health care services before relocating. The NM hospital in Hermosillo, for example, has the only cardiac Description: $5 million facility in middle- and catheterization laboratory in northwestern Mexico. Few working-class section of Cape Town, South Africa; Mexicans, however, have private health insurance, so choosing a private hospital usually means paying the bill in full, For the offers general medicine and surgery, obstetrics and time bcing, CIMA is working with the public health system so gynecology, and pediatrics at levels of quality that some of its advanced equipment can be offered to low- income patients at a discount. So far, two-thirds of the users of the cardiac catheterization lab have been covered by state assis- Sponsors: Local investors from "previously tance. The net result: more Mexicans of modest incomes are disadvantaged" community getting quality health care at home, rather than seeking it on costly trips to the United States or forgoing it altogether. IFC Role: A founding shareholder with approximately $1 million investment; attracted other investors Impact v Spring 1999, Vol. 3. No. 2 To the Rescue: AAR ambulance on the scene in area affected by last year's US <1 Embassy bombing in Nairobi. 00M; - r ILE CASUALTY UNIT sources in South Africa. "Today we can get any amount of fund- recently begun expanding into Tanzania, Rwanda, and Ethiopia, ing," Mohamed said. and is also looking for opportunities in Mali and Mozambique. "The secret of our long-term success will be going into other Before investing, IFC required a feasibility study by an indepen- places. We will grow from our start as a high-margin, low-volume dent doctor from the United Kingdom, whose due diligence business to a lower-margin, high-volume business," said Lord confirmed the local sponsors' projections. "That gave us confi- Enniskillen, the company's chairman and chief operating officer. dence. I have to view the project as an investor," Mohamed said. "The feasibility study cost us $10,000, but I was glad to Within Kenya, AAR is seeking to enroll new members in rural have it." areas. AAR also covers the spouses and children of its members who work in Nairobi and have left families behind in their vil- Kenya: Better Coverage lages. These outlying patients can travel to an AAR clinic by The Maina Waruis' health care provider, AAR, was established bus, or, in emergencies, in an AAR ambulance. The organiza- in 1984 as an emergency air evacuation service. But as public non plans to significantly extend its reach to the underserved health care in Kenya has declined, AAR has stepped in to meet the growing demand for primary care services. In a private AAR _ _ clinic, Josethine Maina Warui says, "you feel you are wanted and you feel recognized. In the public hospital you are neglected Name: AAR Health Services unless you know somebody." Description: Largest managed health care The company has four clinics in Nairobi and its suburbs, one in organization in Kenya, with 65,000 members; also Mombassa, and a sixth in Kampala, Uganda. It has 65,000 owns five medical clinics in Kenya and one in Uganda members in Kenya, 70% of whom are covered through their employee benefits programs. The rest are individuals and small Sponsors: Kenya residents who are expatriate business owners such as the Maina Waruis, who pay $89 to $361 Europeans; Acacia Fund; IFC; and AAR senior a year per person out of pocket, depending on the level of care management they select. Most AAR clients choose levels that cost $205 to $262 a year, a sign of how much they value health care in a IFC Role: Invested $500,000 equity to support country where per capita income is about $340. AAR's expansion in Kenya and into other East African AAR also has 5,000 members in Uganda and aspires to become a countries regional health care provider throughout East Africa. It has * Impact a Spring 1 999, Vol. 3, No. 2 rural populations by opening nurse-run outreach clinics, The Future Enniskillen said. IFC plans to broaden its contributions to the health care field. Building on recent experience with projects that raise medical IFC has taken a $500,000 equity stake in AAR, thus becoming standards, IFC is starting to work with companies whose sole a 5% shareholder. The funding helped AAR expand and obtain sadrs F ssatn owr ihcmaiswoesl ar5%csharehicldes and comunictions heqipe Renpand aded obtin purpose is to boost cost-effectiveness in a country's health sys- rescue vehicles and communications equipment. An added hen- tem. An example is a Brazilian firm that offers an array of cost- efit, Enniskillen said, is that sdrviving IFC's rigorous due dili- saving services, such as home care to shorten hospital stays. gence process helped his firm gain credibility in the eyes of Related areas on the horizon are telemedicine and privatization other potential investors. AAR plans to launch a financing of public health insurance. Whatever is chosen, the goal will be scheme that, with IFC's help, would allow corporate members to to help the entrepreneurial energies of the private sector deliver spread the current up-front annual fee for membership over 12 quality health care to more people at an affordable price, thus monthly payments. Thus more companies could offer the bene- complementing the role of government in this all-important fit to their employees, he said. sector. * In the Operating Roam: IFC Executive Vice President Peter Woicke and South Africa representative John Pott visit Cape Town's Eerste River Medical Centre. Impact. Spring 1999, Vol. 3, No. tchoes Raising a Regi'on Is Standards Rob W'right, IFC Corporate Relations Unit Ore than 2 million migrant workers from Burkina Paso have VV L'i moved to C6te d'lvoire, seeking jobs that their far poorer country cannot offer. Much of what they earn they send home, where it makes a big difference in family members' daily lives. But even though the two countries share a border, a language, and a currency, until last year it was often impossible to wire money from Abidjan in anything less than two weeks. A sleepy local banking system wouldn't move any faster, making the workers reluc- tantly settle for bringing the money to rela- tives by hand whenever they went home. It was not a great situation. Fortunately, though, things are changing. ; - 2t . :/ 1'0 \0 10' 20 Underbanked: RM-E- FAR j\. A L G E R I A ~L I B Y A The 16-country PANI -Economic SAHAR;J - : i ,/ f i \ / ' ~-Community of .K 2: , _ _ j j X ,, ,West African MAURITANIA '' '.