OCTOBER 1987 - VOLUME 8 - NUMBER 10
U P D A T E S
A Code of Conduct for Transnationals
More than 10 years after it was first proposed, the United Nations Code of Conduct for Transnational Corporations is near completion.
The Code, which would set specific, albeit voluntary, rules for corporations doing business outside their country of origin, would be a radical departure from the arbitrary and haphazard guidelines currently governing relations between multinationals and the countries in which they operate.
Agreement has already been reached on many issues, including environmental and consumer protection in the host states; prevention of transfer pricing; full disclosure of information to host states regarding transnational corporation (TNC) activities, policies and structure; and local involvement in ownership and control of TNC operations.
But progress, though steady, has been slow on the remaining, more controversial sections of the Code.
The Code was originally proposed by the developing nations in the early 1970s. In the same time period, the covert campaigns by the United States multinational ITT to bring down the popularly elected government of Salvador Allende were beginning to come to light. When Allende's government was brutally overthrown, other countries took up the call for the Code, which was expanded to include a whole range of actions by TNCs. Developing countries wanted to proscribe TNCs from: failing to meet environmental or safety standards mandated in the First World; dumping unsafe products; selling hazardous drugs without properly informing foreign citizens of the dangers; paying substandard wages; and bribing foreign government officials.
TNCs are power brokers in many developing countries. In 1986, the total value of direct foreign investment by TNCs amounted to some $700 billion. Many TNCs have assets greater than the GNPs of the countries in which they operate. Unfortunately, this power has not always been used responsibly. In 1984, a Union Carbide plant spewed toxic gases into Bhopal, India, killing thousands of people in the most deadly industrial disaster of the century. According to dozens of reports immediately following the accident, safety and maintenance procedures at the plant fell far short of those required in the United States and other developed countries.
Long after A.H. Robins' Dalkon Shield intrauterine device was pulled off the market in the United States because it caused pelvic inflammatory disease and other severe infections, miscarriages, stillbirths and death, it was sold in dozens of countries, jeopardizing the lives of hundreds of thousands of women.
Proponents of the TNC Code of Conduct hope that an international set of guidelines will prevent the double standard under which TNCs now operate and provide an instrument by which trade unions, consumer and environmental groups and host governments can hold TNCs accountable for the consequences of their actions.
The original purpose of the Code of Conduct was to provide a "framework that would seek to eliminate the negative aspects of the activities of transnational corporations, while promoting their positive contributions to economic development," according to the U.N. Center on Transna tional Corporations. But as the Code evolved, and as opposition mounted, its provisions began to address host country treatment of the TNCs as well. Now the Code's aim is to establish guidelines for all TNC/host state relations.
As negotiations now stand, the Code will be voluntary rather than mandatory - much to the chagrin of many developing countries. Industrialized countries argue that a voluntary Code, universally approved, would have more than enough moral and political weight; a country that had approved a voluntary code would have an obligation to obey its provisions, whereas a mandatory code could be broken by any country not in complete agreement with its principles without the risk of dishonoring a national commitment.
Despite enforcement problems, consumer groups and other advocates are anxious for completion of the Code.
"The proposed U.N. Code of Conduct represents the most important attempt, to date, to draft an instrument on foreign direct investment to which all nations are parties," according to Esther Peterson, the United Nations representative for the International Organization of Consumers Unions (IOCU). Peterson, in her testimony before the U.N. in May 1987, said the Code would safeguard consumer interests by requiring TNCs to comply with their host countries' national laws concerning consumer protection and with international health, safety and quality standards such as those specified in the recently passed U.N. Guidelines for Consumer Protection, the Food and Agriculture Organization (FAO) Pesticide Code and the International Code of Marketing of Breast-milk Substitutes. The Code of Conduct will also require TNCs to disclose to their host countries major health and safety information on their products or services. This would include proper labeling, accurate advertising and safe packaging of products.
Peterson believes the Code will help stabilize foreign investment because TNCs, adhering to the same rules everywhere, will no longer be able to avoid govemment regulations, tax increases and labor force organization by shifting production from one country to another. This process has caused "corruption, political interference, dumping of unsafe products, environmental disasters and unstable host state-foreign investor relations," Peterson said.
Although some TNCs have attacked the Code for being anti-business, antidevelopment and unduly restrictive of TNC operations, proponents of the code argue that it merely insures good business behavior from both sides. If TNCs claim to be good citizens to their host countries, says L.K. Jha, a member of the Indian Parliament, then "compliance with the Code should not be seen as an onerous burden which they reluctantly accept." The Code does not ask U.S. TNCs to meet requirements in foreign countries that are any greater than those already mandated in their own countries.
Jha says that "the basic aim of the proposed Code of Conduct on TNCs is to remove the distrust and suspicion with which many developing countries look at these corporations."
The bulk of the issues impeding pas sage of the Code relate to the section on the "treatment" of TNCs. Compromises have been proposed but no consensus has yet been reached.
