International Environmental Standards for Transnational Corporations

Article for Blog Post Writing Competition 2011 | by Karan Singh


April 8th, 201111:03 pm


“I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country.”

-Thomas Jefferson

I. Introduction

It is strange that an author of the American Declaration of Independence would ever speak of crushing corporations after all don’t corporations have the same freedoms and rights of the collective masses that own them? Why is it that even in 1789, when terms like Foreign Direct Investment (FDI) were unheard of that the President of a Country should speak disparagingly of Corporations, declaring them to be akin to the “aristocracy” he had fought against? The answer, however, has become truly relevant in the last forty years and the rise of TransNational Corporations (TNCs).

A Transnational Corporations is a corporation or a company that manages the production or supplying services in more than one country. TNCs thus are spread across countries owning diversified assets in all of them[1] and at the same time are able to assert pressure and control over the governments of those states. For example, take the case of McDonald’s- the chain of fast food restaurants spread across the world. McDonald’s not only has an annual revenue of $24.1 Billion[2] but also has been accorded with the honour of a theory on foreign relations[3] and a economic theory[4]. This is certainly something to worry about considering that there are countries whose GDP is not as much as that of certain TNCs.

II.Transnational Corporations and Environmental Standards

The ever increasing number of TNCs[5] is a double edged sword: On the one hand they employ millions of workers across the world[6] but on the other they spread prominently to those countries with lax environmental and labour standards[7]. This is a fact that the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) have also stressed the importance of integrating environmental costs and liabilities into financial statements[8].

In such situations there are necessarily two factors that affect the flight of industry from one country[9] and the setting up of the same in another country- “pollution havens”[10]. The pollution haven hypothesis (PHH) predicts that, under free trade, multinational firms will relocate the production of their pollution-intensive goods to developing countries, taking advantage of the low environment monitoring in these countries[11].

The problem lies at both ends. Countries, especially those that are part of the OECD, have imposed polluter pays norms[12] this itself leads to two implications for the industry- one, where the costs of enforcing the new environmental standards are not high and ; second, the situation in which the costs are in fact high and the profits meagre. In the second case it can easily be concluded that TNC’s, which prominently work for shareholder’s equity, would shift to a “pollution haven”. But practically it can has been seen that even in the first case, where it is relatively easy and cost effective to manage and adopt new environmental standards, the public opinion tends to turn against the industry[13].

Furthermore, the trend is that these “pollution havens” are bound to exist in countries which are termed as “Least Developed Countries” (LDCs). This is termed as “environmental factor endowment” of a country.

“The Environmental factor endowment” of a country is determined by the capacity of the natural environment to absorb pollution which depends on the current level of exploitation of environmental endowments. Secondly, it is determined by the willingness of the population and politicians to tolerate pollution[14]. There are of course those who argue that this in turn would lead to capital flight to LDCs which would then enable them to be able to develop faster and be able to afford better environmental norms[15] but the arguments seem weak because they assume a period of high pollution- the environmental and social cost of which cannot be said to be recouped by better environmental policy afterwards[16].

<31 style=”text-align: justify;” _mce_style=”text-align: justify;”>III. A New Hope?

LDCs and even countries such as India and China which are developing at a fast pace cannot be said to be free from the yoke of capitalism and the greed for profits that make TNCs go from country to country trying to search for worse environmental regulations. In fact the Multilateral Agreement on Investment (MAI) had also faced such challenges and allegations of promoting a “race towards the bottom” between countries so as to attract more jobs and investments from more developed countries by keeping their labour, environmental laws lax[17].

In the case of India the Enron power fiasco can be viewed as the example of transnational corporations and their effects on an economy. To be fair: India is not free from corruption or can claim to be the poster child for checking corruption in its rather large bureaucracy. In fact India is ranked number 87th on Transparency International’s Corruption Perception Index (CPI) which orders countries from the least corrupt to the most corrupt depending on “the perception of corruption in the public sector”[18]. But the Enron deal concluded with Enron Corporation, practically translated into subsidizing the power produced by the Enron’s Dabhol power project in Maharashtra by buying less power from cheaper power producers such as National Thermal Power Corporation, the Bombay Suburban Electric Supply (BSES) undertaking, or Tata Electric and the Maharashtra State Electricity Board buying 5% of the power it required with 15% of its revenue[19] but that is the power of Transnational Corporations assisted by the desperation of developing countries to attract Foreign Direct Investment (FDI). The same applies to the Bhopal Gas Tragedy wherein India allowed Union carbide to setup an Indian plant even after Canada has rejected the building of the plant due to reservations about its safety.

Hope, however, is found in the unlikeliest of places. Botswana for example. The De Beers Group- The International diamond retail giant, has had a partnership with the government of Botswana since 1969. 25% of the employment in the country directly or indirectly linked to the diamond trade[20]. However, the feature that separates Botswana from other diamond rich countries, such as the civil war torn Sierra Leone, is its ability to manage its these resources. The money that accrues from the sale of diamonds mined in Botswana are put into a state run fund from which the money is utilized to build roads and clean water systems[21]. Thus, not only effectively charging De Beers for the environmental impact of its mining in the country but also using the money for social betterment. Thus, Botswana has managed not only its natural resources better but also made sure the profits from these resources contribute immediately towards developing Botswana as a country[22].