~ ''" "". b j >'\e '> - States region, -/ aM UR TA A i ' iEcobank's target 0e f ', - S i j I ! market. r-APE VER& M " ' A I I N I G ER / - - i < SE0IEG AL ' - < - *,. * "C - c H A D * H,t~|A , .V r RURKINA P ,*,<4yS ChJd C : ; :OB_ , PFASO 50 -ONR~Th A~ CITE ,iGNANAS r N I G E Okt Aa C; AN LJY CIVOIRE j ,ol CENTRAL '~~~, ~~~~ N .~~~~~~ AFRICAN i~,W E , I a mou s krD\ : < 4,-4, / ( C REPUBLIC ( f - < a,s' S CAMEROON i ,J\ - B O hE i bO 7BO0IWM1BffTBRS Z S-I - fdasN fYo,nd e Bong Mp : ff t-=fl, e'> I GE C I DEM. REP. <, E, ou8wmfw*Xdf@;, saf L IO-1 'e OF c _ se; ( - . CONGO CONGO o0 GAON i- ip ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~.' 20 Last year saw the opening of the Burkina "Ecobank today, with its geographical erable financial difficulty. Founded in Faso subsidiary of Ecobank, an African- coverage and integrated structure, truly is Togo with initial shareholder capital of owned holding company deternined to the West Africa bank," said Frank $33.5 million in 1988, Ecobank lost half provide better banking than what the Kennedy, CEO of HSBC Equator Bank, a that money within six years. A bad loan region has come to accept. From the out- merchant and investment bank focused portfolio, a failed commodity trading set it has distinguished itself from corn- solely on Sub-Saharan Africa. "It is well joint venture with N.M. Rothschilds, and petitors in Ouagadougou by not closing at positioned to play a leading role in the a disastrous acquisition of the former lunchtime or on Saturdays and by offer- economic development of West Africa, Chase affiliate in C6te d'Ivoire had all ing same-day wire transfers from Abidjan. and demonstrates that regional integra- threatened its goal of becoming the only Customers responded well, making the tion there is driven by the private sector regional bank active in both the French- bank profitable in its first year and forc- and not necessarily by government." and the English-speaking countries of ing rivals to match the higher standards ECOWAS. In a last effort to salvage the once they saw the government give it an No matter where in the developing world mission, the board was reconstituted and award for innovation. IFC works with private sector clients, one its profile raised by appointing cofounder thing is clear: competition transforms and former Togo Chamber of Commerce IFC is a founding shareholder in the markets. It's a golden rule, in Africa or head Gervais Koffi Djondo as chairman Burkina Faso bank, having invested about anywhere else, and one Echo knows well. and by attracting other heavyweight $300,000 for a 10% stake in 1997. Now it directors such as Sam Jonah, head of has gone a step further, investing another Reaction Ghanaian mining powerhouse Ashanti $7.5 million in parent Ecobank Trans- "This is not rocket science," says Arnold Goldfields, and Abdoulaye Kone, who national Inc. (ETI) to help it bring similar Ekpe, who left a career with Citibank in served as C6te d'Ivoire's minister of banking improvements throughout the 1996 to become Ecobank's CEO. "Once finance for 15 years. 16-country Economic Community of you introduce these kinds of service West African States (ECOWAS) region. improvements, the local market tends to The new board then moved to recruit a The African-owned company wins high react well and you can't go back." new CEO with the vision to turn things marks from both local and foreign bank- around. It chose the Nigerian-born Ekpe, ing specialists. But while profitable today, as recently as who had just overseen Citibank's entry 1994 the Ecobank network was in consid- into the South African corporate finance Impact * Spring 1999, Vol. 3, No.2 I and capital markets. His plan of attack: integration, dependence on commodities A from one strengthening central management of the with low prices, civil war in some mem- country subsidiaries and adopting a viable ber countries). Meeting that goal is quite Name: Ecobank Transnational Inc. business plan that could attract new capi- a challenge, and the reason IFC has pro- B tal from local shareholders and bring in vided the bank with managerial assis- Business: Africa's first locally owned !prestigious international investors for thc tance as well as financing (see box, p. 17). regional bank holding company r first time. He soon approached IFC, Based in: Lome, Togo which supported his goals but was a hard Les Echos Subsidiaries in: Benin, Burkina Faso, sell. It took two years of negotiations, but On the wholesale side, Ecobank is target- C6te d'lvoire, Ghana, Nigeria, Mali, he finally reached a deal that will bring ing letters of credit, cash management, Togo; plans to open in several other West African countries soon Founded: 1988 Equity: $61 million Ownership: Local shareholders and employees (79.4%), ECOWAS Fund (13%), Kingdom Holdings Africa (7.6%); IFC will become a 3.2% share- holder in the bank's holding company upon conversion of a recent $7.5 mil- lion quasi-equity investment, and is also a shareholder in its Burkina Faso ' i subsidiary Ethics: Requires all employees to read and sign an eight-page corporate ethics statement detailing stances on conflicts of interest, fraud, reporting violations, and policy against "knowingly IFC in as a 3.2% shareholder in the hold- Cash Call: Speedy service at doing business with drug traffickers, ing company. Ecobank branch in Benin. money launderers, and other crimi- nals;" also has directors sign a code of "IFC's degree of thoroughness in consid- conduct prohibiting secret gains from ering a potential investment was similar and treasury operations for the large mid- to what I was used to at Citibank, but dle market of local and foreign compa- with one key difference," he added. "At nies untouched by the big French, US, that do not give priority to the interests big banks like that the process is a little and UK banks interested only in the of "shareholders, employees, and cred- more brutal. They can just decide to bluest of blue chips in