Creating Shared Value in Ukraine

Copyright Terry Hallman 2003

Once a nation or government puts people in the position of defending their own lives, or that of family and friends, and they all will die if they do nothing about it, at that point all laws, social contracts and covenants end. Laws, social contracts and covenants define civilization. Without them, there is no civilization at all, there is only the law of the jungle: kill, or be killed. This is where we started, tens of thousands of years ago.

By leaving people in poverty, at risk of their lives due to lack of basic living essentials, we have stepped across the boundary of civilization. We have conceded that these people do not matter, are not important. Allowing them to starve to death, freeze to death, die from deprivation, or simply shooting them, is in the end exactly the same thing. Inflicting or allowing poverty on a group of people or an entire country is a formula for disaster.

These points were made to the President of the United States near the end of 1996. They were heard, appreciated and acted upon, but unfortunately, were not able to be addressed fully and quickly due primarily to political inertia. By way of September 11, 2001 attacks on the US out of Afghanistan – on which the US and the former Soviet Union both inflicted havoc, destruction, and certainly poverty – I rest my case. The tragedy was proof of all I warned about, but, was no more tragedy than that left behind to a people in an far corner of the world whom we thought did not matter and whom we thought were less important than ourselves.

We were wrong.

It is not enough to merely give people the things they need to survive. This will work for a short time, but is not a long-term solution. There is an old saying: give a man a fish and he can eat for one day. Teach him to fish and he can eat for a lifetime. Giving people enough to live today may be enough for today, but it is not enough for tomorrow. Helping and teaching people to make a living, sustain themselves and their families, is in fact the only long-term solution to the problem of poverty. Further, for the first phase of economic development or economic recovery of any location, it is also possible to create an ongoing source of the critical funding needed to get the job done. Capitalism and market economy comprise the best economic engine ever invented. Assisting poor communities in developing their own markets is now meeting growing acceptance as the best way to go to alleviate poverty. The profit motive, integral to capitalism and market economics, is the driving force for successful economies around the world.

In all cases, a certain amount of outside funding is needed to get things started. I proposed a strategy for this starting phase: at least one enterprise in a community, the function of which is to provide profit to be used in the community to grow more businesses. Most of the net profit from this community-funding enterprise would be placed into a community development fund such as a credit union. The balance of profit is invested into the business for growth. The community fund is then used by people who have most need, rather than the conventional practice of returning the money to the pockets of only a few people. Those few people tend to become wealthy to the point that they do not actually need more money, while many people in any given community probably do need the money. In this regard, this strategy of directing profits for use by people who have the greatest need might be called “social capitalism.”

Traditional capitalism results in profits for the few people who own an enterprise. Over time, this often results in enormous amounts of money for a few people. This is the appeal of capitalism: the possibility of gaining great personal wealth, becoming rich. The problem is that money is not an unlimited resource. If money piles up in the hands of a few people, this must come at the expense of others who will then have less, or nothing at all. There is no other possibility. This is the basic flaw and weakness of capitalism, and was the central point of the 1996 paper. The end result is uneven distribution of resources.

This same result will be the outcome in any community, village, city, or state: a few people will become very wealthy and have far more money than they need, while many people will be left with little or nothing. Thus, merely introducing capitalism and market economy into a community will bring limited benefit, mostly to a few people while many others are left in need of basic living requirements. This is an especially tough problem in Ukraine and Russia, where so-called mafia capitalism is not uncommon, and bloodshed is not unusual in the race to accumulate as many personal assets and as much money as possible. It is safe to say that most of the players in the mafia capitalism game are not working for the benefit of the community, but only for themselves and the smallest number of people possible with whom their winnings must be shared. This is the exact opposite of what is needed, and the results are very obvious throughout both countries in the form of widespread poverty and all that comes with poverty.

There is no requirement in capitalism for the direction in which profits will go. They can accumulate in the hands of a few people, and they can be made available to meet social needs. Using profit to meet social needs does not necessarily remove the profit motive because everyone involved in such an enterprise is likely to want it to be profitable so that they will continue to have a job and income. This has been the case many times in US companies, for example. A company may have an economic downturn and lose money instead of making profit. Employees often accept lower pay to keep their jobs and to keep the company going. Employees know very well that the company must once again make a profit – end up with more money than it requires to operate it each year – if they are to keep their jobs. Otherwise, it will consume more money than is needed to operate and finally cease to exist when all of its money is gone. Employees accepting lower pay is a way to help return the company to profitability. The employees all share the profit motive. The profit motive is not the exclusive domain of the few people who start a company. It is shared by everyone involved because each has his or her own self-interest in keeping the company going.

