![[Backgrounder - Winter 2003]](http://www.foodfirst.org/images/pubs/backgrdrs/2003/w03v9n1.jpg)
Worse Than the World Bank? Export Credit Agencies–The Secret Engine of Globalization
by Aaron Goldzimer* Also available in PDF format (286kb).
Bankers are always very secretive about the precise structuring of their deals, but essentially the strategy is simple. The key is to get as high a return as possible, while palming the risk off on somebody else. That is why you should never listen when people tell you that export credit agencies are…dinosaurs. What could be nicer in times of turmoil than having the risk picked up by the taxpayer? –Euromoney1
The Three Gorges dam project in China is probably the biggest and most controversial construction project on the planet. Its reservoir is nearly half the length of California, in a watershed that is home to more than 370 million people. Many experts predict the outcome will be a nightmare: enormous amounts of residential and industrial waste and 530 million tons of silt a year–currently flushed out to sea–will instead collect in the reservoir; by some estimates, the odds of the dam’s breaking are 1 in 1,000 (not counting a military or terrorist attempt to destroy it), endangering tens of millions of lives downstream; and already nearly 2 million people are being forcibly evicted to make way for the reservoir.2 Under intense pressure from nongovermental organizations (NGOs), the World Bank has refrained from financinthe project due to the environmental, social, and economic controversies surrounding the dam. But few people know that other institutions run by the leading industrial nations have provided almost $1.5 billion in taxpayer-backed loans, guarantees, and insurance to construct the dam.3 These institutions are export credit and investment support agencies (ECAs).
While movements for global justice have succeeded in generating
public debate about other previously anonymous institutions, such
as the World Bank, the World Trade Organization (WTO), and the
International Monetary Fund (IMF), one big piece has been missing
from our understanding of how the global economic system favors
multinational corporations and banks from rich countries over the
poor and the environment in developing countries. That missing
piece is the role of export credit agencies. “ECA” must
be the next international acronym dragged into the public light.
What Is an ECA? 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 (see
box). Like department stores that provide credit so people
without cash will buy the stores’ products, rich countries
(through their ECAs) provide loans and credit to developing
countries, so that they will buy the rich country’s
exports.4 The results include debt for poor countries
and increased sales and foreign investment opportunities for
multinational corporations based in wealthy countries. Many ECAs
offer direct loans; or, when commercial banks or exporters
provide the loans or credit, ECAs provide guarantees or
insurance–essentially promises to reimburse the banks or
exporters and cover most losses. ECAs offer lower interest rates,
premiums, and fees than the private market would–and can also
back transactions that the private market would
refuse.5 But for developing-country borrowers,
ECA-backed loans are still at higher interest rates than many
loans from other official sources like the World Bank or the
International Monetary Fund (IMF), or other development banks and
aid agencies.6 Also, in addition to support for
exports, many ECAs offer loans, guarantees, or insurance for
direct investments in developing countries by corporations based
in the ECA’s home country. How
ECAs Drive the Global Economy Few people
recognize the scale and importance of ECAs’ role in the
global economy. One ECA enthusiast calls them “the unsung
giants of international trade and finance.”7 At a
minimum, it is likely that ECA-backed export credits and foreign
investment from industrialized countries towards developing
countries amount to $100 to $200 billion annually.8 In
comparison, the entire World Bank Group’s commitments in 2000
came to only $19.3 billion, and all official development
assistance commitments from the global North to the global South
amounted to only $62.2 billion.9 Furthermore, despite
recent downturns related to the Asian financial crisis and
September 11 attacks, export credits to developing countries have
been growing over the long term, while development assistance has
declined or remained stagnant. 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
Low-Risk Financing for High-Risk
Projects Moral hazard is the term used
to describe the perverse consequences that can arise when actors
do not face the consequences of their actions. A textbook example
might be flood insurance: if people know that they will be
compensated by federally funded flood insurance for any flood
damage, many more build their homes in floodplains. There is a
similar dynamic at work with ECAs–except on a much greater
scale. In many cases, the ECAs can absorb up to 85 or 95 percent
of the risk from a given transaction, meaning that potential
losses for corporations and banks can be minimal. When an ECA
will take on most of the risk and provide nearly full
compensation if something goes wrong, there is every incentive
for corporations and banks to move ahead with any overseas
transactions–even excessively risky ones. In fact, there is less
incentive to do thorough due diligence and risk assessment to
