Money talks...but will it listen?

Since 1998, when up to 60,000 people formed a human chain in Birmingham during the G8 meeting in England that year, the mass mobilizations of people protesting at international summits have helped to make capitalism a point of popular political debate. This ‘counter-globalization’ movement has prompted us to question whether our economic system is functioning for the collective good or creating such inequality and ecological destruction that it is leading humanity to ruin. Since 1998 inter-governmental summits have been organized in more secure locations, where the protesters have little chance of disrupting the meeting. Consequently the question for many people interested in mass public mobilization, as part of a counter-globalization movement, has been ‘where to go from here’?

In July, the ‘Make Poverty History’ campaign and associated ‘Live 8’ musical events marked a new stage in social activism around these summits. Coordinated NGO action in the build up to the summit, combined with initiative by UK Chancellor Gordon Brown, meant that the world’s media expected an announcement on what the G8 leaders would do to improve their role in the aid, trade and debt situation of the global South.

The way that celebrity involvement dominated the message broadcast around the world was a concern for some. The message became one of charity not justice, with the powerful men of the world asked to help the unfortunate rather than being challenged to correct their own countries’ involvement in oppressive trading and financial relations with poor countries. The movement on trade issues was non-existent, and the debt cancellation deal was not comprehensive.

Nevertheless, the G8 leaders did agree to write off 100% of the debts of 18 countries that were owed to the IMF and World Bank, and to require those countries to agree to measures that would reduce corruption, but not require them to adopt other reforms that would amount to interference in their domestic political processes. This achievement represented the culmination of a number of forces, including the seven years of protests at these international summits.

The agreement does not, however, end the rich countries abuse of the South through its odious debt claims. It is still to be seen whether some countries will fund debt cancellation by diverting money from their aid budgets – robbing Peter to pay Paul. Debt still stands at US$2.5 trillion, much of which has been paid for many times over, in cash, as well as in the lives of children denied medical care and education as a result. The West’s moral debt remains unpaid.

The biggest problem with the debt cancellation agreement, one that development NGOs did not highlight clearly at the time, but which is relevant to the corporate citizenship agenda, is that the majority of the developing country debts are owed to private financial institutions and are therefore not covered by the G8 agreement. In Latin America, for example, 63% of their external debts are to the private sector, and only four of the continents countries will benefit from the G8 debt cancellation initiative.140

These bonds of poverty and exploitation are known in the financial world as “emerging market debt”, and have been one of the best-performing asset classes since 2000. When Switzerland and other countries cancelled their government held debts in the 1990s the net debt repayments from developing countries didn’t actually fall, as those countries were then in a better position to service other debts, owed to creditors like the World Bank and private institutions. So although the G8 politicians could express their joy that thousands of children in Sub-Saharan Africa will be able to get an education because of debt cancellation, it is shareholders and fundholders that are the immediate winners of government debt cancellation, as poor countries will be better able to service their private debts. No wonder then that emerging market debt prices spiked in the weeks following announcements about deals on debt, along with the shares of banks like UBS.

So what have these ‘secret winners’ of the G8 actually done to help alleviate the debt crisis? Through the ‘London Club’ process they have rescheduled debts, reactively, when a country has reached such difficulty they have to suspend payments, and then on really expensive terms. Worse, the private financial institutions and their associations, such as the Washington-based Institute of International Finance (IIF) have blocked efforts to get an arbitration process set up for all debts to be looked at in terms of their legitimacy. We should remember that a quarter of the loans making up the current debt stock were lent to dictators. Not encumbering new democracies with the debts of the regime they have replaced was a good enough argument for the US and UK to cancel Iraq’s debts accrued during Saddam Hussein; but they do not wish to recognize this as a matter of principle. 

