Aussie Jitters

In recent years, a wave of protectionism has stymied foreign investment deals all over the world.  We all remember the U.S. Congress's rejection of bids by China National Offshore Oil Corporation and the United Arab Emirates' Dubai Ports World to acquire American oil and port interests in 2005 and 2006.  The antiglobalisation hysteria has been so intense in parts of Western Europe that even food and music are "protected" from foreign influences as a matter of national survival.

Now that protectionist wave is set to hit Australia, a medium-sized, commodity-exporting nation that has greatly benefited from exposure to the global economy.  The spur is the proposed 26 billion Australian dollar (US$20.1 billion) investment by the state-owned Aluminum Corporation of China (Chinalco) in Rio Tinto, Australia's second-largest resource company.  Next month, Treasurer Wayne Swan will decide whether to support the Foreign Investment Review Board's presumptive approval of the deal.  The aluminum company hopes to lift its stake in the Aussie mining giant to 18% from 9%.  But with current shareholders restive over the terms of the deal and political pressure mounting in opposition, the signs are not looking good that the deal will go forward.

Never mind that China is one of the few sources of investment cash;  and given that Rio's options to improve its balance sheet are confined to slashing jobs and selling off assets, it needs vital capital to reduce part of its enormous debt load.  A new wave of protectionism, moreover, would raise a red flag to markets about Australia's openness to foreign capital.  As former prime minister John Howard said last week, "we have to be very careful not to reject investment unless we have good reason".

The problem is that public opinion is a double-edged sword.  Polls here consistently show that foreign investment taps deep feelings of identity and violation in the community.  They also reveal that Australians know that investment has been crucial to the nation's prosperity.

We have witnessed the emotive force of foreign investment in the reaction to Royal Dutch Shell's takeover bid of Woodside Petroleum in 2001 as well as the Japanese investment in the resources industry in the 1970s.  Whether it has been Kraft's decision to move jobs to low-cost India or businessman Dick Smith's warnings about food icons falling into foreign hands, the message is consistent:  Aussies are very uneasy whenever a well-known local brand, or a large stake of that local company, is sold to foreigners.

In the Sydney-based Lowy Institute's annual foreign policy survey in October, 90% of respondents said the federal government has "a responsibility to ensure major Australian companies are kept in majority Australian control" and "a majority of Australians oppose major foreign investments by companies, banks or investment funds controlled by governments".  Yet more than 75% of Australians recognise that foreign investment leads to job growth and wealth creation.  In other words, we sneer at the very foreign investment we know has been crucial to our prosperity.

Australians are especially two-faced about Chinese foreign investment.  We're very uneasy about Chinese state-run companies that are increasingly investing in our raw materials;  78% are opposed to a state-run company, bank or investment fund that bids for a controlling stake in a major local company.  Yet 62% also think China's economic growth is a good thing, because it has helped underpin the nation's 17-year growth cycle and may enable Australia to weather the worst effects of the global financial storm.

In recent months, several high-profile conservative political figures -- such as Liberal leader and former investment banker Malcolm Turnbull and former treasurer Peter Costello -- have opposed the Chinalco deal.  They insist Canberra should be vigilant about monitoring Chinese state-run investment bids, especially where issues of energy and resource security emerge.  Fair enough.  After all, China remains a communist one-party state and state-owned companies may still be subject to direction from Beijing bureaucrats.

But firms -- regardless of the source of ownership -- still need to obey the laws of the nations in which they are investing.  Australia should recognise that Beijing is in the process of making a transition from communism to capitalism, that its state-run companies are becoming more independent and that foreign investment helps build a Chinese middle class that will demand more political freedom.

Public unease about globalisation is hardly an Australian peculiarity.  Nonetheless, the onus falls on political leaders and policy makers to try to bridge the divide between elite and public opinion by explaining more clearly the benefits of capital flows.  Ultimately, Australia is deeply integrated into the global economy.  We have more to gain from relaxing barriers to foreign investment than from searching for hidden perils.

Spread the flu virus to stop it

The death toll from swine flu is mounting.  But in one respect we can count ourselves lucky:  The virus originated in Mexico, a country that quickly shared samples with the World Health Organization.  Scientists in the United States and Australia are already working on developing a vaccine.

Such cooperation may seem like a no-brainer in the face of a potential global pandemic.  But some countries don't see it that way.  Consider the case of Indonesia, which in 2006 refused to share critical samples of avian influenza with the world health body, jeopardizing efforts to create a vaccine.

At issue here is a long-running debate about patents on vaccines developed by private companies in response to pandemic diseases.  In the days immediately following the discovery of swine flu, international activists have called for generic flu vaccines to be licensed for manufacture in developing countries.  They have regularly attacked drug patents on the grounds that they keep treatments out of the hands of poor people by allowing patent holders to charge high prices.  Representatives from the Third World Network, a group based in Malaysia, have stated access to vaccines "is going to become a problem" and that developing countries will need "access to technology".  This mindset has encouraged some countries to stop sharing the virus samples that make the research possible.