Africa. In retail, itors" withdraw from a country or a transaction the business involves savings accounts, Development Impact: Introduces all of a sudden because it no longer makes credit cards, and traveler's checks - not top-quality management practices, sense for them. I can't see IFC doing that. high finance, but something for which technology, and customer service into They are tough, but also very sympathetic there is a great need locally. While it is to the developing world - willing to not the largest player in any of its target West Africa's locally owned banking walk with us, so to speak." markets, the new focus on "basic banking sector done well," as Ekpe puts it, has led to His bank's mandate is to help meet the steady earnings and dividends to share- demand for first-class corporate and con- holders since 1996, with the bank in sumer finance in the ECOWAS region, Ghana the most profitable link in the an area that has both its pluses (an chain. "underbanked" population of 206 million and a combined GDP of $70 billion) and More important from a development per- minuses (little tradition of economic spective, though, may be the innovations Impact * Spring 1999, Vol. 3, No. 2 The Human Resource Challenge Running a first-class multicountry that African companies need to become offered, either at the INSEAD business fiancial services network in Africa and remain internationally competitive. school outside Paris or at Harvard requires a strong team with both excel- It helps improve financial performance University. tent banking skills and a solid under- by delivering practical training and standing of the business climate in development customized to the needs Sending staffers overseas, however, is each country of operations. But the of the local senior management team at about two-thirds more expensive than local talent pool In finance is thin, and each client company. what the comparable level of training as an African-owned institution, would cost locally. So Ecobank plans to 'Ecobank is well aware that human AMSCO has sent several senior man- build the first regional school of bank- resources could be one of its toughest agers from European and US banks on ing in West Africa, seeking to upgrade obstades. Since management and contract. They serve at the level of the professional skills and competence trainirig are in short supply in the managing director or below in the sub- of its 1,000 employees and those of ECOWAS region, IFC has introduced sidiaries in Benin, Burkina Faso, Cote other banks in the subregion and Ecobank to the African Management dIlvoire, Nigeria, and Togo, helping beyond. Both IFC and AMSCO have Servfces Company (AMSCO), which is raise banking practices to international pledged to support the banking school Chelping provide both. standards in each case. AMSCO is also project, with AMSCO already planning facilitating staff training in credit analy- to provide a management team to help Headquartered in Amsterdam, AMSCO sis, treasury operations, and other run it. The school is expected to be was established as a fee-based enter- fields through a $250,000 donor grant launched within 24 months and run on prise in 1989 by IFC, the African that Ecobank matches on a three-to- a cost-recovery basis. - Development Bank, the United Nations one basis. The training is done through Development Program, seven European seminars, workshops, and on-the-job -Ken Best bilateral financial institutions, and 53 instruction given by specialists from private shareholders to provide the Citibank and other institutions. A limit- management personnel and training ed amount of foreign training is also - - . r|- 9 that the group based holding company's role is to apply is introducing. international financial management stan- j * _ l t 81 1 _4.. .4 It finances more dards to the whole operation - essential _t 4 n l l 1' i itI t- ; . _,_ trade between in a part of the world whose indigenously IL _ _ \ vi,, . " 4,t --the three largest owned banks have often operated without 1 st Y t + ;i; ECOWAS them and allowed highly questionable IrX -H* t- t - economies practices to occur. (Ghana, Nigeria, and "We're not just doing this to make CBte d'lvoire) money," Ekpe said. "We're trying to make than any other a difference. For example we have a strict 0. i *1St R < ? . ;,. A L institution, and anti-money-laundering policy, and all our is the settle- employees have to sign onto our code of _ .L- __ment bank of ethics. We also have very strict internal the regional controls, with each subsidiary undergoing stock exchange various audits four times a year. If some- in Abidjan that thing isn't caught the first time, it will Lobbying: Financial services con- has slowly emerged in the past two years. show up later." sumers at Ecobank in Togo. The Accra subsidiary introduced money market operations to Ghana and has Ecobank is present in seven ECOWAS become the launching pad for a new countries now, and ultimately wants to be regional investment bank. The Togo- in all 16 of them. Branches in Senegal Continued on page 25 Impact * Spring 1999, Vol. 3, No. 2 ~~~~~ - Champion of Change Y } ou can look. You can look hard. You can look as hard as you want But you won't find many corporate tumarounds more dramatic than the one Lou Gerstner - * has overseen at IBM. When he arrived in 1993, taking a job no one else seemed to want, the venerable com- puter giant looked, by Gerstner's own admission, "like it was going into a death spiral." _ Through the '60s, '70s, and most of the '80s, IBM had defined information processing and its role in the world's leading enterprises. Ironically, it was IBM's own innovation - the introduction of the personal computer - that began a fundamental shift away from mainframes and the computing model that it created, ultimately calling the company's Name: Louis V Gerstner very relevance into question. By the time Gerstner took over, these questions of rele- age: L G vance had degenerated into questions about IBM's very survival. Age: 58 Title: Chairman and CEO, At the time, many inside and outside IBM were calling for the company to splinter and IBM Corp. (since 1993) allow product-specific divisions to compete on their own merits within individual