THE LIFEWORTH REVIEW OF 2008

Beyond the Western financial crisis

May 9, 2009 by  
Filed under Third Quarter

‘The credit crunch is creating a new world order in banking and finance . . . It’s a world in which the Chinese state, if it co-ordinated the investments of its cash-rich institutions, could end up owning more-or-less the entire financial system of the US and the UK.’ That was the view of BBC business editor Robert Peston.44 Although the financial crisis seemed global, the origins began in the highly leveraged West, and posed a greater long-term threat to the economic systems of post-industrial economies than to rapidly industrialising ones. Looking forward on how this period of history—what we now refer to as ‘the credit crunch’—will be appraised, the term ‘Western Financial Crisis’ might be a strong candidate. If a New Financial Order is emerging, it is clear that China will play a significant role in how it is formed.

Mark Leonard: China is emerging as an intellectual power.

Mark Leonard: China is emerging as an intellectual power.

Mark Leonard of the European Council for Foreign Relations said, ‘it’s not just economic and military power that’s shifting from west to east. China is emerging as an intellectual power. It’s coming up with its own ideas, which are very influential, which other people are copying.’ He explained that ‘the debate we’re having about managing China’s rise has got a mirror image in China, where they’re having an argument about how to manage the west’s decline. In the US, they’re talking about what mix to have of containment and engagement, to try to get the China that they want. But what’s interesting is that the Chinese are thinking about how they can shape an America that is organised in a way that benefits their interests.’45

Some worry about the growing role of China on the world stage; others welcome it. As expected, the focus of the world’s attention on the Summer Olympic Games in Beijing led to widespread coverage of China’s poor human rights record and its occupation of Tibet, and PetroChina’s oil investments in Sudan, which human rights campaigners have long argued is complicit with genocide occurring in the Darfur region.46

With calls for Olympic boycotts made by some campaigners falling on deaf ears, the London Times (which is owned by News International, a company with significant investments in China) collected together a series of articles on its website examining some weaknesses in anti-China arguments. One Times commentator noted that ‘The lowlife double standards that informed Western views of the vicious Easterner 60 years ago are being rehabilitated in the modern era by human rights activists, who are calling on Western democracies to put pressure on China over its occupation of Tibet and its human rights abuses.’ The logic of this argument about racially motivated fears was somewhat confused when the author added ‘the West has no moral authority to lecture anyone, including China, about rights and democracy. Here in Britain, free speech has been curbed through the creation of new thought crimes (see the Racial and Religious Hatred Act).’47

A more compelling pro-China argument rests on indications that some African nations are increasingly welcoming and voluntarily preferring Chinese state-led investment projects over Western private investment. South African-based commentator Janine Erasmus reported in September 2008 that ‘China has become Africa’s third-largest trade partner, after the US and former colonial power France. According to a report by China’s General Administration of Customs, bilateral trade between China and Africa will exceed R803 billion ($100 billion) in 2008, two years earlier than predicted.48

‘The trend is attributed to escalating shipments of natural resources to China, especially crude oil, mainly from Sudan, Chad, Nigeria, the Republic of Congo and Angola, metals from Ghana, Gabon, the Democratic Republic of Congo, Zambia, and South Africa, as well as cobalt and other minerals. At the same time, goods manufactured in China are increasingly sought after by African consumers. During the first half of 2008, exports to China from Africa rose 92 percent to R240 billion ($30 billion), while the continent imported goods to the value of R184 billion ($23 billion), an increase of 40 percent according to the Chinese customs authority.’

One key advantage for China in what is often viewed as a ‘new scramble for Africa’ has been the ability of its state-controlled banks to finance infrastructure investment as part of its trading arrangements. In the Democratic Republic of Congo, China ‘is estimated to have pumped in $9 million for developing the mines and building roads and hospitals. In exchange it will be allowed to mine in the mineral rich Congo for 22 years. Despite heavy criticism from opposition parties the government has continued to defend the deal. It has described it as the “Marshall plan” it needed, to rebuild the country and ensure it reaches double digit growth levels.’49

When the mines reach full production capacity, China will be extracting 4,000 tons of copper from six mines. Deputy Minister of Mines Victor Kasongo told South African television that ‘It was important for Congo to have infrastructure to sustain. It is not by Congo’s fault [that] others couldn’t give us the money or access the market. So we had to take our own responsibility to bring growth forward. The China deal came to replace the promise we had with western countries.’50

According to the contract, China is expected to build close to 4,000 km of road connecting the country’s major economic hubs, 26 hospitals and improve 250 km of road in Kinshasa alone. Opposition members have criticised the deal, arguing that it favours Chinese firms who receive much of the building work. With China, Brazil and India tying up infrastructure or loan deals in several African countries, often in return for oil, metals and other commodity resources, concerns have been raised among traditional lenders such as the International Monetary Fund (IMF) and World Bank.