identify any risks in the first place.10 “http://www.foodfirst.org/images/pubs/backgrdrs/2003/refugees.jpg”
align=”right” border=”0″>Not only can this result in a great
waste of economic resources, but it also generates the kinds of
large, risky projects that often involve enormous social and
environmental impacts and, frequently, corruption. These include
big dams, mines, oil development, nuclear power plants, and other
large resource extraction and infrastructure projects. Not
surprisingly, one of the fastest-growing segments of the
ECAs’ activity has been large projects in developing
countries,11 and ECA backing has become increasingly
crucial for these kinds of deals. Most medium- and long-term ECA
financing (which was approximately $67 billion in
1999)12 is for such projects. In comparison, the World
Bank committed just $7.68 billion to projects with potentially
adverse environmental impacts in 2000.13 In addition,
the actual financing leveraged by ECAs for these kinds of
projects is much greater than that supported by ECAs directly,
since every dollar provided or backed by an ECA can attract an
additional two or more dollars of purely private
financing.14 So one of the essential characteristics
of the ECAs’ rise to prominence in international trade,
finance, and the global economy has been the large-scale shifting
of risk for global trade and investment from private banks and
corporations to publicsector ECA accounts. “newh3″>Built-In Indifference to Negative Impacts, and Growing
Policy Contradictions At least in theory, lending
by the World Bank, the IMF, and most other official or
development agencies is supposed to contribute to local economic
growth, development, and/or poverty alleviation. These aims
constitute all or part of the stated missions of these
institutions (even if much of what they do may contradict these
aims). In contrast, most ECAs do not have a development mandate
at all. Indeed, their sole purpose is the promotion of their own
countries’ exports or foreign investments, and they have
resisted any other considerations. As one colleague has written,
“They are not foreign assistance agencies. They are domestic
assistance agencies.”15 Moreover, after decades
of debacles and mounting public pressure, the World Bank and
other development institutions have adopted some degree of
transparency, as well as policies and standards intended to
prevent social and environmental abuses by the projects they
finance (although these safeguards are often insufficient, poorly
enforced, and still lead to flawed schemes). But even though ECAs
have become by far the largest and most important source of
official support for such projects, most ECAs have no effective
safeguards or transparency–and recent moves by ECAs towards such
policies have been a grotesque sham in all but a handful of
cases.16 For example, the vast majority of ECAs do not
have to release any information about projects with potentially
severe environmental or social impacts before they approve
them–meaning that taxpayers, locally affected communities, and
others may have no knowledge of ECA activities and imminent
project impacts, nor any opportunity to provide input or to
object. Many ECAs do not even release such information after they
approve transactions unless the corporate client approves of this
disclosure. This creates a serious policy contradiction. Indeed,
ECAs routinely support projects–like the Three Gorges dam and
the Enron Corporation’s Dabhol power plant–that the World
Bank or other public institutions have refrained from financing
because of their harmful economic, social, or environmental
impacts. Leaving Behind Mountains of
Debt 
ECAs have become not only the largest
single source of official finance flowing to developing
countries, but also, according to the World Bank, these
countries’ largest official creditors–with ECArelated debt
constituting the largest component of developing-country official
debt.17 Roughly 64 percent of Nigeria’s entire
external debt is for export credits; for the Democratic Republic
of Congo, it’s 42 percent.18 And ECA-backed loans
carry higher interest rates than do most World Bank, IMF, or
other official loans. There are a variety of ways export credits
can contribute to developing countries’ sovereign debt, or
debt owed or guaranteed by the developing countries’
governments–ECAs can also generate other kinds of massive
financial liabilities for these governments that are not counted
as debt. The most obvious ways ECAs can lead to sovereign debt
are when they lend directly to a government or public entity, or
when they guarantee or insure commercial bank or corporate credit
or loans to a government or public entity. But there are other,
more subtle mechanisms. One is sovereign counterguarantees, which
can turn even a purely private transaction between a Northern
exporter and a private Southern buyer into a completely public,
bilateral, sovereign debt– owed by the developing country’s
government to the rich country’s ECA. Here’s how it
works. When a private exporter or a bank in the North seeks an
export credit from a Northern ECA, this largely shifts the
exporter’s or bank’s risk to the public ECA, as we have
seen. But when the buyer in the developing country is private,
the ECA frequently insists that the Southern government also
provide a counterguarantee. So if the private buyer in the
developing country does not pay the Northern exporter or
creditor, the Northern government (the ECA) will cover the
losses–and then proceed to collect from the Southern government.