niches. Background: BS in Engineering, But as a long-time customer of the information technology industry, Gerstner had anoth- Dartmouth College, 1963; er idea. Instead of more component suppliers, he believed the marketplace needed MBA, Harvard University, 1965; someone who could tie the pieces together into integrated solutions. Rather than disag- management consultant, gregating IBM, Gerstner held it together and made integration the comerstone in his McKinsey & Co., 1965-1978; rebuilding plan. top executive at American Express Co. 1978 -1989; It worked. Today IBM is the world's largest diversified information technology company, CEO, RJR Nabisco, 1989-1993 an $80 billion global solutions provider with strengths in hardware (from supercomput- Reputation "Intense, ers to laptops), software (including products from the strategic acquisitions of Lotus Reputabon: "Intense, Development, Tivoli, and others), services (consulting and systems outsourcing), compo- ambitious, driven ... precisely nents (microchips, hard disk drives), and research (more annual patents than any compa- the CEO IBM needed." ny worldwide for six straight years). In all this work, Gerstner says IBM does just two (Fortune magazine) things: "create the industry's most advanced information technologies, and help cus- He Says: "Every day it becomes tomers apply those technologies to improve what they do and how they do it. " IFC can more clear that the Net is taking attest: IBM's AS/400 servers and Lotus Notes software are critical parts of our own infor- its place alongside the other mation architecture. great transformational technolo- gies that first challenged, and For the last few years Gerstner has been coming to Washington to brainstorm about then fundamentally changed, corporate strategy with World Bank and IFC President James D. Wolfensohn and other the way things are done in the CEOs, offering insights about managing for change and other topics. In this interview he world." again shares some of those thoughts, which will ring true to any business, no matter what the size. And from his vantage point at the vortex of the global communications revolution, he talks about what must be done so that all countries, rich and poor, can share in the unparalleled benefits the Internet brings. U Impact * Spring 1999, Vol. 3, No. 2 IFC: Since you joined IBM six years ago, Gerstner: I've got to be careful with ful institutional restructuring without a the company's market value is up nearly this, because I don't want to leave the commitment to lead an effort that will $150 billion. Clearly, you've turned around impression that we did everything right, take five years - minimum. And you the company. How have you done it? or that we're done. That's a problem a lot have to understand up front that the hard of organizations box themselves into - part isn't getting started. Responding to a Gerstner: There are a number of ways setting a set of objectives, reaching them, crisis is relatively easy. The hard work is to measure progress, and market value is and concluding that the work is done. It's in sticking with your program over multi- one of them. But to deliver those results, never done. And as soon as you start ple years - seeing the changes through, we had to first win back the confidence thinking it is, you're headed back where reaching whatever objectives you set, but of our customers - many of whom had you started in the first place. You're never never being satisfied with that. staked a lot of their success to our tech- done. nologies. So from day one, we made sure IFC: How did you start the restructuring every corner of the company reconnected IFC: Does this kind of restructuring have at IBM? with our customers. Every change we've to start with a commitment from the top? made has been driven by identifying who Gerstner: You have to do a very honest our customers are, what they want, and Gerstner: Sure. I mean, there are a core and rigorous self-examination. What are how we can best provide it. set of decisions that have to be made at we good at? What's our core competitive the top. They'll be executed by line man- advantage? Is that advantage sustainable? So we started by eliminating the internal agement across the enterprise, but the Every organization has to do this - a focus that had become part of the IBM strategic decisions will be made by a small very tough self-assessment of the strategic culture. We'd been so successful for so group of people. Beyond that, I don't direction, the structure you want to long that we started competing with our- believe you can embark on any meaning- achieve, the basic value proposition to selves, rather than our competition in the customers, and a dispassionate assessment marketplace. That inward-looking orien- of strengths and weaknesses. This exercise tation generated two problems. First, it IBM Net Income led us directly to the central questions of was disconnected from what was happen- (billions of dollars) where to concentrate resources, where to ing with customers in the marketplace. invest, where to disinvest, and it led to 8 the most important business decision we Second, it made us slow in an industry 1998 made - the decision to hold the compa- where being first is almost as important as 6 ny together and serve our customers as being right. No company in this industry the premier integrator of information has the luxury of waiting on perfect deci- 4 technology solutions. sions or products. The industry moves too fast, and the pace of change is only accel- 2 There are a couple of other things we erating. To succeed in this industry, you believed, and believe, were important to have to get into the market, learn, adapt, 0 our restructuring, and could be relevant and continuously improve. to any company going through this kind -2 of change. One is the importance of com- The other thing we did - the most petitive benchmarking. important thing, actually - was re-ener- gize an incredibly talented group of peo- After you've determined what you want ple who were very eager to bring this to accomplish -to be the best global company back to a position of leadership. -6 competitor, or the best within your indus- What they've done is the most