Dominique Strauss-Kahn: this new financial help must not destroy the original Bretton Woods policies

Dominique Strauss-Kahn: this new financial help must not destroy the original Bretton Woods policies

In response to these concerns African members of the IMF meeting in August 2008 in Mauritania issued a declaration pledging ‘greater transparency in their dealings with China and other so-called non-traditional sources of finance’.51 IMF Managing Director Dominique Strauss-Kahn told Reuters in August 2008 that ‘It is good news that there are new sources of financing, but we have to be very careful in order that this new financial help does not destroy the original policies of the Bretton Woods institutions’.52 A report released in July 2008 by the World Bank53 states that China, together with India and several Gulf nations, is financing a number of large infrastructure projects, such as hydropower schemes and transport schemes, across sub-Saharan Africa which may have positive impacts in the drive to reduce poverty. World Bank vice president for Africa Obiageli Katryn Ezekwesili has remarked, ‘China’s growing infrastructure commitments in Africa are helping to address the huge infrastructure deficit of the continent.’54

In an era of globalisation, it is natural that Western firms will face increasing competition around the world. What was perhaps unforeseen by Western policy-makers was the scale of the impact of state support for Chinese investment. Rosalind McLymont writing in the New Jersey-based Shipping Digest55 reports that ‘China’s two-way trade with Africa surged past $70 billion in 2007, compared with less than $1 billion in 1980, while US trade with Africa grew to about $85 billion from about $23 billion in the same period . . . Between 1998 and 2006, Africa’s exports to China increased 2,126 percent against 402 percent in exports to the United States. To facilitate those exports, Beijing set up most-preferential-treatment agreements with 20 African countries, including tariff-free treatment on 454 products imported from the least developed nations.’ She also noted that ‘With $1.7 trillion in cash reserves, compared to the United States’ $62 billion, Beijing has much more leverage for deals in Africa than Washington does.’

The scale of growing South–South cooperation and investment led by China represents a new challenge to traditional Western-led North–South investment. While some Western companies have responded to the corporate responsibility agenda by building infrastructure and increasing the transparency of their dealings with developing-country governments (for instance, BP in Angola), the willingness of private international capital to take long-term risks is more constrained than recent state-facilitated Chinese arrangements in Africa. One consequence is that, while Western hydrocarbon companies may have led the oil boom in African nations, as the centre of global economic power shifts ‘eastwards and southwards’ contracts for infrastructure and future development are increasingly going to Southern-based companies, with China, Brazil and India posing a growing challenge to Western dominance in world trade. Along with that will be a reduction in Western influence on the corporate responsibility agenda, as new challenges, views and initiatives emerge among a more diverse field of business activity.

» Rainbows in the storm

(The references are available in the pdf download and hard copy versions of this annual review, available from Lifeworth’s bookstore.)

This section can be referenced as:

Bendell, J., and N. Alam, S. Lin, C. Ng, L. Rimando, C. Veuthey, B. Wettstein (2009) The Eastern Turn in Responsible Enterprise: A Yearly Review of Corporate Responsibility from Lifeworth, Lifeworth: Manila, Philippines. (Page numbers for this section are available in the pdf download and hardcopy.)

Rainbows in the storm

May 8, 2009 by  
Filed under Third Quarter

As money was such a dominant issue in the third quarter of the year, let us round up some of the news in the socially responsible investing (SRI) field that caught our eye. Because, even though the financial crisis has overshadowed all other stories for all types of investors, there was no let-up in campaigns and news stories targeted at influencing socially responsible investors, particularly in relation to investments in countries with poor human rights records.

Action on Zimbabwe was one such rainbow amid the financial storms. In June 2008, international concern about rigged elections and political violence led to renewed calls for companies to review their investments in the hyper-inflation-ravaged country. Standard Chartered, the UK-listed international bank, came under the spotlight following reports that the Foreign Office was investigating one case of a possible breach of EU sanctions.

