Thursday, July 13

Export Credit Agencies: crony capitalism on steroids

"An export credit agency is an agency of--or backed by--a government. Usually overseen by the finance, trade, or economics ministry, an ECA uses taxpayer money to make it cheaper and less risky for domestic corporations to export or invest overseas. Almost all industrialized nations have at least one ECA.*

Pundita, [re post on crony capitalism]. You asked what the government could do to help countries move toward genuinely competitive capitalism. For starters the US and other G8 governments could deal with the worst excesses of their export credit agencies.
Mark in Long Island

Dear Mark:
You are opening a big subject. If Noam Chomsky is right in his assessment that ECAs are de facto welfare for corporations, I doubt our elected officials and representatives will want to rein them in -- not unless enormous pressure is applied from the voter. However, Pundita is not knowledgeable enough about the subject to say whether I agree with Chomsky.

In any case, ECAs influence a government's foreign policy and this is done outside the spotlight of public scrutiny. And they are on record for financing highly questionable and even discredited development projects in the world's poorest countries.

So let's introduce the other readers to the arcane world of export credit agencies. Wikipedia flatly states that their very short article on the topic needs to be expanded by an "expert." So far there have been no takers.

I include a link to the Wiki article because it contains a handy reference list of the world's most well known export credit agencies. But let's start our journey of understanding with a dramatic story from a highly informative (although clearly biased) article on ECAs written for the layperson. It’s titled Worse Than the World Bank? Export Credit Agencies -- The Secret Engine of Globalization from the Winter 2003 issue of The Backgrounder.
“ . . .one of the most important benefits that corporations are receiving from ECAs is not financial backing at all--but rather political backing. Corporations prize the political power that comes with an ECA loan, guarantee, or insurance policy-- power that can be exerted on developing countries.

For example, after the electricity board of the Indian state of Maharashtra cancelled its agreement to purchase overpriced power from Enron's Dabhol power plant, the U.S. government exerted extreme pressure on the Indian government to pay, in a strategy coordinated at the highest levels of the U.S. government (the National Security Council) and involving even Vice-President Richard Cheney and Secretary of State Colin Powell.

The U.S. did not do this just to assist Enron, but also to protect the hundreds of millions of dollars in U.S. taxpayer loans and insurance that had been supplied by U.S. ECAs.22 According to the Associated Press, U.S. government threats have even included cutting off aid to India.”
That should be enough to whet your interest. Pundita suggests reading through the entire Backgrounder article, which contains some eye-popping pie charts. And don't miss the part about the ECAs leaving behind mountains of debt. But to get down to brass tacks:
[. . .] Indeed, the increasing role of ECAs in the global economy--directly backing hundreds of billions of dollars of international trade and investment and leveraging much more in purely private flows--raises the question of the extent to which government intervention through ECAs has actually driven the process of economic globalization.

Why ECAs Are Troubling
Not only are ECAs by far the single largest part of public financial flows from North to South, but as we will see, they are also the least examined, the least transparent, the least accountable, and, in some ways, the most harmful. Among the issues critics of ECAs raise are that they:

· Support destructive projects that even the World Bank will not touch
· Lack basic environmental, human rights, corruption, and other safeguards
· Undercut their governments' own developmental and environmental policies and multilateral agreements
· Contribute heavily to developing countries' debt burdens
· Have little or no transparency or accountability
· Provide corporate welfare by passing business' risks and losses on to unwitting taxpayers
· Contribute significantly to the arms trade, the expansion of nuclear power, and global warming.

The Beginnings of Change
Many nongovernmental organizations (NGOs) began to grapple with export credit agencies after discovering that they had become the principal financiers of the projects local communities in developing countries were battling because of environmental or social impacts, corruption, or other ills. A loose international network of NGOs and trade unions has grown rapidly over just the last three to five years, working on many of the issues discussed in this paper.

In 2000, 347 NGOs from 45 countries documented their calls for reform with a platform statement known as the Jakarta Declaration. NGOs have successfully campaigned to stop or delay certain ECA projects, such as the Maheshwar dam in India and the Ilisu dam in Turkey. And NGOs have forced a few countries to adopt some significant ECA reforms, at least on the issues of transparency or the environment.36

Moreover, every G8 communique' between 1997 and 2001 included language encouraging or mandating international negotiations towards multilateral environmental reforms for ECAs.

However, after nearly five years of these international discussions and negotiations (which take place at the OECD), governments have failed, and most countries have decided to implement a proposal that NGOs rightly regard as a total sham.37 (Negotiations are set to re-open later [in 2003].)

Moreover, attempts to address nonenvironmental issues surrounding ECAs--such as debt, corruption, and human rights, have either been similarly weak or simply nonexistent.

How Are ECAs to Be Dealt With? The Policy Debate
Many people favor eliminating ECAs, seeing them as socially harmful trade subsidies that benefit neither the ECAs' home countries nor the recipient countries. But if ECAs are going to exist, clear reforms should be the minimum price of their continued existence. At the very least, ECAs must abide by strict rules in order to prevent the crushing debt, human rights abuses, corruption, environmental damage, and other impacts that now frequently accompany ECA activities.

These rules would fall into three categories:

· Screens, assessments, and binding standards to ensure that ECAs do not support transactions causing environmental or social harm, labor or human rights abuses, and/or unjustifiable debt.

· Measures to prevent ECA support for transactions involving corruption.38

· Transparency, including consultations with potentially affected communities and other stakeholders and the public release of project information before a project's approval,and the release of data on the nature and extent of the ECAs' activities.

Governments should not support projects that devastate local communities and the environment and leave little behind besides a few well-lined pockets and mountains of debt. If they continue to do so through their ECAs, the most destructive chapters in the history of development are sure to be repeated.

What Can You Do?
Like other previously anonymous institutions (the World Bank, IMF, WTO, etc.), ECAs will never change unless and until their impacts and their role in the global economic system are exposed and publicized. Otherwise, they will continue to operate in near-anonymity and obstruct any efforts for change. The time has come for ECAs to be dragged into the public light--and for us to demand change from governments, legislatures, the G8 and OECD, and ECAs themselves. ECAs must become accountable to the world.

1. To contact organizations working on ECAs. Visit eca-watch.org to find lists of nongovernmental organizations (NGOs) in over 30 countries working on ECAs.

2. For more information. Visit environmentaldefense.org/go/eca or eca-watch.org. Also, this backgrounder is drawn from a larger paper that you may wish to read to delve deeper into the subject. It is entitled "Globalization's Most Perverse Secret: The Role of Export Credit and Investment Insurance Agencies," and it's available at environmentaldefense.org or new-rules.org.39
A word of caution about the author's use of the World Bank as a comparison: The Bank is one among many development banks. So to attempt to view the perceived sins of the EFAs against those of the World Bank doesn't convey an accurate picture of the damage that 'bad' development bank projects and programs have done.

*From the Backgrounder report.

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