When "wanted" posters bearing his name and face were plastered around his hometown of Greenwich, Connecticut, Bill Harrison, chief executive of JPMorgan, caved in and bound his bank to place social and environmental outcomes front and centre in financing decisions. Half-way around the world in the forests of Kalimantan, Indonesia, the Kiani Kertas pulp mill, built for $1.3 billion, remains silent and rusting as one international bank after another has been blackmailed into reneging on firm commitments to lend.
Visiting Scholar Adam Lerrick
In the late 1990s, James Wolfensohn, then-World Bank president, invited "civil society" inside to enlist more voices for his plans to double global aid. The genie is out of the bottle. There are now 40,000 NGOs; 3,000 have consultative status at the United Nations, triple the 1995 number. Now, not a single dollar of multilateral funds is disbursed without NGO blessing. While NGO "consultants" are overloading official lending with rich-nation moral priorities, finance ministers in middle-income countries are walking away from subsidised funding because it costs too much to do business with the development banks.
Leading emerging nations have curbed their borrowing and paid down their balances. Net World Bank loan flows have declined $30 billion over the past seven years and are now negative. The development banks now supply a mere 2 per cent of the average net $200 billion that the capital markets provide.
As the locus of emerging world finance has migrated to the private sector, the NGOs are following the money. Big global banks in rich countries are hostage to reputational risk. Here, a fickle public deposits money, takes out loans, mortgages houses and invests savings. Compared with this retail mega-flow, profits from project finance are a pittance that can be sacrificed.
NGOs second-guess every private sector call. Forty-one of the world's banks, controlling 80 per cent of global project finance, have been compelled to sign up to the Equator Principles tying them to World Bank environmental and social strictures. Sixty-one institutional investors, overseeing $4,000 billion, succumbed to the 2006 UN Environmental Programme Finance Initiative that dictates a higher "fiduciary duty" to forgo maximum returns in favour of the greater social good.
But developing nations have amassed the collective wherewithal to break away. NGOs have handed them the market opportunity. The most under-utilised resource in the emerging world is the deep pool of money overflowing from the rise in commodity prices and manufacturing output. Soon the funds deposited and the skills developed in western banks will travel to developing nation financial institutions that are immune to NGO pressures. The Abu Dhabi Investment Authority and China's CITIC will trade in their Treasury bonds and blue-chip shares to underwrite more profitable ventures in the developing world. Shanghai, Singapore and the United Arab Emirates will become world-class financial centres.
The concerns of the NGOs may be real. But fiat by self-anointed regulators from rich nations should not devalue developing world assets. When sources of capital are restricted, the cost of financing is raised and the value of the asset reduced. For the Kiani Kertas pulp mill, this translates into an NGO-impaired value of just 50 per cent of the plant's $800 million free-market appraisal. There are costs to the choices in ideological crusades. If clean air in Los Angeles or Frankfurt means fewer schools in Rio or shorter life expectancy in Jakarta, the west should compensate and not just confiscate.
As emerging world financial power strengthens, national property rights will be re-established and the imbalance of bargaining power redressed. The fair sharing of the costs of rational development between the industrialised rich and the developing poor will be negotiated in the marketplace.
Adam Lerrick is a visiting scholar at AEI.