The lack of leadership from the banks on the debt crisis is understandable when you consider their role in lubricating the processes that led to it. Capital flight from developing countries has been a key factor in balance of payments problems. An estimated US$11 trillion US is held in tax haven banks by highly wealthy individuals, costing the world’s governments about US$255 billion a year in lost tax revenue. Currency speculation at over a trillion dollars a day is also a major problem, destabilizing currencies so that there is a mismatch between loans priced in rich country currencies, and repayments in domestic currencies. The world’s top twenty banks account for 80% of this currency speculation, making a huge profit from a trade that helps no one and contributes to debt crises.

In 2005 the private financial sector in rich countries lobbied hard for regulatory changes in poor countries that would do little to address these problems, and their own culpability in the current and future odious debts of the developing world. Their efforts lead to a declaration from the G8 on the importance of progress in the developing world liberalizing its financial sector, and a commitment to attaining commitments by the Hong Kong ministerial of the World Trade Organization. There is no proven development benefit from such liberalization, and many developing countries doubt the benefits of capital liberalization. In fact, countries who have not liberalized their financial sectors, like Malaysia, China and Chile, have managed to ride out financial crises affecting their regions. Corporate lobbying for blanket liberalization of financial sectors is, therefore, irresponsible.

With the message of the 2005 G8 protests having been so managed by celebrities and mainstream NGOs, protesters may now consider that protesting at these summits has run its course, and turn their attention elsewhere. Many of the people who protested on the streets at the Birmingham G8 summit saw G8 governments and institutions like the World Bank and IMF to be mere servants of a system of unfettered profit-seeking. The system itself has to change, not its functionaries. This thinking was illustrated by the mass protest in the UK that followed the 1998 G8, which was called ‘Stop the City’ and targeted London’s financial district. With recent debt cancellations the banks are now in the hot seat on debt. Therefore, in answering the question ‘where to next’ the counter-globalization movement may once again turn its attention to the private financial institutions. Reports on the conclusions of the counter-Summit suggested that such a shift in focus is likely.141

A report in September from Christian Aid gave an indication of this shift in focus toward the questionable impact of private banks in international development. The charity attacked offshore tax havens and the banks that use them, estimating that tax evasion and offshore banking secrecy costs third-world governments up to US$500 billion a year in lost revenues. The report's author, Andrew Pendleton, said the UK government had a particular responsibility. "Of the world's 72 tax havens, 35 are British territories or Commonwealth members. Tackling global evasion will take a lot of international co-operation, but it would be fitting for Britain to take the lead."142

Are the banks and investors ready for growing critical attention from civil society? Many currently consider their social responsibility is sufficiently addressed by having a recycling programme in headquarters, employee volunteering, more sophisticated risk assessments, and a few extra product lines for niche markets, called ethical or socially responsible investment funds. HSBC has gone further than most in addressing its own in house impacts on the environment, committing itself to carbon neutrality.

Some have also begun to address issues more central to their core business of providing financial services. For example, Barclays has given an account of its efforts to improve its consumer and corporate lending practices, and promote financial inclusion, in its Corporate Responsibility Report for 2004.143 A number of banks have also begun addressing the impacts of their lending practices, through the Equator Principles. HSBC's Corporate Social Responsibility Report for 2004 reported for first time the number and value of transactions approved and the number of transactions declined through applying the Equator Principles.144 A number of initiatives in the institutional investment arena, reported in the section Changing Money, are also indicating that the sustainable development dimension to normal fund management practices are beginning to be looked at. However, some of the greatest impacts of the financial sector on sustainable development could involve Southern country debts, capital flight and tax avoidance, hedge funds, and currency speculation. It is not surprising that these areas are left unaddressed by most financial institutions, because finding socially and environmentally beneficial ways of conducting these activities appears to be a difficult challenge, perhaps impossible. Some prodding from activists may make this challenge an unavoidable one, and usher in a new paradigm in responsible finance, that addresses the core activities on banks and investors.

The power of the private financial institutions in shaping the policies of the G8 reminds us clearly that money talks. As the counter-globalization moves its attention towards those same financial institutions, we will find out whether money can listen.

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contents © Greenleaf Publishing, apart from the Introduction © jem bendell, 2006. site by waywardmedia.com