Most seriously, in 2006 Indonesia's Health Minister Siti Fadilah Supari asserted that the country owned the "genetic resources" of the sovereign state.  She protested that the WHO was providing virus samples to pharmaceutical companies which then developed vaccines, patented them and made profits without any compensation to the virus-providing nation.  To "right" this "wrong", Indonesia stopped sharing samples.

Indonesia's underlying worry has been access to the vaccines these companies develop.  According to Dr. Supari, part of the problem is that once the WHO is supplied with the sample, "originating countries do not have any right about the destiny of the shared viruses".  Indonesia also complained that the limited supply of vaccines was then being bought up by developed countries, with nothing left over for poorer countries.

Indonesia's concern is understandable, and officials of many other countries have expressed similar views, including Cuba and India.  According to WHO data, vaccines are distributed to at least one in five people in the U.S., Canada, Western Europe, Russia and Australia.  By contrast in most developing countries it is less than one in 20.  But the solution is to find ways of making vaccines accessible after they're developed -- not to undermine the intellectual property rights, and the international cooperation, that allow vaccines to be developed in the first place.

As it is, Indonesia's withholding exposed the international community to significant risks, and was built on the false premise that patents act as a barrier to access to vaccines.  In reality, the vast majority of medicines and vaccines are developed by private companies.  These companies do so because they are afforded patent rights.  Without patents the commercial incentive for the development of a vaccine does not exist.

Fortunately in March 2007 the Indonesian government resumed virus sharing, on the condition that an international agreement be negotiated to increase vaccine stockpiles and potential licensing for patented vaccines for developing countries.  Those negotiations are ongoing.  But the dangers posed by this misguided thinking on patents and virus-sharing remains.  Without private-sector support, governments will be left owning viruses in pandemics, but not the vaccinations to protect people.  And that will be a real public-health disaster.

A Bad Climate Trade-off

The high priests of climate change are wrapping up their latest meeting today in Poznan, Poland, where the United Nations is hosting a conference on global warming.  But don't expect a real solution to emerge.  While most of these politicians and negotiators concur global warming is a man-made problem, there is still fierce opposition to the quickest method for spreading man-made solutions: free trade.

Numerous technologies already are on the market or in development that can increase energy efficiency or directly reduce the volume of global emissions.  Solar panels provide an alternative source of power generation for countries currently dependent on carbon-dioxide-emitting energy such as coal.  Clean coal technologies can significantly reduce pollution from existing coal-fired power stations.  Fluorescent lamps can increase energy efficiency over traditional lighting systems.

But trade protectionism inhibits the international spread of these and other technologies, especially to high-polluting developing countries.  Low-carbon technologies are classed as "manufacture" and are treated as an industrial good on each country's tariff schedules.  Developing countries have high tariffs on industrial goods as a form of industry protection.  A 2007 World Bank study found that of four major low-carbon technologies -- clean coal, wind, solar and fluorescent lamps -- tariff and nontariff barriers can be as high as 160% among the top 15 greenhouse-gas-emitting developing countries.  Such products also face stiff nontariff barriers like quotas and import ceilings.

Even worse, many developing countries are now calling for compulsory licensing of patents on low-carbon technologies to reduce their cost.  Under this regime, governments ignore patents on these technologies and allow for local production or importation of knock-offs.  At last year's United Nations Framework Convention on Climate Change Meeting in Bali, Nigerian Environment Minister Halima Tayo Alao argued that patents are a "barrier" to transferring low-carbon technologies to developing countries.

In reality, compulsory licensing may give countries access to cheaper technologies in the short run, but in the long run, the incentive to invest in new technologies is diminished.  Patents encourage innovation by letting inventors profit from their hard work.  A World Bank report published in 2007 found that weakening patents will actually harm the transfer of low-carbon technology to developing countries.

Environmentalists, oddly, are supporting protectionists on both tariffs and patents.  Environmental NGO Friends of the Earth, for instance, has argued that tariffs on low-carbon technologies are necessary "to enable developing countries to build their own supply capacity in developing environmental products".  This is fundamentally mistaken.  Low-carbon technologies are in their developmental infancy.  Suggesting developing countries will innovate the next generation of low-carbon technologies is a fantasy.

Some leaders do recognize the problem.  The European Union and the United States have been leading the charge in favor of an Environmental Goods and Services Agreement which would separate low-carbon technologies from other manufactured goods on tariff schedules, paving the way for tariff reductions on these products.  It would also make it easier to spot and reduce nontariff barriers.  Unfortunately, these talks are making little progress.  Developing countries like Brazil and India fear that conceding too much in these talks will diminish their leverage in broader trade negotiations underway in the Doha Round.

Leaders in Poznan are talking loudly of the need to reduce global carbon dioxide emissions, but until they put their trade policies where their mouths are, it will be just a lot of hot air.

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Calpers, a Lesson in Hypocrisy

Asian investors were in shock earlier this year when the California Public Employees' Retirement System, or Calpers, announced plans to withdraw its investments from Malaysia, Thailand, Indonesia and the Philippines.  While it subsequently reversed its decision on the Philippines, it has reconfirmed its intention to withdraw from the other countries.