The influential newsletter Africa Confidential alleged that Standard Chartered, together with Barclays and the insurance firm Old Mutual, was one of three British-based groups thought to have provided an estimated $1 billion (£500 million) in direct and indirect funding to Robert Mugabe’s administration. The Independent on Sunday quoted internal Foreign Office emails expressing concern about the bank’s activities, with one message stating ‘I’d say Standard Chartered is my prime concern. I’ve not asked them whether they’ve made any of these loan payments, but there’s a good chance that they may have been forced to do so by the Reserve Bank of Zimbabwe. Officials said that, if a sanctions-busting case is proven, ‘we will take appropriate action. We are determined to see that EU sanctions are properly enforced.’56

In July 2008, The Observer reported that Shell was considering pulling out of Zimbabwe ‘amid claims that President Robert Mugabe was reserving the distribution of fuel at petrol pumps for party supporters’.57 A study by London-based Ethical Investment Research Services quoted by the paper showed that Britain is the largest foreign investor in Zimbabwe with holdings in more than a quarter of the 82 companies that have their parents listed on overseas stock exchanges.

In response to public concerns, UK Prime Minister Gordon Brown asked companies doing business in Zimbabwe to ‘reconsider’ their position. The Foreign Office said this meant that they should look at board members and shareholders of their subsidiaries to see if regime members were directly benefiting.

While—in common with other long-standing investors in the country such as Unilever, British American Tobacco and the mining corporations Anglo American and Rio Tinto—Standard Chartered Bank pledged to stay in Zimbabwe, some non-resource companies with smaller commitments did respond, with Tesco announcing that it would ‘stop sourcing products from Zimbabwe as long as the political crisis persisted’; and the Mayor of London promised that London Transport’s ‘Oyster Card’ supplier EDS would not renew its contract with the Munich-based company Giesecke & Devrient, because the latter provided banknotes to Zimbabwe’s central bank. The communications company WPP meanwhile sold its 25% stake in Imago Young & Rubicam which had been advising the regime ‘for just $1 to the majority shareholder, Sharon Mugabe, who is also chief executive’.58

July 2008 also saw renewed focus on Western investments in Burma (Myanmar) with the publication of a new report by Burma Campaign UK, ‘Insuring Repression’, accusing foreign insurance companies of working closely with the regime’s insurance company to ensure that foreign businesses can operate in Burma.59 Sixteen companies were highlighted as their members or subsidiaries sell insurance to companies in Burma, including Lloyds of London, Hannover Re, Catlin, Atrium, XL, Tokio Marine, Sompo Japan and Mitsui Sumitomo. Johnny Chatterton, author of the report and Campaigns Officer at Burma Campaign UK, said, ‘By selling insurance to companies operating in Burma these companies are propping up a regime that rules through fear—raping, torturing and killing Burma’s civilians. These companies are putting profit before ethics, they are helping to finance a regime that less than a year ago was shooting peaceful protesters on the streets of Rangoon.’ The Campaign criticised the EU for failing to follow the US in imposing targeted financial sanctions that would prevent insurance companies from selling insurance to companies in Burma and praised a number of companies that have taken the decision not to provide insurance to companies there, including AIG, Allianz, AON, AVIVA, AXA, ING, Munich Re, SCOR, Swiss Re and Willis.

In July 2008, there was interesting news for those following the increasing public interest in and scrutiny of SRI funds when Pax World Management Corp. agreed to pay a $500,000 fine to the US Securities and Exchange Commission (SEC) because it had failed to follow its own socially responsible investing criteria over a five-year period, when two of its mutual funds invested in off-limits industries such as gambling and liquor, and oil and gas exploration. David Bergers, head of the SEC’s Boston office, said it apparently was the first case the agency has brought alleging violations by a mutual fund firm that purports to use social as well as financial screening criteria in making investments.60 After the failures at Pax, the socially responsible investment industry estimated by the US Social Investment Forum to hold more than $2.7 trillion in investor assets in 2007 could come under closer scrutiny.

» Rent-a-geek

(The references are available in the pdf download and hard copy versions of this annual review, available from Lifeworth’s bookstore.)

This section can be referenced as:

Bendell, J., and N. Alam, S. Lin, C. Ng, L. Rimando, C. Veuthey, B. Wettstein (2009) The Eastern Turn in Responsible Enterprise: A Yearly Review of Corporate Responsibility from Lifeworth, Lifeworth: Manila, Philippines. (Page numbers for this section are available in the pdf download and hardcopy.)