extraordi- try, or the best in one product segment, or nary thing I've seen in 30 years in busi- -8 whatever it is - then you have to quan- ness. They're what made IBM's turn- 1993 tify what it will take to reach that goal. around possible. -10 To answer that question, you have to be able to measure your current position and IFC: What can other organizations learn Difference in IBM's bottom line where you stand relative to your competi- from IBM's success at reengineering and from years one and five of the tion - and you have to be able to track managing change? Gerstner era: more than $14 that position over time. billion. Impact a Spring 1999, Vol. 3, No. 2 -U-- Man and IBM now has major new research Co uter: Would we labs in Delhi and Beijing, part of a -~have either $18.3 billion investment in research -ithi and development since 1995. Here are some ways it sees the Internet making its presence known in the developing world: * E-commerce: Peru's first online supermarket, Tiendas E. Wong, offers 15,000 items for sale. Operating costs are half those of traditional stores, and profit mar- IFC: IBM has been out front pushing the IFC: Where is the Net having its greatest gins from online sales are 35%.. 7 concept of e-business. What do you mean impact? higher. by the term? Gerstner: Right now most of the atten- 1 Distance Learning: Korean Gerstner: Three years ago, there was a tion centers on e-commerce. And it's easy lot of confusion about what the Net was to see why -we're watching the cre- National Open University has more all about. People were fixated on enter- ation of nothing less than a new digital than 200,000 students at 13 region- tainment, online magazines, news, or a economy. Within the next couple of al and 31 remote education centers, lot of applications targeted at the home. years, Internet commerce will be a tril- plus a Web site that will soon hold We said then, and have maintained con- lion-dollar marketplace. And the incen- 10,000 hours of broadcast lectures tinuously until now, that the Internet tives driving organizations to enable was not just about browsing for informa- wholly new ways of relating to customers and learning materials. In Mexico, tion, or some kind of planetary chat or their trading partners are enormous. the Monterrey Institute of room. We said the Net was a vocational One example is the way networks alter Technology puts digitally delivered medium -a place where real work the basic economics in the costs of trans- education within the reach of some would be done, where real wealth would actions. Airlines estimate that it costs an be generated, and real competitive average of $8 to process a ticket order. 43,000 students. advantage would be found. This was a The same transaction on the Net costs novel idea at the time -so novel we $1. Banks estimate that a face-to-face But there's still a long way to go. had to create a new vocabulary to define transaction with a teller in a branch Many developing countries' high it. "e-business" is the term we coined to office costs a dollar or more. On the Net, describe all the ways people and organi- the same transaction can be completed zations will derive value from the Net - for about one cent. logged off. Take Argentina: the local all the physical transactions and interac- calls needed to get into the Net typ- tions that will become digital and con- And this isn't simply a powerful tool ically cost more than twice what ducted using global networks: retailer to available exclusively to the world's they would in the US. Until local consumer; employee to employee; gov- entrenched franchises. One of the most ernment to citizen; physician to patient; dramatic effects of the Net is the way it telecom markets open up to greater teacher to student. levels the playing field for small business- competition, bringing connection es, or emerging economies. Small busi- prices down, the information gate- The Net won't replace these physical nesses can establish a global presence at way will be thin indeed. transactions, but it's going to augment nominal cost, and attack the household them in an enormous way. It's happening name brands with unprecedented levels all around us. of service and convenience. Developing Source: 1998 IBM Annual Report; ain a yaswoegnrtoso Alexis de Tocqueville Institution (USA) nations can bypass whole generations of * Impact * Spring 1999, Vol. 3, No. 2 technical investment. That creates an ers around the world are just starting to invented yet. All these devices will bring interesting set of opportunities for world address. The central question here is hundreds of millions of people to the Net leaders who now have the chance to nur- whether we're going to allow this tech- quickly, and more cost-effectively than ture high concentrations of Intemet nology to-divide the world into two ever before. So I believe the Net has the usage as a way to leapfrog other regions in camps - one with access to the technol- potential to reduce the gap between the terms of production, productivity, and ogy and one without. I think that's one "haves" and the "have-nots," not widen profitable growth. possible outcome, but it's not inevitable. it. We have a great opportunity to take We have the chance to close the gulf unprecedented levels of information and IFC: Isn't all this largely a US phenomenon? between the so-called information learning to the entire world regardless of "haves" and "have nots" if we can give an individual's income or where they live. Gerstner: Right now it is, but that's the world's people fair, affordable access changing fast. Seven countries other to information technology and the Net. IFC: Last year, you announced your deci- than the United States have around 10 sion to remain at IBM for another five percent of their populations using the IFC: What has to happen to make access years. What's the biggest challenge facing Net, and very soon, therc will be equal more universal? you? numbers of people accessing the Web in English and other languages. Two years Gerstner: A couple of things. First, gov- Gerstner: I would say it's execution. We ago, 85 percent of all Internet com- ernments have to end telecommunica- have our vision. It's e-business. The job at merce