Calpers is not just the largest pension fund in the world (it has assets of $149 billion), but one with a reputation as a leader in corporate governance and in the corporate social-responsibility movement.  While Calpers' investment in Thailand, Malaysia and Indonesia only amounts to $219 million, the concern has been that other investors would follow suit.  Well, relax.  Commercial investors were never going to follow Calpers' lead, as it was a clear route to losing money.  And now, its reputation as an investor and leader in corporate governance is in free fall.

However, its decision, particularly in regard to Malaysia, is instructive of the activist role funds like Calpers have taken on.  Calpers' decision was based on commissioned research that not only concluded that these Asian countries were bad risks, but that Argentina was the most promising of the emerging markets.  Since this research was completed in December 2001, the Thai and Indonesian markets have done well and the Malaysian market has held steady, while the Argentine market has collapsed (down 66% in dollar terms as of mid-July).  Moreover, these trends were well-advanced and known in February when Calpers made its decision to divest.

Why would any fund pursue such a strategy?  The answer, in a word, is politics.  Calpers is fundamentally a political organisation.  It is the monopoly provider of pension services to California's state public servants.  Its board is composed overwhelmingly of political types:  elected officials and political appointees.  And it has close union links.

A political orientation naturally leads to activism.  But for a long time Calpers restricted its activism to improving standards of corporate governance, not only in companies it was invested in but in the corporate sector as a whole.  However, from 1998 on Calpers broadened its activism to include non-corporate aims;  it jumped into social activism.  Since then, it has joined shareholder resolutions promoting higher spending on alternative energy, reductions in greenhouse gases, free AIDS drugs and country boycotts.  Calpers has also coordinated its corporate-governance resolutions with union campaigns.

Calpers crossed the rubicon by divesting from profitable investments.  In 2000, at the insistence of Phil Angelides, the state's treasurer and Calpers trustee, it withdrew its investments from tobacco firms.  This decision was made despite warnings from consultants and staff that it would cost at least $30 million in transaction costs.  From the time of the vote to the end of May this year, tobacco stocks outperformed the S&P 500 Index by 90%.  Calpers is now considering another demand from Mr. Angelides to divest from companies that operate in "offshore tax havens".  The rationale is that these firms "are avoiding taxes" and are "more difficult to sue".

Calpers' decision to divest from Asia followed similar logic.  In early 2000, Mr. Angelides, with union support, announced that Calpers should take into consideration labour and other human-rights standards in its emerging-nation investments.  Other members of the Calpers board and staff initially strongly disagreed.  According to the San Francisco Chronicle:  "Opponents ... warn that if fund managers start mixing social activism with their investment decisions, the funds will lose money".  At the end, the board gave in to Mr. Angelides' demands and altered its selection methodology.

Previously, Calpers had employed Wilshire and Associates to develop a selection process that incorporated the use of a range of commercially focused indexes, gathered from reputable published sources.  These indexes measured market volatility, regulation and legal system, investment restrictions, settlement proficiency, transaction growth and growth of technology.  The previous methodology also included indexes on the level of economic development and political stability.

In 2001 it eliminated the growth of technology index, augmented the political stability index and added two new indexes:  transparency and labour standards.  The transparency index measures monetary and fiscal policy, accounting standards and stock-market listing.  These are commercially relevant issues and the measures are compiled by reputable independent sources.  The political-stability index measures civil liberties, judicial independence and political risk.  A strong argument can be made on commercial grounds for their inclusion and they were also derived from reputable sources.

Politicisation came with the measure of labour standards.  Calpers hired the consultancy arm of an arguably union-friendly non-governmental organisation, Verite, to compile the measure.  Verite adopted the standards promoted by the U.S. union movement.  As for its methodology, it made assessments largely based on interviews with labour activists and research on newspaper articles (which in turn were largely generated by these activists).

Thailand was excluded from the Calpers list largely on market as well as transparency factors.  Indonesia was excluded on the basis of a number of factors.  Malaysia, however, was excluded in the end based on a labour-standard assessment.  As in the past, Malaysia ranked high on market-related factors and would have remained on Calpers' list except for its low ranking on labour standards (the fifth lowest of 27 countries).  Malaysia was also ranked poorly on civil liberties and some transparency issues, but it was the low ranking on labour standards that pushed it off the list.

In reality, the performance of the Malaysian labour market has been excellent, with high job growth, low unemployment and a doubling of real wages over the last decade.  Moreover, it has absorbed two million migrant workers from surroundings countries whose labour standards the Calpers study surprisingly rates more highly.  And in contrast to the Calpers study, Malaysia's labour market was this year rated by the World Competitive Index as number two among emerging nations in terms of attractiveness to investors, and the seventh across the world.

Malaysia has long been on the bad books of the U.S. union movement.  It has been the leading critic of attempts to include labour standards in trade and investment deals and of the labour standards promoted by the union movement.  And it has been highly successful in attracting investment away from the U.S.

It is important that Asian policy makers and investors see through the corporate social responsibility rhetoric of Calpers and understand the political agenda that drives this fund and others like it, for they are growing in number and influence.