The private transaction has turned into purely public, bilateral
debt between the taxpayers of the two countries. Another way ECAs
can generate massive budgetary liabilities for developing
countries’ governments does not appear in debt statistics. It
occurs when ECA projects involve governments in largecontingent
liabilities even when they do not borrow or guarantee a loan. For
example, ECAs often finance power projects in developing
countries–largely because the ECAs shoulder the risk for private
investors in privatized power (and other infrastructure) sectors.
However, many developing countries’ governments must still
offer extraordinarily generous terms in order to attract this
private investment. In the case of a power project, the
government may need to sign a power purchase agreement (PPA),
which guarantees the purchase of power (whether it is needed or
not), frequently at high, dollar-denominated prices.19
(Corruption also plays a role, as there are frequent allegations
of bribes paid by foreign investors to secure these projects and
their overly generous PPAs.) Since this purchase agreement is not
a loan, it is not counted as debt, even though it may have
multibillion-dollar budgetary implications. For example, after an
Indian state electricity board refused to honor its power
purchase agreement with the Enron Corporation’s massive,
ECA-funded Dabhol power plant in India (which had been the
subject of widespread allegations of corruption), Enron estimated
the size of its legal claim on the government of India at $4 to
$5 billion– none of which is counted as debt.20
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How Are ECAs to BeDealt 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.
- To contact organizations working on ECAs.
Visit eca-watch.org to find lists of nongovernmental
organizations (NGOs) in over 30 countries working on ECAs. - 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
Notes
- Rupert Wright, “Forfeiting for Fun and Profit,”
Euromoney, December 1997, 140-1. - Great Wall Across the Yangtze, directed by Ellen
Perry, 2000; Doris Shen, e-mail to the author, 21 June 2002;
Berne Declaration, et al., “A Race to the Bottom: Creating
Risk, Generating Debt and Guaranteeing Environmental
Destruction,” 1999, 7; Probe International, “Three
Gorges Dam Project,” www.probeinternational.org/pi/3g/index.cfm?DSP=content&ContentID=1708, October 31, 2000 (accessed August
30, 2002); International Rivers Network , “Three Gorges
Campaign, “ “http://irn.org/programs/threeg/”>http://irn.org/programs/threeg/
(accessed August 30, 2002). - Berne Declaration, et al., 7; Probe International,
“Who’s Behind China’s Three Gorges Dam?”
www.nextcity.com/probeinternational/ThreeGorges/who.html
(accessed August 30, 2002). - Even though an increasing number of developing countries have
created ECAs, most of them are negligible in size compared to
industrialized country ECAs. Industrialized country export
credits go disproportionately to developing countries. Malcolm
Stephens, The Changing Role of Export Credit Agencies,
Washington, DC: International Monetary Fund, 1999: 63. - Interestingly, the World Trade Organization (WTO) trade
agreements define export credits as a prohibited export subsidy.