was generated inside the US. tions monopolies and encourage competi- hand for us now - this year and for the Within three years, most forecasts say at tion. Markets around the world havc to next several years - is executing our least 35 percent of e-commerce will be open to new network operators and strategy in the marketplace. And that's a take place outside the US, and that Internet service providers. There's no way big challenge - not just for me, but for percentage will grow as access to the the Net would have grown the way it has my whole management team. It's the computing infrastructure becomes more in the United States if users faced the issue we spend most of our time on. I universal. leased line rates that prevail in Europe, if think we're up to it, but I don't cver want the market for Internet services was my leadership team to think we can relax. One of the really interesting implications closed, or people had to deal exclusively of this emerging networked world, is that with government or monopolistic IFC: Where's your greatest opportunity? just as it dissolves barriers to market providers. The World Trade Organization access and opportunity, it will redefine took an important step toward more open Gerstner: Leading our customers into our notions of national and regional access with a general agreement on basic this world of e-business. Showing them borders. telecommunications. Now it's up to indi- the benefits of the networked world and vidual countries to step up and imple- helping them to use the technology to The Net is a great catalyst for economic ment their commitments and to conceive improve what they do. The Internet is expansion around the world. Look at even more ambitious ways to liberalize the epicenter of technological change what's happening with software develop- their telecommunications infrastructures, today, but more important, it is the cata- ment in India as just one example. Beyond bringing down telecommunica- lyst for business change - the redefini- India is already doing $2 billion a year in tions rates, equal access will require a tion of supply chains, business models, software exports. And all the major play- change in the current model of personal economic assumptions, the ways we build ers, including IBM, have established computing. On this front, there's a lot products and how we distributc them. operations there. We employ more than more to feel good about. Up until now, The Intetnet has returned information 2,000 people in two joint venture compa- getting to the Net meant having - or technology to the agenda of the CEO. nies, and last year we opened our newest having access to - a full-blown personal The Net is fundamental to every element IBM Research lab in Delhi. computer. But today, we can say with in the CEO's strategic agenda: growth, confidence that this is going to change, competitive advantage, customer service, IFC: Many analysts see the Internet as and change forever. The PC's reign as the global expansion. We feel very fortunate having unprecedented power to increase center of innovation and investment in to be in a position to help bring the ben- or decrease the gap between rich and our industry is over. Within a few years, efits of this technology to our customers poor worldwide in the 21st century. most of the devices that people use to and the people they serve all over the Which do you think will occur? access the Net will be non-PC devices - world.- wireless hand-held computers, screen Gerstner: That's a very important ques- phones, Web-enabled TVs, public access tion that policy makers and business lead- kiosks, others that haven't even been Impact * Spring 1999, Vol. 3, No. 2 MAN OF CULTURE l f you like the interplay of busi- best seller, prompting endless arguments italism was taking as its basis a new factor ness, politics, and development, and counter-arguments and emerging as of production, social capital. and wonder why some coun- one of the decade's most influential I tries seem to be better at it works. A former US State Department official, than others, there may be Fukuyama is now a professor of public nothing better you can do than sit In 1995 Fukuyama returned with an even policy at George Mason University in down with a book by Francis more provocative work, Trust. A deep and suburban Washington, DC. This summer Fukuyama. Rare are those who challenging look into the cultural roots of he will publish his newest book, The can interpret the age. Rarer still are economic success and failure around the Great Disruption: Human Nature and the those who can define it. He does world, it was named "Business Book of Reconstitution of Social Order. Like his both. the Year" by the European and one of the others, it is sure to excite some readers top 10 in that same category by Business and confound others, yet make all think Born into a family that came to the Week. It saw no accident in the climb of in new ways about the big global issues, United States from Japan three genera- the US, Japan, and Germany to the sum- including some they probably had not tions ago, he was almost unknown before mit of industrial power - they were considered before. In February IFC's the publication of his 1989 essay, "The "high trust" societies with a natural ten- Economic Department arranged for him End of History," which quickly ftamed the dency to solve problems by working to speak at IFC in preparation for partici- debate in the new post-Cold War era. together. And they made full use of the pation in a Seoul conference on democra- With the conclusion of the century's great single most valuable natural resource in cy and development in Asia organized by ideological struggle, it said with force, the new global economy: the knowledge Korean President Kim Dae-jung and the there was now only one option left for and skills of their people. At the same World Bank. His contribution there: a any country that wanted to succeed: time, it warned, "low trust" societies with speech on "Asian Values in the Wake of "democratic capitalism." The primary no impulse to build communities based the Asian Crisis" that asked whether East question for the future was the identity of on shared assumptions, such as China and