An earlier stumbling block over how to define TNCs was finally surmounted after it threatened to bring negotiations to a standstill. The Soviet Union and other Eastern European countries were pushing for a definition that excludes publicly owned companies - the majority of all companies within their borders. But the United States and some Western European countries claimed that without including state-owned companies, the Code would unfairly target only Western TNCs, leaving the Soviet bloc's equivalent undeterred. What was finally agreed upon was a broad definition that would make the Code applicable to all companies operating in foreign countries, regardless of who owns them or from which country they originate.
"The most serious outstanding issue still remaining," says Peter Hansen, Director of the United Nations Center on Transnational Corporations (CTC), "is over the relevance of customary international law to the Code. All parties agree that conventional intemational law (the written law governing international business activities), should be adhered to. But some find the developing world's customary international law (the unwritten code that has developed over hundreds of years) objectionable. "In their point of view it is the ideological justification or underpinning of colonial exploitation," said Hansen.
Another condition which threatens to slow progress is the wording used to define how TNCs should be compensated after nationalization. The United States does not think the terms "appropriate," or "just and fair" are strong enough. The United States delegation wants to add "prompt, adequate and effective," to the nationalization provision. Semantic debate, says Hansen, may simply be a way to stall enactment of the Code. "The benefits to all sides are so obvious that from a rational view it is incomprehensible that it has not been adopted," says Hansen. "All these various standards would make TNCs credible contributors to the countries in which they operate, and for developing and developed countries the Code would contribute to greater clarity in the international investment field."
- Rachel Wolfe
Stopping the Shell Game in South Africa
The campaign to force Shell Oil Company to withdraw from South Africa is gaining momentum. In addition to waging a boycott of consumer goods, the campaign is now organizing a shareholders' protest to encourage the divestiture of funds from both Royal Dutch/Shell and its parent companies, Royal Dutch Petroleum and Shell Transport and Trading Company. Royal Dutch/Shell operates in South Africa through its subsidiary, Shell South Africa. In addition to oil refming and distribution, the company also has interests in chemical and coal activities.
Kenneth Zinn of the United Mine Workers of America, one of the unions organizing the boycott, says the anti-Shell alliance wants to use a special clause in the company's bylaws to convene a meeting on a resolution calling for complete and total withdrawal from South Africa by the company. The clause, which allows stockholders to band together to bring resolutions to a vote, has never been applied to the company's international policies.
Since last year the boycott has expanded considerably. Fuel contracts have been discontinued; Shell ads have been dropped from newspapers; and consumers have boycotted products to protest Shell's refusal to leave South Africa
But Lewis Hoffacker, International Affairs Consultant for Shell, says that so far "the boycott initiated against Shell Oil Company has had virtually no impact on the company." The boycott was, however, addressed at both annual meetings of the parent companies, one in London and one in the Hague. Resistance to the boycott was reiterated and the parent companies "hope[s] and expect[s] to be there [in South Africa] for the foreseeable future."
Church and labor groups have already divested more than $12.4 million in Royal Dutch stocks and bonds. And three of the five largest U.S. institutional shareholders petitioned in favor of the special resolution, which may force the parent companies to reconsider their policies. Mellon Bank and Wells Fargo are two of these shareholders; the third asked for confidentiality. Since the drive began on March 31, 12 million shares out of the 26.8 million required for the 10 percent quota have been committed to the resolution.
Lewis Hoffacker insists that "Royal Dutch/Shell Group and Shell Oil Company in Houston stand firmly opposed to apartheid and want to see it ended as quickly and peacefully as possible." But, the company says a pull out is not the answer. "In our case, withdrawal or 'disinvestment' is, in practical terms, meaningless. The physical assets cannot be removed from the country: they would be taken over by a new owner and the operations would continue. Our employees would feel abandoned." Shell argues that change will come through constructive engagement.
Despite such claims, critics like Kenneth Zinn say the company's role has been anything but constructive. Shell's role is particularly controversial since the company provides the South African military and police forces with fuel. By law all oil companies operating in South Africa must supply the government with fuel. "South Africa does not have its own oil and depends on companies like Royal Dutch/ Shell for its very survival," emphasized Zinn.
Defense of the constructive engagement policy centers on the belief that economic pressure can be effectively mounted from inside the country by powerful multinationals. The Sullivan Principles and the European Economic Code of Conduct for companies with holdings in South Africa, both of which outline certain standards for companies doing business with South Africa, are based on constructive engagement. Ostensibly these codes were designed to encourage companies to supply workers with opportunities for advancement and guarantees of nondiscriminatory policies in the workplace. Critics, however, scoff at these attempts to focus the apartheid issue only in the workplace; they argue that the problem rests with a political system where a white minority controls a black majority.
At a press conference on June 3, 1987, Reverend Leon Sullivan, author of the "Sullivan Principles" announced that he was "calling for the withdrawal of all United States companies from the Republic of South Africa, and for a total United States embargo against that country, until statutory apartheid is ended, and Blacks have a clear commitment for equal political rights."
