The Export-Import Bank of the United States (EIB) is a governmental export credit agency. The agency refused to approve of loans and guarantees to three American firms in the process of obtaining contacts to participate in the construction of the Three Gorges Dam in China. This management report analyzes the decision of the EIB. It is determined that the decision was an ethical one, as it was based on scientific reports that the construction of the Dam would be an environmental disaster for the people of China. Contrary opinions are considered through this report. The fact that the Chinese government acknowledges that the construction of the Three Gorges Dam is environmentally dangerous substantiates the intelligent stance of the EIB.
Export credit agencies support domestic firms to export their products or services (Esty Sesia, 2007, 11). On the other hand, the International Finance Corporation, an institution of the World Bank Group promotes economic growth in developing countries mostly by investing in sustainable private corporations in these countries without requiring guarantees from their governments (International Finance Corporation, 2010). Whereas the entire World Bank Group made financial commitments worth only 19.3 billion in the year 2000, export credit agencies around the world make investments worth 100 to 200 billion each year. Referred to as the driving force of the global economy, these agencies use taxpayer dollars to make it both less risky and cheaper for domestic companies to invest or export abroad. They do this by providing credit and loans to developing nations so they can buy from rich countries. They also provide insurance or guarantees to reimburse exporters or banks should they suffer losses in poor countries (Goldzimer, 2003).
The Export-Import Bank of the United States (EIB) is a government-owned export credit agency (Goldzimer). The agency refused to provide loans and guarantees for the construction of the Three Gorges Dam in China (The U.S. Export-Import Bank and the Three Gorges Dam, 2000, 1). Export credit agencies of Canada and various European nations agreed to finance the project nevertheless (Schucking, 1998). In this report, we analyze EIBs managerial decision to refuse finance for the building of the worlds largest dam in China (Hvistendahl, 2008).
EIBs Refusal to Finance Contracts for the Three Gorges Dam
As China demanded loans and export credit guarantees before foreign contractors could participate in the construction of the Three Gorges Dam, three U.S.-based companies, Caterpillar, Voith Hydro and Rotec Industries were refused guarantees and loans by the Export-Import Bank of the United States. The Bank was set to refuse all domestic companies for the project, the reason being that the construction of this dam is environmentally hazardous (The U.S. Export-Import Bank and the Three Gorges Dam, 1-2). Schucking writes that the United States is the only country that has clear cut environmental and social standards for its export credit and investment insurance agencies. In fact, the chairman and president of the EIB, Martin A. Kamarck would refuse to approve finance and guarantees for the Three Gorges Dam today just as he did back in 1996 (The U.S. Export-Import Bank and the Three Gorges Dam, 2). Today, even the Chinese government acknowledges the fact that the Three Gorges Dam is an environmental catastrophe endangering millions of lives as it triggers landslides, alters ecosystems and causes various other environmental problems (Hvistendahl).
Esty (2003) states that ethical standards must be applied in project finance decisions (6). Kamarck had made the correct decision to refuse loans and guarantees for the Three Gorges Dam, and Dick Shoemaker, heading the United Automobile Workers at Caterpillar had made a perfectly reasonable statement connecting U.S. taxpayer funds to an unethical project, thereby support Kamarcks decision. Even the Deputy National Security Adviser to President Clinton had said that the United States does not wish to fund or back a project that raises human rights as well as environmental concerns. However, Dennis Hastert, an Illinois Congressman did not have ecological and human rights concerns on his mind when he stated that it is best for the EIB to support American companies for the project in China regardless of politics (The U.S. Export-Import Bank and the Three Gorges Dam, 2-3). As a matter of fact, EIBs decision not to back the construction project had nothing to do with the political relationship between the United States and China. As Kamarck explained, the EIB was backing several projects in China at the time (The U.S. Export-Import Bank and the Three Gorges Dam, 2). The decision not to finance the construction project was a matter of principle. According to Kamarck, the project did not meet EIBs environmental guidelines (The U.S. Export-Import Bank and the Three Gorges Dam, 2). Had the construction project met EIBs guidelines, the export credit agency would not have refused loans and guarantees to domestic companies seeing that America is a business leader that would always try to strengthen its economy.
Donald Manzullo, another Illinois Congressman, had remarked that EIBs refusal to back the project in China would hurt the American economy (The U.S. Export-Import Bank and the Three Gorges Dam, 9). His opinion was as uninformed as that of Hastert, given that EIB management has the best interests of the U.S. economy at heart. In fact, EIB serves to promote American goods and services abroad (The U.S. Export-Import Bank and the Three Gorges Dam, 3). Mocking the decisions of EIB management must be considered an instance of negative politics. Regardless of the extent of profits expected by Caterpillar, Voith Hydro and Rotec Industries through their contracts in China, the decision made by the EIB management must be respected (The U.S. Export-Import Bank and the Three Gorges Dam, 2-3). Despite the fact that the Three Gorges Dam was expected to become a major source of renewable power for an energy-hungry nation, the decision of the EIB management was an informed one, as scientists from around the world had already warned of the dangers of constructing the dam (Hvistendahl).
