Sunday, September 27, 2009

CORPORATION: common discount rate

What will happen to social and environmental values when they are subordinated to a common discount rate?
Let’s say a company owns a forest in which it has chosen for many generations to selectively harvest the trees. Because of its prudent management the company has very little debt, but it doesn’t earn enormous profits, either. It consistently delivers to its shareholders a 9 percent return on equity, considered below average for the forest products industry. Meanwhile, world financial markets have heated up. It is now possible to purchase AAA – rated bonds yielding eleven percent, which couldn’t happen at a worse time for the company, due to the fact that home building has declined because of high interest rates. Therefore the price of lumber is 30 percent lower than in previous years. Now our company’s return on equity is just 6 percent and its stock has been hammered by trader who no longer sees it as a valuable company to own. With its stock prices cut in half, shareholders angry, and analyst baying at the door, management does the ‘rational’ thing. It clear-ups large sections of the timber, raising not only its short term return on assets, but also investing the surplus funds where it can get a higher return that it did in the forest.
In short, the money the forest represented became more valuable than the forest itself. So the forest is gone, and the money it has earned has entered the international pool of capital, thereby putting just a little more pressure on the owner of another forest to convert their assets on the ground to cold cash. This positive feedback loop is the dilemma faced by all corporations. When long-term value is reduced to, or tantamount to, net present value, the corporation has only one choice if it is to maximise return for shareholders and attain returns greater than the discounted rate of capital growth as expressed in financial markets. Money and only money, decides what is valuable, and why. Who determines that it is time for an ancient forest that yields only 4 percent on equity to become the flooring for suburban homes, or in the case of virgin timber on the Olympic Peninsula, to become apple crates. No one, really. It is the not the social or personal choice. It is the market choice.
What happens in GATT (General Agreement on Tariffs and Trade?)
Since its formation in 1948, the purpose of GATT has been to lower tariffs and trade barriers in order to stimulate international trade. Its origins can be traced to the Bretton Woods conference in 1944, where proposals and draft documents were created to serve as the basis of a precursor organisation, the International Trade Organisation. The ITO was originally designed to be an adjunct institution to the International Monetary Fund and the World Bank. At that time, and after the war, there was a widespread fear that the economic conditions that characterized the Depression and tariff-protected economic isolationism. On both accounts, trade liberalization was seen as a strong and vital remedy. Like the United Nations, the GATT organisation was seen as a potent force for multilateralism, although it would be an economic force rather than political. Its strength was that it was a forum for negotiation and accommodation that prevented legal and hostile actions between nations due to trade conflicts. In this sense, the GATT was an innovative if not a breakthrough institution in world history, having developed dispute-resolving mechanism that has proven durable and effective since it’s founding. From what it learns in this ongoing process of constant negotiation, the GATT council to the contrasting parties occasionally proposes “rounds” of talks aimed at further streamlining trade policies and eliminating protective barriers. For example, despite the seven prior rounds of GATT agreements, in 1985 a typical international transaction still required 360 different documents, while during the same year; the U.S Congress introduced over a hundred pieces of legislation that would place restrictions on imported goods.
When the fine print is read on the GATT treaty, it turns out to be as free as its proponents assert. It is full of loopholes, concessions to special interest groups, variable tariffs, and outright giveaways to industries that happened to be sufficiently wealthy and strongly represented in the negotiations. In other words, it is not a free-trade agreement, but a ‘managed’ trade agreement. It creates a type of lottery system, where low-wage countries, competing to make products for high-wage companies, hope that by allowing their workers to be exploited by multinational corporations, they too, can hit the jackpot and eventually become high-wage countries.
GATT not only makes the world decidedly less safe at home, it worsens conditions overseas as well. Taiwan, for example, has proposed laws that would prevent and control the damage from tobacco use. These laws would ban cigarette sale in vending machines, restrict public smoking areas, prohibit all forms of tobacco advertisement and promotions, and would be coupled with a strong educational effort to convince people to quit or not take up smoking. The U.S trade representative threatened Taiwan with trade sanctions if these laws passed, even though they affect domestic Taiwanese tobacco companies as much as they would American exporters. American cigarettes companies have been remarkably successful overseas, employing creative and sophisticated ad campaigns in foreign countries. In Korea, after bans on foreign tobacco companies were repealed, male teenage consumption rose from 1.6 percent to 8.7 percent. What has happened there and in other countries is that the old government-dominated tobacco monopolies have been forced to adapt the same marketing techniques as the Americans, which even further accelerates tobacco usage and disease. Just as it has with agricultural practices, GATT policies regarding tobacco force the world to devolve to the lower common denominator of commerce, which is growth of sales, reduction of corporate cost, and enhancement of profit regardless of the impact on local societies or ecosystems.
It would be easier to see the relationship between large scale economic activity and environmental degradation if it weren’t for the excellent job that corporations do of making us feel at ease with their bigness through advertisement images – beautiful photographed senses of small towns, local community activities, and families. We’re all connected and in this together, the ads assure us
We are not shown the manufacturing facilities, the noise, the dirt. We do not see the distribution centres that cover dirty football fields, or the massive amount of waste that is generated and discarded. General Motors will exploit the image of small towns near their Kentucky Saturn plant, but not show us the ghettos of Flint, Michigan, PepsiCo, the corporate owner of Kentucky Fried Chicken, will show us a reunion under a chestnut tree where an extended family dips into buckets of the Colonel’s esteemed chicken, but we are not shown the mile-long conveyor belt of factory-produced chicken, pumped full of sulphonamides, and nitro furans, being stunned, killed, scalded, defeathered decapitated, bled, eviscerated and dismembered at a rate of ninety a minute by low-paid workers who report high rate of repetitive motion injuries.


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