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Export Credits - What is the public policy aim?

by Barry Coates and Daniela Reale, World Development Movement

first published 23 May 2002

Summary

Britain’s Export Credits Guarantees Department (ECGD) provides substantial sums of public money every year to support British companies operating overseas. The use of public money to support private corporate interests can only be justified if it has a demonstrable public policy purpose. But ECGD backing for companies is not aimed at reducing poverty or promoting sustainable development. Moreover, it is the poor in the developing countries who pick up the bill when ECGD-backed deals go wrong, argues this presentation at an NGO Seminar on Export Credit Reform, held in the House of Commons, London.

Contents

 

Main text

The most important question that needs to be asked about export credits is what are they for? What is the reason that the British government and other governments are intervening to support businesses? What is the public policy purpose?

The amounts of public guarantee are substantial. In the UK, Export credit guarantees and insurance policies totalled £5.66 billion in 2000/2001 against £5.5 billion in 1999/2000. Internationally, loans and guarantees from all export credit agencies amounted to US$504 billion in 2000.1

What kind of projects?

Public concern over export credits has recently surfaced in the media, particularly focusing on the Ilisu dam in Turkey. But this is only the latest in a long history of public concern over the Export Credit Guarantee Department (ECGD). Other concerns include projects with a heavy social and environmental cost, including nuclear power stations in China, a series of massive coal-fired power stations in India and China, and large dams or mines that displace indigenous and minority peoples and have serious environmental impacts.

The various ethical procedures introduced by the ECGD have been considered inadequate in the view of NGOs, but, more fundamentally, they will do nothing to alter the mix of projects.

Secondly, there is concern over the high proportion of export credits for arms sales, particularly to repressive regimes such as cover for exports in the arms to Iraq scandal and for the export of Hawk jets to the Suharto Indonesian government (which was continued under the current government). Defence products make up 3% of UK exports of products but accounted for 48% of ECGD coverage in 2000/01.

The ECGD review failed to ensure that export credit guarantees are provided only for productive expenditure. Currently this applies only to the 63 World Bank IDA countries (which includes the 41 countries in the Heavily Indebted Poor Countries (HIPC) initiative) but excludes other countries such as Pakistan.

Thirdly, there are questions raised over corruption in ECGD supported projects.

Cases from Kenya, Malaysia, Indonesia and Pakistan illustrate that export credit guarantees have supported projects that have paid bribes on a large scale.

When the recent review was announced, WDM asked the then Minister for Trade whether companies convicted of bribery and corruption would be barred from ECGD contracts. The answer was no.

Beyond the criticism of ECGD practices in the past, there are deeper questions over the rationale for spending public funds on export credits.

Do export credits stimulate development?

The argument in support of export credits is that they provide support for developing countries to benefit from new projects. But there are a number of problems with this reasoning:

  • Most export credits are provided to the richer developing countries or middle income countries. In 2000/01, the four top markets for ECGD export credits were South Africa, Saudi Arabia, USA and Turkey. These four countries alone accounted for more than half of the total export credits.
  • Most guarantees are provided to a few large multinational companies
  • If there is one lesson that development agencies have learned (or should have learned) it is that large infrastructure projects built by foreign companies do not put countries on a sustainable development path. The projects funded by ECGD do little to build the skills and capacity of developing countries.
  • Since export credits are only available to foreign companies, they discriminate against domestic companies in developing countries.

The ECGD review does nothing to ensure that the aim of export credits is to promote equitable and sustainable forms of development in the poorest countries.

Who bears the risks of poorly designed projects?

This is one of the most serious problems. Under ECGD guarantees, many of the risks are transferred from the private sector to the public sector. Projects that clearly fail, or that involve substantial amounts of bribery and corruption, or that supply arms to repressive regimes may end up being paid for by the British taxpayer.

In other cases, the burden ends up with the developing country, as a bilateral debt. In some of the poor heavily indebted countries, cancellation of unpayable debts may be provided. But in order to qualify, developing countries need to meet IMF conditions that have little if anything to do with poverty reduction (such as conditions requiring privatisation of state owned enterprises). In addition, the costs for debt cancellation will be paid for out of the British aid budget (although the Chancellor has given assurances that the funds will be ring-fenced and will not divert funds from aid).

The ECGD review does nothing to ensure that companies are responsible for bearing the risks of project failures in future.

Are export credits consistent with British government policies?

It is clear that from the above that export credits are not aimed at supporting the reduction of poverty, the promotion of sustainable development, protection of human rights or curbing of corruption. Nor are they a fair or efficient mechanism for creating jobs in the UK. The ECGD's activities are inconsistent with other commitments to the International Development Targets, tackling climate change, the Universal Declaration of Human Rights and the OECD Convention on Bribery and Corruption.

Meanwhile, successive British governments have pursued policies of trade liberalisation in which developing countries have been persuaded or forced to remove subsidies for exporters on the grounds that they are wasteful and unfair. There are now agreements in the World Trade Organisation (WTO) to limit such subsidies. The rich countries have managed to negotiate rules that exempt themselves from these rules with regard to, for example, subsidising agricultural exports. But developing countries and economists are asking why the rules should be different for the rich.

Nor are export credits consistent with British government policies pursued through the IMF's Programmes which have forced developing countries to reduce subsidies, even to the poorest people in their countries. It appears that there is one set of rules for the rich and another for the poor.

The ECGD review has clearly failed to ensure the coherence of British government policy.

What are export credits for?

ECGD was founded at a time when it was seen as a matter of national pride to have strong exports and companies were subsidised to do so. But export credits are focused on those industries which are neither "sunrise industries" that will be important to Britain's future, nor are they an efficient way of generating jobs in the UK (analysis by Oxford Research Group and CAAT, based on WDM's research, estimates that public subsidies for defence exports, partly through ECGD support, cost around £11,000 per job per year).

This form of government intervention in support of large multinational companies is outdated and serves no supportable policy aim. The argument that other countries are doing it and the government needs to protect British companies is an argument for high-level political pressure to phase out this form of ill-advised policy on a multilateral basis as soon as possible. This approach was missing in the ECGD review and missing in Britain's foreign policy.

Is there a role for government intervention?

If the public is to support government action in these areas, it should pass two main tests:

  1. It should address a market failure --export credits should be reserved for projects in the poorer developing countries that do not have access to private sector financing and have missed out on the massive rise in foreign investment through the 1990s. It would also mean targeting support to small and medium sized exporters and local partners as a priority. It would mean that equal terms should be made available to businesses in those countries and in other developing countries to enable for competition.
  2. It should conform to government priorities -- export credits should be reserved for projects that create tangible benefits for the poor and/or contribute to specific aims related to the environment, human rights and civil society.

The fundamental questions of ECGD's purpose need to be asked. The review of ECGD and its new 'ethical' stance have not provided satisfactory answers. This is the real agenda for ECGD reform in the 21st Century.

Notes

1 Berne Union, Annual Report 2002.