At the time that the EIB management decided not to support domestic companies to participate in the construction of the Three Gorges Dam, the Chinese government was defending the project (Hvistendahl). But, the EIB relied on an assessment prepared by its Engineering and Environment Division, according to which the project raised serious questions concerning population relocation, protection of the natural ecology, water qualityandmitigation of the effects of natural disasters (The U.S. Export-Import Bank and the Three Gorges Dam, 6-7). The United States government took a wiser stance toward the project than the Chinese government at the time. In the economic sense, hurting the Chinese population to build a dam would reduce the capacity of Chinese human resources, which in turn would hurt the global economy. Scientists had warned that the dam construction would increase disease and lead to a reduction in biodiversity to boot (Hvistendahl). Although scientists words fell on deaf ears in China, the United States EIB management made an environmentally and economically sound decision, bearing in mind that all ecosystems are linked and environmental problems in any part of the world tend to adversely affect the entire planet a fact that is widely known today (Hvistendahl).
Indeed, disregard for environmental problems in China would have eventually hurt the American economy. Had the EIB decided to grant loans and guarantees to domestic companies for their participation in the construction of the Three Gorges Dam, the Chinese people hurt by the construction would have blamed all export credit agencies, including EIB, responsible for the project. Furthermore, companies based in the United States would have lost countless valuable customers in China had the construction project adversely affected the latters lives. By making an ethical decision, the EIB had aligned itself with the United States political and economic goal to remain as a political and business leader for developing countries and emerging markets to continue looking up to. Manzullo and Hastert had a limited view of the American political economy when they criticized EIBs decision to refuse to back the construction project in China.
According to Esty, project finance is meant to increase the value of a project (1). As the Three Gorges region is a development hub at present, it is a serious mistake to finance a project that is expected to have detrimental effects on society, environment and the economy (Hvistendahl Goldzimer). The EIB management understood that it would not be adding value to a project by providing loans and guarantees for the Three Gorges Dam. Rather, in this case, project finance would have reduced the value of the project in question. The Chinese governments acknowledgement of the fact that the Dam is dangerous is further proof that the project was essentially worthless. Moreover, all export credit agencies should follow the example of EIB before making decisions to finance projects with the potential to harm the world.
Export credit agencies support domestic firms to export their products or services (Esty Sesia, 2007, 11). On the other hand, the International Finance Corporation, an institution of the World Bank Group promotes economic growth in developing countries mostly by investing in sustainable private corporations in these countries without requiring guarantees from their governments (International Finance Corporation, 2010). Whereas the entire World Bank Group made financial commitments worth only 19.3 billion in the year 2000, export credit agencies around the world make investments worth 100 to 200 billion each year. Referred to as the driving force of the global economy, these agencies use taxpayer dollars to make it both less risky and cheaper for domestic companies to invest or export abroad. They do this by providing credit and loans to developing nations so they can buy from rich countries. They also provide insurance or guarantees to reimburse exporters or banks should they suffer losses in poor countries (Goldzimer, 2003).
The Export-Import Bank of the United States (EIB) is a government-owned export credit agency (Goldzimer). The agency refused to provide loans and guarantees for the construction of the Three Gorges Dam in China (The U.S. Export-Import Bank and the Three Gorges Dam, 2000, 1). Export credit agencies of Canada and various European nations agreed to finance the project nevertheless (Schucking, 1998). In this report, we analyze EIBs managerial decision to refuse finance for the building of the worlds largest dam in China (Hvistendahl, 2008).
EIBs Refusal to Finance Contracts for the Three Gorges Dam
As China demanded loans and export credit guarantees before foreign contractors could participate in the construction of the Three Gorges Dam, three U.S.-based companies, Caterpillar, Voith Hydro and Rotec Industries were refused guarantees and loans by the Export-Import Bank of the United States. The Bank was set to refuse all domestic companies for the project, the reason being that the construction of this dam is environmentally hazardous (The U.S. Export-Import Bank and the Three Gorges Dam, 1-2). Schucking writes that the United States is the only country that has clear cut environmental and social standards for its export credit and investment insurance agencies. In fact, the chairman and president of the EIB, Martin A. Kamarck would refuse to approve finance and guarantees for the Three Gorges Dam today just as he did back in 1996 (The U.S. Export-Import Bank and the Three Gorges Dam, 2). Today, even the Chinese government acknowledges the fact that the Three Gorges Dam is an environmental catastrophe endangering millions of lives as it triggers landslides, alters ecosystems and causes various other environmental problems (Hvistendahl).
