IOU: The Debt Threat and Why We Must Defuse It. Noreena Hertz

known as bribes) necessary to secure the deal.

      Yet rather than trying to screen out corrupt countries from export credit agency funding, some of the world’s most corrupt countries – Indonesia, Turkey, the Philippines – continue to figure in the top 10 markets for export credit support. As Transparency International has written: ‘The continued lack of action by export credit agencies to address the issue of corruption has brought some export credit agency practices close to complicity with a criminal offence.’

      Corruption, yet again, seems not to be a factor when governments of the rich world decide to which countries to lend. Indeed, it remains so pervasive in the world of the ECA that it can almost be thought of as a complementary export that our governments finance. One of Britain’s most prominent contractors in Africa, a man who has built countless schools and hospitals using British ECA funding to do so, told me proudly that he has paid bribes of over $75 million to secure his contracts over the past 10 years.

      Of course, ECA loans aren’t necessarily or always a bad thing. Poor countries wouldn’t be able to finance many projects without them, many of the projects they facilitate are beneficial or at least harmless, and even though the contractor in the story mentioned above did pay out tens of millions of dollars in bribes over the past ten years, he did at the same time build schools and hospitals. The bribes could be considered a kind of operating tax.

      It is just that by lining the pockets of elites, ECA loans undermine not only the possibility of democracy, but also by essentially legitimizing corruption, can impede economic growth. Empirical study after empirical study has shown that corruption is a barrier to significant numbers of potential investors. Which means that the overall return on the debts incurred through ECA loans can be extremely low, or even negative.

      There have been some token gestures made recently on the part of ECAs to appease mounting criticism – Britain, for example, has introduced a new warranty procedure which requires companies to state that they have not engaged in bribery. But in practice reforms tend to be insufficient and unenforceable. Britain’s ECGD still has no investigatory powers, and thus no way of ensuring compliance. As Transparency International has recently said, ‘None of the ECAs seem to seriously consider or even allow the possibility of denying access to export support to a country that has previously been shown to use bribery.’

      Moreover, the projects ECAs choose to fund are often highly contentious. President Boigny of the Ivory Coast built the world’s largest church in Yamoussoukro, his birthplace, a cathedral modelled on St Peter’s in Rome with 36-metre high stained-glass windows, a 280-ton dome twice the height of Paris’s Notre Dame, and a 30-ft gilded cross, with $150 million worth of European export credit financing. A St Peter’s replica with air-conditioned seating for 7,000, standing room for 12,000 and an open-air piazza built to hold a congregation of 350,000 in a town with a population of 100,000 in a country where only 15 per cent of the population is Christian, and still fewer Catholic. Worse still, Boigny built this huge edifice at a time when millions of people in the Ivory Coast were dying from disease; funding for immunization programmes was nil; and AIDS was beginning to get out of control.

      Or take the Bataan Nuclear Power Plant in the Philippines. Built in 1976 for over $2 billion with loans largely provided by the US’s Ex-Im. The largest and most expensive construction project ever undertaken in that country, the loans taken out to build it are still costing the Philippines $170,000 a day to service, and will continue to do so until 2018. This in a country in which GDP per capita is $4,000, 40 per cent of the population live below the poverty line and annual per capita expenditure on health is only $30. And all this expense for a plant that never worked. ‘Filipinos have not benefited from a single watt of electricity,’ said the Philippine National Treasurer Leonor Briones. Thankfully not, because the plant’s design was based on an old two loop model that had no safety record of any sort; and because the plant lies along earthquake fault lines at the foot of a volcano.

      Paying for pollution and gun-runners

      ECAs do not only finance self-aggrandizing or misguided projects or corrupt elites, they are, historically, rarely subject to any safeguards, even those designed to protect human rights or the environment. Most export credit agencies, for example, have no legal obligation to screen out projects with adverse environmental and social impacts, no obligation to ensure that their projects comply with a set of mandatory human rights, environmental and development guidelines, and no obligation to consider the environmental impact of their investments or the contribution they will make to local development. Attempts to get G8 countries to agree on minimal social and environmental standards for their ECAs have resulted only in a non-binding arrangement, with companies now being asked to fill out questionnaires on their environmental and social impact. Once again, however, no procedures have been implemented to allow independent verification to take place. This clearly limited agreement was the compromise solution reached after Germany and France initially boycotted the talks, frustrated that their ECAs were losing their competitive advantage in the face of US demands for higher standards – it is ironic that Green parties were part of governing coalitions in both France and Germany at the time.

      In practice what this all means is that many of the projects ECAs end up financing – leading favourites are big infrastructure projects and resource extraction projects such as mines, dams, oil refineries and nuclear power plants – continue to be environmentally damaging and, frequently, socially undesirable as well.

      The Three Gorges Dam project in China is a perfect example. Here is a project that will force the relocation of 1.3 million people and drown 13 cities. It has been characterized by large-scale corruption and massive construction flaws and has been protested against by numerous Chinese scientists, engineers and journalists. Yet it has already received almost $1.5 billion in loans guarantees and insurance from various European ECAs. As one senior British official mused: ‘There was some problem about moving peasants there, wasn’t there?’

      Although the American ECAs are more strongly regulated than their European counterparts – President Clinton imposed mandatory standards in 1992 and 1997, which prevent them from investing in ‘projects that require large scale involuntary resettlement’ or ‘large dam projects that disrupt natural ecosystems or the livelihoods of local inhabitants’ – Ex-Im and OPIC have also invested heavily in projects with dubious environmental credentials. From 1992-8, for example, the two agencies between them underwrote $23.2 billion in financing for oil, gas and coal projects around the world. Over their lifetime, these plants will release 29.3 billion tons of carbon dioxide, the equivalent of the amount of carbon dioxide produced by 24 billion round-trip New York-Heathrow flights, an amount that would need to be offset by the planting of 48 billion trees.

      One of the American ECAs’ biggest clients during the 1990s for these kind of projects, was Enron. The Houston company’s Cuba pipeline from Bolivia to Brazil, for example, cuts directly through the world’s largest remaining dry tropical forest, and also part of the Pantanal wetlands, damaging 39 indigenous communities and several other non-indigenous communities on its way – as well as devastating the environment. It was a project the World Bank said it would not have financed. Many of OPIC’s own staff recognized it was in violation of its own guidelines. Yet no one stopped it. Indeed, this was typical of the kind of project backed by Ex-Im and OPIC.

      No wonder, as we will see in Chapter 10, Ex-Im and OPIC are currently being taken to court in the US for allegedly failing to conduct environmental reviews before financing projects that contribute to global warming. Although let’s not forget that it’s the industrialized rich world that is responsible for far more carbon dioxide emissions than the