The example of Botswana is relevant because it distinguishes itself from the rest of Africa by not only managing their natural resources better but also making sure the profits from the resources contribute immediately towards developing Botswana as a country. A mandatory Corporate Social Responsibility (CSR) of sorts. Thus, there is hope yet. If an African economy, with all the disadvantages that have lingered from apartheid, war, lack of infrastructure and finance can make sure that FDI is controlled rather than it controlling them, than any nation can do it.

IV. Conclusion

Thomas Jefferson was a man ahead of his time: Two hundred and twenty-two years ahead of his time to be precise. But so is Republic of Botswana.

It is true that Transnational Corporations will often base their investments on a lack on environmental standards and a political situation which either is or can be made into one which would churn out a more favourable environmental factor endowment. And these cases do prominently figure in the media and tend to linger in the minds of the public. But there are countries out there like Botswana which have against all odds managed to protect their natural assets and realized the power of negotiation that LDCs have when it comes their resources and their futures. This is the lesson we must take away. Exploitation must be distinguished from over-exploitation: “Exploitation” is sadly in the cards for LDCs or even developing nations but “Over Exploitation” is something they can control with policies and laws. This is what Botswana’s example has to teach us.


[1] See UNCTAD’s list of the largest Transnational Corporations in the world, Available At: <<.http://www.unctad.org/Templates/Page.asp?intItemID=2443&lang=1>>

[2] Leslie Patton, McDonald’s February U.S. Sales Rise 2.7%, Trailing Estimates, Available at:<<http://www.bloomberg.com/news/2011-03-08/mcdonald-s-february-same-store-sales-climb-3-9-worldwide-on-asia-growth.html>>

[3] See Thomas L. Friedman’s “McDonald’s Theory of War” which though, now, has been proven wrong won him many accolades in the academic circle while it lasted. An article about it is available at : <<http://www.guardian.co.uk/world/2008/sep/06/russia.mcdonalds>>

[4] See “Big Mac Index”. An article on it is available at:<< http://www.economist.com/markets/bigmac/about.cfm>>

[5] Torbjörn Fredriksson, Forty years of UNCTAD research on FDI, Transnational Corporations, Vol. 12, No. 3 (December  2003), p. 8

[6] Ibid

[7] Ibid, Page 29

[8] UNCTAD, Accounting and Financial Reporting for Environmental Costs and Liabilities (New York and Geneva: United Nations), (1999b)

[9] C. Leigh Anderson and Robert A. Kagan, Adversarial Legalism and Transaction Costs: The Industrial Flight Hypothesis Revisited, International Review of Law & Economics, Vol. 20, pp. 1-19, 2000

[10] Don Fullerton. The Economics of Pollution Havens. Cheltenham, UK: Edward Elgar Publishers, 2006,
Available at:<< http://works.bepress.com/don_fullerton/26>>

[11] Umed Temurshoev, Pollution Haven Hypothesis or Factor Endowment Hypothesis: Theory and Empirical Examination for the US and China, Working Paper series- 292, CERGE-EI

[12] OECD Joint Working Party on Trade and Environment, The Polluter-Pays Principle As It Relates to International Trade, Available at : <<http://www.oecd.org/officialdocuments/displaydocumentpdf/?cote=com/env/td(2001)44/final&doclanguage=en>>

[13] Tecmed vs United Mexican States, Award, (29/5/2003), 19 ICSID Rev- FILJ 158 (2004); Metalclad v. Mexico, (2001) 5 ICSID Reports 209

[14] Michael W. Hansen, Economic Theories of Transnational Corporations, Environment and Development, Available at: <<http://www.prdatta.com/Documents/DBA/Globalisation/Articles/Economic%20theories%20of%20TNCs.pdf>>

[15] Ibid, Page 11

[16] Professor Paul Ekins ,Trade and Environment , International Society for Ecological Economics,Internet Encyclopaedia of Ecological Economics (2003)

[17] Daniel C. Esty, Greening World Trade, Institute for International Economics,  p. 83

[18] Source: Corruption Perception Index 2010, (Published by Transparency International), Available at: <<http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results?>>

[19] Prabir Purkayastha, A Disastrous Deal, Frontline, Volume 18 – Issue 04, Feb. 17 – Mar. 02, 2001, Available at: <<http://www.hinduonnet.com/fline/fl1804/18040840.htm>>

[20] Botswana and De Beers celebrate a 40-year partnership, Available at: <<http://www.debeersgroup.com/en/Media-centre/Press-releases/2009/Botswana-and-De-Beers-celebrate-a-40- year-partnership/>>

[21]De Beers, Botswana sales agreement: Will there be any changes?, Available at: << http://www.mmegi.bw/index.php?sid=4&aid=6844&dir=2010/November/Friday26>>

[22] For further reading read the book “False Economy: A Surprising Economic History of the World”,authored by Alan Beattie

 

Article by-

Karan Singh

Fourth Year Student (Corporate Law Hons.)

National Law University, Jodhpur

[Submitted as an entry for the MightyLaws.in Blog Post WritingCompetition, 2011]

 

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