Esty (2003) states that ethical standards must be applied in project finance decisions (6). Kamarck had made the correct decision to refuse loans and guarantees for the Three Gorges Dam, and Dick Shoemaker, heading the United Automobile Workers at Caterpillar had made a perfectly reasonable statement connecting U.S. taxpayer funds to an unethical project, thereby support Kamarcks decision. Even the Deputy National Security Adviser to President Clinton had said that the United States does not wish to fund or back a project that raises human rights as well as environmental concerns. However, Dennis Hastert, an Illinois Congressman did not have ecological and human rights concerns on his mind when he stated that it is best for the EIB to support American companies for the project in China regardless of politics (The U.S. Export-Import Bank and the Three Gorges Dam, 2-3). As a matter of fact, EIBs decision not to back the construction project had nothing to do with the political relationship between the United States and China. As Kamarck explained, the EIB was backing several projects in China at the time (The U.S. Export-Import Bank and the Three Gorges Dam, 2). The decision not to finance the construction project was a matter of principle. According to Kamarck, the project did not meet EIBs environmental guidelines (The U.S. Export-Import Bank and the Three Gorges Dam, 2). Had the construction project met EIBs guidelines, the export credit agency would not have refused loans and guarantees to domestic companies seeing that America is a business leader that would always try to strengthen its economy.
Donald Manzullo, another Illinois Congressman, had remarked that EIBs refusal to back the project in China would hurt the American economy (The U.S. Export-Import Bank and the Three Gorges Dam, 9). His opinion was as uninformed as that of Hastert, given that EIB management has the best interests of the U.S. economy at heart. In fact, EIB serves to promote American goods and services abroad (The U.S. Export-Import Bank and the Three Gorges Dam, 3). Mocking the decisions of EIB management must be considered an instance of negative politics. Regardless of the extent of profits expected by Caterpillar, Voith Hydro and Rotec Industries through their contracts in China, the decision made by the EIB management must be respected (The U.S. Export-Import Bank and the Three Gorges Dam, 2-3). Despite the fact that the Three Gorges Dam was expected to become a major source of renewable power for an energy-hungry nation, the decision of the EIB management was an informed one, as scientists from around the world had already warned of the dangers of constructing the dam (Hvistendahl).
At the time that the EIB management decided not to support domestic companies to participate in the construction of the Three Gorges Dam, the Chinese government was defending the project (Hvistendahl). But, the EIB relied on an assessment prepared by its Engineering and Environment Division, according to which the project raised serious questions concerning population relocation, protection of the natural ecology, water qualityandmitigation of the effects of natural disasters (The U.S. Export-Import Bank and the Three Gorges Dam, 6-7). The United States government took a wiser stance toward the project than the Chinese government at the time. In the economic sense, hurting the Chinese population to build a dam would reduce the capacity of Chinese human resources, which in turn would hurt the global economy. Scientists had warned that the dam construction would increase disease and lead to a reduction in biodiversity to boot (Hvistendahl). Although scientists words fell on deaf ears in China, the United States EIB management made an environmentally and economically sound decision, bearing in mind that all ecosystems are linked and environmental problems in any part of the world tend to adversely affect the entire planet a fact that is widely known today (Hvistendahl).
Indeed, disregard for environmental problems in China would have eventually hurt the American economy. Had the EIB decided to grant loans and guarantees to domestic companies for their participation in the construction of the Three Gorges Dam, the Chinese people hurt by the construction would have blamed all export credit agencies, including EIB, responsible for the project. Furthermore, companies based in the United States would have lost countless valuable customers in China had the construction project adversely affected the latters lives. By making an ethical decision, the EIB had aligned itself with the United States political and economic goal to remain as a political and business leader for developing countries and emerging markets to continue looking up to. Manzullo and Hastert had a limited view of the American political economy when they criticized EIBs decision to refuse to back the construction project in China.
According to Esty, project finance is meant to increase the value of a project (1). As the Three Gorges region is a development hub at present, it is a serious mistake to finance a project that is expected to have detrimental effects on society, environment and the economy (Hvistendahl Goldzimer). The EIB management understood that it would not be adding value to a project by providing loans and guarantees for the Three Gorges Dam. Rather, in this case, project finance would have reduced the value of the project in question. The Chinese governments acknowledgement of the fact that the Dam is dangerous is further proof that the project was essentially worthless. Moreover, all export credit agencies should follow the example of EIB before making decisions to finance projects with the potential to harm the world.
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