However, they then go on to include a famous
“carve-out” that exempts and allows some export
credits, as long as they abide by the terms of an agreement
negotiated by rich countries at the OECD–although there is
controversy over whether everything ECAs do is permitted by this
“carve-out.” - Delio E. Gianturco, Export Credit Agencies: The Unsung Giants
of International Trade and Finance, Westport, Conn.: Quorum
Books, 2001: 2. - Gianturco, 1.
- Because ECAs are so untransparent and disclose so little
aggregate data or information on their transactions, we do not
know exactly how many total export credits there are globally
every year nor how many are extended to developing countries.
These are conservative estimates extrapolating from Stephens, 63;
and “Directory,” in The Berne Union 2002 Yearbook, ed.
Jon Marks, London, UK: Newsdesk Communications Ltd, 2002:
200. - OECD, “Statistical Annex of 2001 DCR,” “http://www.oecd.org/EN/document/0,,EN-document-0-nodirectorate-no-1-2674-0,00.html”>
http://www.oecd.org/EN/document/0,,EN-document-0-nodirectorate-no-1-2674-0,00.html
(accessed August 20, 2002). - This puts the burden of thorough risk assessment and due
diligence on the ECA, whose incentives may not be so strictly
aligned with the need to avoid undue risk. There is anecdotal
evidence to suggest that this is the case. For example, one
expert reported that most ECAs do not check and enforce
compliance with loan covenants and other contractual agreements
after they are approved nearly as much as do private banks, which
tend to be much more vigilant throughout the life of a loan.
Maria Sara Jijon C., presentation on international project
financing to ECAWatch Conference, Berlin, Germany, March 8, 2002.
Also, the moral hazard of ECAs has been implicated in the pouring
of $12 billion of partially ECA-backed international finance into
reckless investments in the Indonesia pulp and paper industry
(fed with illegal, unsustainable clear-cuts of natural forest).
Many of these investments are now insolvent, and it looks likely
that ECAs will be picking up part of the tab. “Profits on
Paper: The Political-Economy of Fiber, Finance, and Debt in
Indonesia’s Pulp and Paper Industries,” Christopher
Barr, Center for International Forestry Research and World
Wildlife Fund, November 30, 2000: 2, 7 (Executive Summary), 32,
47. - These projects have been perhaps the most important factor
driving strong growth in mediumand long-term ECA commitments over
the long term. The World Bank, Global Development Finance,
Washington, DC: Office of the Publisher, 1998; vol. I: 58. There
have been recent downturns in ECA support of such projects due to
the Asian financial crisis and Sept. 11, but “overall, the
trend is likely to be for more longer-term project deals.”
Jon Marks, Deven Godier, and Paul Melly, “New Challenges for
Growth Industry,” in The Berne Union 2002 Yearbook, ed. Jon
Marks (London: Newsdesk Communications Ltd, 2002: 53. - IMF staff, “Official Financing for Developing
Countries,” World Economic and Financial Surveys,
Washington, DC: International Monetary Fund, 2001: 16. - This figure is for World Bank (IBRD and IDA) commitments to
Category A and B projects, which are the classifications for
projects with potentially adverse environmental impacts. This is
a crude attempt to create a more appropriate comparison by
screening out low-impact development projects–such as health or
education projects– which are part of World Bank project lending
but not typically financed by ECAs. The World Bank, “http://www4.worldbank.org/sprojects/”>www4.worldbank.org/sprojects/
(accessed August 6, 2002). - Crescencia Maurer and Ruchi Bhandari, “The Climate of
Export Credit Agencies,” Climate Notes, Washington, DC:
World Resources Institute, 2000: 4. - Bruce Rich, “Exporting Destruction,” The
Environmental Forum, September/October 2000: 32-41. - ECAs with transparency and safeguard policies closer to the
level of development finance institutions include those of
Australia, the U.S., Japan (with respect to transparency), and
France (with respect to some environmental standards). - “Official debt” consists of debt owed to official
(meaning public) creditors, whether bilateral or multilateral
(this excludes debt owed to private banks and other private
creditors). The World Bank, Global Development Finance: Financing
the Poorest Countries, Washington, DC: Office of the Publisher,
2002; vol. I: 107. - OECD, “Creditor Reporting System online,” www.oecd.org/htm/M00005000/M00005347.htm,
November 28, 2001 (accessed August 8, 2002). - Navroz Dubash, e-mail to the author, June 29, 2002.