Asia's unique cultural traits were more the winners within this single remaining France, would have serious trouble devel- responsible for the economic successes it context. Expanded into book form three oping the flexible business organizations enjoyed until recently, or the failure it has years later, it was soon translated into 20 needed to compete in an increasingly experienced since. Afterwards he took a languages and became an international open global economy. Why? Because cap- few minutes to talk to Impact. Es Impact a Spring 1999, Vol. 3, No. 2 IFC: The roots of the financial crisis in In a way that is very good when you have ed to Detroit, the American auto industry East Asia are clear enough: over-valued an established technology, such as auto- also saw that kind of increase in labor exchange rates, excessive borrowing in mobiles in the '50s and '60s, where the productivity. productivity gains lie not in a dramatic hard currences,wekregultionador- change or innovation in the underlying I think there's something in social con- porate governance, and so on. But would technologies, but a tweaking of the social nectedness that is important as a tech- you say it goes deeper than that? Were system that uses an existing, fairly mature nique for managing a production process, there larger cultural issues at work that technology to produce a final product. and that there's an argument to be made made it all happen? The Japanese were really excellent at that this kind of consensual, norm-based that. management is going to become more Fukuyama: The larger cause is a crisis prevalent as the technological sophistica- of overproduction, and there you can find tion of an economy rises. Partly as a result roots in culturally based institutions. w of these examples from Japan, the empha- Industrial policy in Japan, Korea, and to sis all over the industrialized world now is some extent in China really has encour- amore on letting people set their own rules aged investment decisions based on want- instead of on the classic Western factory ing to grab export markets that really did model that had a very legalistic, rule- not promise a market rate of return. based, hierarchical system of management These would not have been made if those and did not require any social trust. But economies had been following market where I think the reason the Japanese signals. have fallen down since is in the fact there's been a large change in the whole IFC: For whatever reason, the successful technological paradigm: the shift towards economies that do follow those signals seem knowledge and away from manufacturing. to be either Western or based on a Western model. Why would you say that is? IFC Why can't its culture do a better job of responding to that? Fukuyama: Well, there is always a question of what is really Western and Fukuyama: Because there the group- what is just a feature of economic moder- . oriented, consensus-based system has not nity that can be adopted by a lot of other been very helpful to them. It hinders cultures, such as advanced in science and things. Changes in technology require technology, but innovation and entrepre- 1 9 9 2 changes in labor markets, and one thing neurship probably are more Western kinds 1 the Japanese have is sticky labor markets. of phenomena. The individualism that is They've got all these groups, obligations, encouraged in the Western tradition, IFC: Give us an example. and norms of reciprocity that demand especially in American culture, and the that you don't fire people or move them Western values of questioning authority Fukuyama: The clearest example was around. But right now, on balance, doing and thinking outside the box are a very "Just in Time" manufacturing in the auto that is what's called for. helpful source of innovation. That's espe- industry. The Japanese were able to dou- cially true at time like the 1990s, when ble or triple labor productivity in the IFC: You're just back from Korea. How what's happening is a real change in the space of five or six years by applying tech- does it rate on these same issues? basic paradigm of economic activity, mak- niques based on an understanding that ing production processes far more infor- firms behaved like social organizations, Fukuyama: Korea's a really different mation technology-based than in the past. and that workers and managers were place. To my mind it is a much more rec- bound to each other. Managers tend to ognizably European-style society than IFC: But why not Japan's tradition that devolve more responsibility to workers in Japan is. It has these traditional class instead favors groups over individuals? It a trust-based system like that and get cleavages that are much more out in the seemed so good for so long. more rapid information feedback that open: There are workers and managers in leaves them closer to the production Korea that don't like each other; the Fukuyama: Japan is known for a process. This happened first in Toyota, workers go on strike; the managers don't norm-based factory management system. and when those techniques were import- like them. Its labor history is much more Impact * Spring 1999, Vol. 3, No. 2 like that of Britain, Sweden, any other or a Liberal party, and then you fight it between integration into the global econ- European country. What I think is really out in a democratic arena. I think Korea omy and development looks more prob- very weird is the Japanese system, which is probably more likely to develop along lematic than it would have looked seven tries to smother these social conflicts in a those Western models than Japan is, or eight years ago. But no one has really big web of mutual obligations. The which I think is healthier. come up with a lasting alternative, and Koreans are out in the streets contesting it's not clear to me that you couldn't fix who's going to get a bigger share of a pie. IFC: So as the 21st Century wears on, those problems. It's a much more conflict-ridden society, will you be more bullish on Korea's eco- and in a sense its democracy may evolve nomic future than on Japan's? IFC: But think about Russia's recent in a more recognizable Western pattern experience. What does it show you about than Japanese democracy. Fukuyama: Possibly. all this? IFC: Why? IFC: Speaking a little more broadly, some Fukuyama: What it shows is that of your critics contend that recent events have shot down your basic argument from The End of History, the one that says the only way left to become an "advanced country" is to be a free market democracy. What do you think? Fukuyama: Assuming that the cur- rent crisis does not turn into a global depression, in which case all bets would be off, I think the argument essentially still stands. There is a path to develop- ment, and there's really no alternative other than integration of the world - r .r £- 'economy. 