TCS Daily

A Proper Accounting

By Julian Morris - September 3, 2002 12:00 AM

JOHANNESBURG - One of the key themes being pushed by NGOs here at the World Summit on Sustainable Development in Johannesburg is 'corporate accountability'. Whilst there is much to be said in favour of corporations being held accountable for their actions, the policies being proposed by NGOs would most likely undermine foreign investment, slow down technology transfer, and do less than nothing for the poorest of the world. The alternative, proposed on Monday by British Prime Minister Tony Blair, of a voluntary code of conduct is far more reasonable but still has problems. A far better solution would be simply to end subsidies to transnational companies (TNCs).

Friends of the Earth and Christian Aid are among the many NGOs here in Johannesburg calling for a global agreement on corporate accountability. Citing numerous examples of corporations harming people in poor countries, they argue that these violations would be stopped if only transnational companies (TNCs) were held accountable for their actions in their country of domicile. But it is not at all clear that their proposal would actually improve the situation.

The argument that individuals and companies should behave in ways that do not harm others is unexceptionable. In most rich countries, the law recognises and protects this basic right of citizens. However, in many poorer countries, the law is often both opaque and costly, so most citizens are excluded. As a result, people and companies are not able to hold to account those who cause harm.

India has a particularly poor record of protecting its citizens from environmental harms. Consider, for example, the tragedy that befell Bhopal, India on December 3, 1984, when, as a result of a series of calamitous errors (possibly even involving sabotage by disgruntled employees), there was a leak of lethal methyl isocyanate gas, which resulted in over 3,000 deaths and as many as 150,000 injuries.

Many of those killed and most of those injured were living on land that had been allocated as a safety cordon by the Indian Government, with the intention that it would be uninhabited - but which had been squatted by migrants. The failure of the Indian Government to prevent squatting suggests that, from an ethical perspective, it was at least as culpable as Union Carbide in causing death and injury. Indeed, this was the implication of Justice Sabyasachi Mukherjee's initial Supreme Court Judgement in the Bhopal case.

Accepting its own culpability, Union Carbide sought to compensate victims and their families and in 1989 agreed a settlement with the Indian government. However, because of the bureaucracy and inefficiency of the Indian Government, few of the victims have received any money to date. Now, the Indian High Court has gone a step further, holding the former Chairman of Union Carbide, Warren Anderson, guilty of homicide. The message to TNCs is clear: if you invest in India be prepared to play by the arbitrary rules of the Indian government and the politicised judiciary.

But what is the broader lesson we should learn from Bhopal? According to the NGOs pushing for a global agreement on corporate accountability, the lesson is that corporations need to be held in check through sanctions in their country of domicile for harms that result from their operations overseas. Like the recent Indian court judgement against Anderson, the primary effect of such an agreement would be to discourage TNCs from investing in places where the rule of law is weak. Whether that is a good thing is a matter of opinion.

Until the 1960s, in an average year famine killed many more people in India than died in the Bhopal disaster. Fertiliser, pesticide and modern (hybrid) seeds have turned that situation around. If these important agricultural inputs had not been produced locally by TNCs such as Union Carbide, they would have been imported or produced by local companies. Prices of these inputs would have been higher and their quality most likely lower. Fewer farmers would have been able to benefit from these technologies and total yields would have been lower. It is likely that many more people would have died of starvation as a result; most likely many more than died at Bhopal.

The global agreement on corporate accountability would only cover multinationals (as Tony Juniper of Friends of the Earth has pointed out, an agreement that covered local companies would be too complicated). But the smaller, local companies that are not subject to the multinational rules would also often not have the technology or know-how of the TNCs, so they would actually present a worse hazard. In other words, the multinational agreement on corporate accountability would increase the cost of inputs to the poorest people in the world whilst simultaneously increasing the risk of a repeat of something like Bhopal.

In addition, by discouraging investment from TNCs, a global agreement on corporate accountability would actually reduce pressure for local accountability by increasing the dominance of corrupt local companies. More generally, it would both undermine economic growth and harm the environment by forcing people to rely on older, less efficient, more polluting technologies.

There is an irony in the NGO demands for a global agreement on corporate accountability, when they are themselves rarely held to account for the often-harmful policies that they attempt to foist on society. Perhaps they would change their tune if they were to be held liable for the harms done to the poor by policies that undermine new investments in energy, roads and water - services that are absolutely essential for economic development to take place and yet would be amongst the first to suffer from a global agreement on corporate accountability.

By comparison to the NGO demands for corporate accountability, Blair's proposal that TNCs voluntarily declare any amounts given to foreign governments seems quite reasonable. In the best-case scenario, it might encourage foreign governments to clean up their act. But it might also lead to attempts to hide these bribes in contracts with other (private) entities, thereby undermining the whole exercise - and possibly even encouraging Enron-like misappropriation of funds. In the worst case scenario, it would lead to disinvestment in countries that desperately need the foreign capital and technology transfer that go along with TNC operations.

All this is rather dispiriting for those of us who desperately want individuals, corporations and, perhaps especially, governments to be held accountable for harms that they cause. Fortunately there is something practical that can be done. At present, many governments actually subsidise companies operating in corrupt foreign countries through export credit guarantees and (in the case of the International Finance Corporation) subsidised exchange rates. If governments really are serious about getting rid of corruption and improving the rule of law in foreign countries, they should end these subsidies. Companies would then have stronger incentives to take into consideration risks associated with poor enforcement of contracts and unstable exchange rates, which might in turn encourage foreign governments to clean up their acts.

Corporate accountability must, ultimately, come from improvements in the rule of law locally. Attempting to impose this from outside - whether through a global agreement or a heavy-handed 'voluntary' code - is unlikely to be very successful and might even be counterproductive. To the extent that TNCs improve economic conditions and empower local people, governments should not do anything further to discourage them from operating overseas.

The author is co-Director of the International Policy Network and editor of Sustainable Development: Promoting Progress or Perpetuating Poverty? (Profile Books, 2002).



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