Creating an enterprise for community funding will work for enriching a community just as well as it will work for enriching a few people. The profit motive remains intact. The enterprise is sustainable as long as it makes a profit, just as with any other business. The main limitation is the time it will take to grow enough to provide the money needed by the community. A credit union or bank, by comparison, can make sufficient money for a community available more quickly. These can be funded immediately with sufficient money to service entrepreneurs in a community. In turn, businesses and jobs are created quickly, reducing the overall financial needs of the community. The limitation of a bank or credit union is making enough money in the process of lending money to sustain itself. This money is made by charging interest rates, which must be high for micro loans. It requires much more time, work and therefore cost to lend one million dollars among a thousand different people than lending the same amount to one person, for example. As a result, the interest rates for micro loans need to be high in order to cover the operating costs of making these loans. Even with high interest rates – up to 35% in the present case – it remains difficult to earn sufficient profits to be able to make loans across a wide region such as Crimea where potential borrowers are spread out in remote areas across the region. The cost of outreach, training and multiple visits in that process can exceed 35% interest ultimately earned on micro-loans to remote areas.

By combining a community-funding enterprise (CFE) with a micro-credit union, the limitations inherent in each one is greatly diminished. The CFE provides sufficient funding to ensure the operating costs of the credit union, reducing the risk that the credit union will have any need to use its capital to sustain itself. The credit union immediately makes available sufficient loan money to match the needs of the community, thereby eliminating the time needed for the CFE to generate the same amounts of money. Additionally, CFE profits over and above what is needed to help with the operating costs of the credit union can be put directly into the credit union. Over time, the amount of money used to originally fund the creation of the CFE is offset by CFE contributions to the credit union. The credit union is increased so that larger amounts of money become available either to make larger loans or to service more borrowers. Together, the CFE and credit union create an enterprise where the original funding not only remains but also increases with time. They complement and balance each other by addressing the economic goals both have in common and offsetting each other’s limitations.

In the emerging global war against terrorism, first response has necessarily been to target and destroy existing terrorist organizations. This is a case of global self-defense. Preventing terrorism is at least equally important. There is an emerging consensus that poverty provides the essential breeding ground for terrorism to emerge. People with nothing have nothing to lose and much to gain.

In efforts to deal with communities in or near poverty, it will be useful to target progressive, peace-oriented communities just as aggressively as has been done in targeting terrorist cells. Both types of communities are quite similar, but, one has attempted a peaceful path whereas the other has not. Toward this end, the most promising and deserving communities must be “hit” with equal force as is brought to terrorist cells – the difference being delivery of resources rather than ordinance. The point is to grow the best, most promising communities with the same focus and passion brought to destroying terrorists.

Rewards must come for being decent, peaceful people to the same extent that punishment is brought for those who are not. There is no more obvious a case to be made for such reward than that of Crimean Tatars. This is a community which deserves to be rewarded first, quickly, and strongly as the opposite example of terrorist threat. Attending to those communities which represent the strongest threat very simply invites others to follow suit and become threatening. Rewarding those who represent strong and clear commitment to democratic principles and peaceful resolution of conflict will have the same effect: inviting others to follow suit and become peaceful and democratic. This is the best possible outcome, and an excellent start toward building a better world based on democracy, peace, broad prosperity, and the fulfillment of basic human rights.

In the emerging global war against terrorism, first response has necessarily been to target and destroy existing terrorist organizations. This is a case of global self-defense. Preventing terrorism is at least equally important. There is an emerging consensus that poverty provides the essential breeding ground for terrorism to emerge. People with nothing have nothing to lose and much to gain.

In efforts to deal with communities in or near poverty, it will be useful to target progressive, peace-oriented communities just as aggressively as has been done in targeting terrorist cells. Both types of communities are quite similar, but, one has attempted a peaceful path whereas the other has not. Toward this end, the most promising and deserving communities must be “hit” with equal force as is brought to terrorist cells – the difference being delivery of resources rather than ordinance. The point is to grow the best, most promising communities with the same focus and passion brought to destroying terrorists.

Rewards must come for being decent, peaceful people to the same extent that punishment is brought for those who are not. There is no more obvious a case to be made for such reward than that of Crimean Tatars. This is a community which deserves to be rewarded first, quickly, and strongly as the opposite example of terrorist threat. Attending to those communities which represent the strongest threat very simply invites others to follow suit and become threatening. Rewarding those who represent strong and clear commitment to democratic principles and peaceful resolution of conflict will have the same effect: inviting others to follow suit and become peaceful and democratic. This is the best possible outcome, and an excellent start toward building a better world based on democracy, peace, broad prosperity, and the fulfillment of basic human rights.

Conclusion

Just as the US now heavily uses smart bombs in warfare, it is becoming increasingly apparent that the equivalent is needed in aid efforts. It is not enough to spend, say, US$ 7 million dollars for five Tomahawk cruise missiles and then spend a fraction of that amount in building a peaceful community which does not merit targeting by missiles. Yet, that is what we have in this case.

The above was extracted from an economic development proposal for the Crimean Tatars in 2003.  In his interview with Inci Bowman  Hallman discusses the success of the Tomsk Regional Initiative and how this development approach will improve the lives of Tatars.

In his notes on Ukraine Terry describes how he found it necessary to block the project to ensure that his intellectual property would not be misused.

Related:

Clinton’s warning – the manifesto for People-Centered Economics

Britain’s warning – Capitalism is an insufficient economic model

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