4 a I I. EFC: What's the path? Fukuyama: There are three parts t I.T [FA I- 1aw l T1 -i L iUV it: (1) Democracies don't fight and there- fore you have a democratic "zone of peace" that has developed in the world; 1 9 9 5 (2) the way to get democracy is through F o r t h c o m i n g economic development (these two have a strong correlation); and (3) the way to get Fukuyama: In Japan, there's one all- development is to integrate as completely there are real political and cultural pre- embracing political party that somehow as possible into the global economy. conditions for the establishment of either smothers all the social cleavages that a market economy or a working democra- exist. It brings together rice farmers, Now that three-part syllogism is threat- cy. What's been happening in Russia in industrialists, and others under the big ened if, in fact, integration into the glob- the last year really forces a certain kind of Liberal Democratic Party (LDP) banner. al economy turns out to be destabilizing. thinking. It's possible that they're now in Whatever social tensions exist are all hid- I think you can at least make a plausible an equilibrium situation that is neither den from view -they're discussed in the argument that the kind of financial insta- capitalist nor democratic, but is also not back rooms of the LDP, but there's no bility you've seen in the 1990s - a obviously going to evolve into something open contestation of these different social European currency crisis, a Mexican peso that we would call a working capitalist actors. In most European countries, the crisis, an Asian financial crisis, Russia democracy. They could be stuck there for contestation is much more overt: The and Brazil - is evidence that there's a very long period of time.C workers have a Social Democrat Party, something not working right in the global the managers have a Christian Democrat financial system. Therefore the link Impact a Spring 1999, Vol. 3, No. 2 Continued from page 7 Continued from page 17 the new OECD convention on the supposed grounds that busi- and Niger are due to open later this year, perhaps followed even ness in most of the world cannot be conducted without bribes. by Liberia. The expansion requires new capital and must be Today, though, US companies tend to say they approve of the managed carefully, as the record of others who have tried and FCPA, although that could be because of what it does not do as failed, such as Meridien-BIAO, shows. much as for what it does. Since 1977, there have been fewer than 50 convictions under the act, although supporters insist it After Ecobank proved itself by attracting $13.5 million in new has nevertheless been a powerful deterrent. capital from its African shareholders, IFC made an initial show of support by introducing it to Saudi Arabia's Prince Alwaleed One good reason to be hopeful about the OECD convention is Bin Talal Bin AbdulAziz Alsaud, a master of the markets whom that it now brings most of the world's major exporters and for- Money magazine unabashedly calls "one of the world's greatest eign direct investors under roughly the same rules about bribery. investors." The single largest shareholder in Citigroup, Apple As in most cases, competition may prompt companies to police Computer, and Four Seasons Hotels, he is one not easily one another. Before, all a US company could do if it was beaten impressed. But his Kingdom Holdings Africa investment vehicle to a contract by a bribe-wielding European firm was to com- is committed to investing $1 billion in the continent's most plain to Washington. attractive companies, and after doing thorough due diligence on the Ecobank story, it agreed to inject $7.05 million into the Wesley Cragg, a business professor at Toronto's York University holding company and take a seat on its board. and head of Transparency International's Canada chapter, recalled that it was Boeing that raised the possibility of corrup- In January IFC followed with its $7.5 million equity and quasi- tion (as yet unproven) in the purchase of Airbus aircraft by the equity investment, which helped raise total capital from $33 Canadian government. Intense competition will do that for a million to $61 million and complemented the earlier IFC stake place. If the OECD convention is enforced, Cragg predicted, in the Burkina Faso subsidiary. While still small compared with increasingly "companies who lose contracts because of what the capital of the large South African, Nigerian, and foreign they see as corruption will come forward." The truest sign, per- institutions that dominate African banking, this is money that haps, that competitiveness and corruption do not mix. E can go a long way in improving standards from Mauritania to Cameroon and helping channel savings into investment - the key to development everywhere. In a few more years, the world Philip Segal is the Hong Kong correspondent of the International will know how far Ecobank's echoes resound. H Herald Tribune. He has lived and worked in Asia for seven years and has also been a correspondent of the Economist in Mexico City IFC's work with Ecobank has been carried out by its Sub-Saharan and Ottawa. Africa Financial Markets Division (Bahadurali Jetha, manager). Papa Madiaw Ndiaye is the investment officer on the project. Impact1 Spring 1999, Vol.3, No. IFC International Finance Corporation 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA www.ifc.org IFC is a member of the World Bank Group supporting private sector development in member countries through investment, advisory services, and technical assistance.