- Dana Milbank and Paul Blustein, “White House Aided Enron
In Dispute,” Washington Post, January 19, 2002: A01; Human
Rights Watch, “The Enron Corporation: Corporate Complicity
in Human Rights Violations , ” http://www.hrw.org/reports/1999/enron/,
1999 (accessed August 30, 2002). - Leslie Wayne, “A Guardian of Jobs or a `Reverse Robin
Hood’?,” New York Times, September 1, 2002: Bu1. - Milbank and Blustein; Human Rights Watch; Dana Milbank and
Alan Sipress, “NSC Aided Enron’s Efforts,”
Washington Post,January 25, 2002: A18. - “U.S. Official: Cutoff of Aid to India Possible if Enron
Project Deemed `Expropriated’,” Associated Press, April
8, 2002. - Leslie Wayne.
- Dieter Frisch, “Export Credit Insurance and the Fight
Against International Corruption,” Transparency
International working paper, 1999: 2. - Michael H. Wiehen, “OECD Working Party on Export Credits
and Credit Guarantees,” Transparency International working
paper, 2000. - Peter Evans, e-mail to the author, July 19, 2002; Peter Evans
and Kenneth A. Oye, “International Competition: Conflict and
Cooperation in Government Export Financing,” in EX-IM Bank
in the 21st Century: A New Approach, ed. Gary Hufbauer and Rita
Rodriquez, Washington, DC: Institute for International Economics,
2001. - Susan Hawley, “Still Underwriting Corruption? The
ECGD’s Recent Record,” The Cornerhouse,2002: 2; Ann
Feltham, “The Case for Removing Arms from the ECGD’s
Portfolio,” Campaign Against Arms Trade: 1. - “Submission by the Campaign Against Arms Trade in
Response to the Export Credits Guarantee Department Review of Its
Mission and Status,” Campaign Against Arms Trade, 1999: 7;
Hansard Written Answers, United Kingdom Parliament, July 4, 2002:
Col 471-3W. - “Submission.”
- “Submission,” 10.
- EU-Enlargement Watch, et al., “Financing Disaster: How
the G8 Funded the Global Proliferation of Nuclear
Technology,” 2001: 1-5. - Maurer and Bhandari, 4-5.
- Greenpeace U.K., “Exporting Pollution: Double Standards
in U.K. Energy Exports,” briefing document, 2002: 2,
10. - Maurer and Bhandari.
- See note 16.
- Ironically, Germany continues to blemish its tradition of
environmental leadership with both the weak environmental
policies and performance of its ECAs and its highly
obstructionist role in these international negotiations. And the
U.S., in contrast to its undermining of nearly every other
international environmental or human rights initiative, has been
the driving force behind these negotiations–largely because it
does not want other countries to undercut the environmental rules
that the U.S. Congress has already required of it. - Such as those called for in Wiehen; in Susan Hawley; and in
Kristine Drew, “Recommendations to the U.K. Export Credit
Agency,” Public Services International Research Unit and
UNICORN, 2002. - Aaron Goldzimer, “Globalization’s Most Perverse
Secret: The Role of Export Credit and Investment Insurance
Agencies,” in After-Neoliberalism: Economic Policies That
Work for the Poor, ed. Jim Weaver, Didier Jacobs, and Jamie
Baker, New Rules for Global Finance Coalition, 2002: 106-23.