Sunday, April 17, 2011

The US – a Loophole Society – or a Society of Trust?

My immersion into the loophole society concept took place in 2007 when I was bringing used computers to Ghana, to be donated to schools. While the total value of the computers was about $1200, getting them through Ghanaian customs took two weeks and cost me another $1200. I had to hire an agent, who was a relative of the headmaster at the receiving school, who expected to be paid $200 to shepherd me through the myriad customs clearance offices. This customs process, designed to plug customs loopholes for importers, doubled the costs of the goods. However when I had delivered the computers I found out that I could have bought the same computers for about $1200 on the public Makola market in Accra – so it seems clever people always find ways to exploit the loopholes.

It is my perception that the loophole society concept is not restricted to African countries. Even the US has become more and more a society where people exploiting loopholes are rewarded and admired. Last week we learned that, by clever exploitation of tax loopholes, GE had 10.8 billion of profits, but a tax bill of $0 for 2009. The loophole phenomenon however is by no means restricted to big companies, but trickles down to individuals looking for loopholes to get a little break in dealing with others.

For me, the culture of loopholes, as compared to a culture of trust, is based on small worlds, or more precisely, the lack of small worlds. In a society with a small world structure where everybody knows everybody, loopholes have little chance. Exploiting loopholes is replaced by a culture of trust. The smaller the “world”, the more people value their reputation and their social capital and therefore don’t dare exploiting loopholes.

I learned about the differences between “small worlds” – engendering trust, and the “big world” encouraging exploitation of loopholes recently when I was attending a meeting of the Swiss-American chamber of commerce. A frustrated Swiss businessman – coming from a very small world – bitterly complained about the 500 page contract that the lawyers of his US business partners wanted him to sign. As he said, in Switzerland business contracts are still one or two pages, containing the key points of the business deals, and not 500 pages of provisions trying to plug every possible loophole. Because, as he said, if something goes wrong, instead of trying to resolve the issue, lawyers from both parties will start pouring over the 500 pages, and try to find the loopholes in their favor. This is great news for the lawyers, as it keeps them happily employed. It is not so great news for the Swiss business owner, because he will have to spend most of his profits, and then some, for the fees of his American lawyers.

Doing sponsored research in both the US and Switzerland gives another opportunity to compare the loophole society with the trust society. Research dollars spent at a top US university carry an overhead of 70%. This compares to an overhead rate of 15% in Switzerland. This means, that out of every US research dollar, 70 cents are spent on internal university administration, whose main task it is to make sure that the other 30 cents are not squandered. Compare this to the overhead at the Swiss university, where 15 cents on every Swiss Franc are spent on oversight and administration, and the remaining 85 cents on the researchers.

While the last two examples are somewhat oversimplified, they nevertheless illustrate a larger trend. The point really is that we should be moving towards a society of trust, and not a society of exploiting loopholes. This means that we should try to create localized small worlds based on self-organization and trust, where individuals are trusted to do the “right thing”, but are also held accountable for their own actions.

1 comment:

  1. Dear Peter,

    this is a really interesting article. And I have to add: I have had a very similar loophole experience in Pristina (Kosovo), two years ago. We have been on an excursion in the region, visiting some new build schools which are mainly externally funded by EU governments. The biggest insight from talks to local authorities and embassies:

    Of approx. 10.000 €, only 1.000€ to 2.000€ really get where they should. The rest disappears in the "dark".

    ReplyDelete