This acknowledgment that even 10 years after the Sullivan Principles were implemented statutory apartheid still exists in South Africa, undermines the "legitimacy" of constructive engagement. American companies operating in South Africa can no longer use these controversial standards to side-step the apartheid debate. (See "Slippery Sullivan Principles," MM June 30, 1985).
Sullivan's renunciation of corporate involvement in South Africa coincided with South Africa President Pieter W. Botha's announcement of another year of the countrywide state of emergency.
Zinn said, "Even if the European Economic Community's Code [to which Shell South Africa subscribes] was as strong [as the Sullivan Principles], Reverend Sullivan's renunciation of these principles really shows that the only answer for these companies is to leave South Africa."
Auditing the Bank's Work
Each year, as background for its September annual meeting with the International Monetary Fund, the World Bank releases a World Development Report presenting its assessment of development in the South. In recent years, the Bank has used this report to argue for free market, outward-oriented policies for developing nations.
Glossing over an increasingly stagnating world market, the Bank's annual exercises have relied on overly optimistic projections of a resurgence of the high growth rates from decades past. Over the past nine years, the World Bank has consistently projected that developing countries' exports would grow at over five percent per year during the 1980s; the 1981-86 actual growth rates averaged negative.4 percent.
This year, perhaps realizing that the current world market made more than a glowing forecast necessary, the Bank went one step further. It presented the findings of its trade survey policies. The Bank's findings: in recent years, nations with freer, more outward-oriented trade policies have fared much better than those with inward-oriented policies. Star performers in the survey were Singapore, Hong Kong and South Korea.
For this survey, the Bank divided 41 countries into four categories - strongly outward-oriented, moderately outwardoriented, moderately inward-oriented and strongly inward-oriented - and then studied their performance from 1973 to 1985. The three strongly outward-oriented East Asian newly industrialized countries (NICs), which broke into world manufacturing markets during the past few decades, did predictably well.
What the Bank failed to highlight was that its own tables show that the moderately inward-oriented countries outpaced the moderately outward-oriented in both Gross Domestic Product (GDP) growth and real per capita Gross National Product (GNP)
Placing countries neatly in one of four policy categories requires making subjective judgments. For example, one of the more dismal performers during this period was the Philippines, a country often referred to as the "guinea pig" for World Bank export-oriented policy-related loans. The Bank placed the Philippines among the moderately inward-oriented countries.
But there is a more serious flaw than poor categorization: some key countries were simply ignored by the study. Neither Burma nor China were surveyed, yet both were among the best "developing country performers" in the 1980s. Both were classified as inward-oriented.
China's economic growth, unsurpassed anywhere in the world in the 1980s, was overwhelmingly domestic, even though this was the period when the Chinese began opening up to the world market. Chinese rural industries, for example, grew at over 20 percent annually during the 1980s. China's experience makes a strong case against the World Bank's model of development and a strong case for slowly opening up an economy only after a substantial domestic market has been developed and nurtured.
The World Bank is also a strong proponent of a laissez faire approach to development. The World Development Report implies that its highest achievers subscribe to this philosophy. In fact, no developing country more carefully assists its nation's export assault than South Korea does. The other NIC countries follow similar approaches.
The survey suffers in another way. Nowhere does it mention workers' rights, education, health care or other social indicators. In fact, the outward-oriented nations of South Korea, Taiwan, Thailand, Turkey and Chile are among the worst violators of even minimal workers' rights. By comparison, workers' rights are much better protected in India, Peru, Argentina and other inward-oriented nations.
Juxtaposing the Bank's survey against the 12 indicators of education, health and nutrition compiled by Ruth Leger Sivard in her annual study, World Military and Social Expenditures, yields additional interesting contrasts. Sivard ranks 142 countries by these and other, more traditional indicators. Comparing a country's ranking on the 12 social indicators in 1983 with their rankings on per capita GNP, the inward-oriented countries, on average, fared much better. Overall, the five top performers in this comparison of rankings based on social indicators to rankings of per capita GNP were all in the World Bank's inward-oriented list: Sri Lanka, Bangladesh, India, Tanzania and Madagascar.
World trade grew at an average annual rate of 8 percent over the 1950s and 1960s, 4 percent in the 1970s and has slowed to just over 2 percent in the 1980s. Yet the World Bank chose as its survey years a period thatbegins in 1973, which results in conclusions that are suspect for the current period of slow growth in the world economy.
A more revealing survey was conducted by the United Nations in its World Economic Survey, 1987. This study looked carefully at the 14 developing nations which achieved per capita GDP growth rates of over 2.5 percent for the period 1981-85. Labeling these 12 Asian and two African countries according to the World Bank's categories yields results that are far from conclusive. Six of the UN success stories were outward-oriented; eight were inward-oriented.
Those countries that remained dependent on raw materials exports fared disastrously. Yet major World Bank reports on sub-Saharan Africa in 1982 and 1984 concluded with policy recommendations that counselled increased emphasis on such cash crop exports.
In short, policies that generate growth in some developing countries during an era of rapid growth in world markets do not always work well in today's slow growing world economy.
- John Cavanaugh and Robin Broad,