Monday, December 13, 2010

Michael Komesaroff on China in Africa--State Duty, Corporate Responsibility and the Changing Face of Economic Globalization

Michael Komesaroff, principal of Urandaline Investments, a consultancy specializing in China’s capital intensive industries, and recently executive in residence at the School of International Affairs, Pennsylvania State University, has written an  excellent analysis of a  China's implementation of its natural resources policies in Africa.  Michael Komesaroff, An African Romance, China Economic Quarterly 9-12 (Dec. 2010).  Komesaroff's thesis is both elegant and profound:

The success of Chinese resource companies in tapping Africa’s bountiful natural wealth is the envy of their Western competitors, who frequently struggle to get a foothold in Africa’s alluring but frustrating mineral sector. China’s success stems from building much-needed infrastructure in exchange for privileged access to high-quality natural resources. China’s twin policies of offering no-strings investment and refusing to interfere in the internal affairs of other countries, plus the fact that China is unburdened by a toxic colonial legacy on the continent, make its state-owned companies a far more welcome partner for African governments than troublesome Western investors. (Michael Komesaroff, An African Romance, China Economic Quarterly 9 (Dec. 2010).

A combination of a state investment policy grounded "non-interference" as a touchstone of state to state relations, the ability to successfully project public power through private market activity, and the fortuity of an unparalleled success in painting Marxist-Leninist neo-colonialism as distinct and more benign than the previous versions as practiced by Western hegemons during their days of ascendancy, has been ably deployed to the political benefit of the Chinese state and to the economic benefit of its people. 

This is no criticism of the Chinese; rather it serves as a reminder that the West no longer necessarily controls either the terms of private market activity or its normative structuring. As a consequence, Western enterprises are increasingly becoming the passive partners of Chinese concerns, and more likely to adopt Chinese frameworks for global economic (and political) activity.  This phenomenon is most acutely apparent in Africa.

Komesaroff illustrates the point with a reminder of the depths to which the Australian extractive concern Rio Tinto has fallen in Africa, now nor merely  an overseas Chinese company but one that is dependent on state partnerships to succeed in Africa. 
The recent decision by Australian miner Rio Tinto to team up with China’s aluminium champion Chinalco on a large iron-ore project in Guinea, a tiny state in west Africa, suggests that Rio is attempting to hitch a ride on China’s coattails in the continent. . . . Most importantly, the project could demonstrate that it makes sense for Rio to form a much closer relationship with Chinalco, already its largest shareholder. . . . Announcing his company’s participation in the Simandou development, Chinalco’s president Xiong Weiping mentioned both his company’s skill in executing infrastructure projects and its understanding of the Chinese market. But Chinalco’s biggest advantage in the African environment is the fact that is heavily backed by the Chinese state. In contrast, Rio Tinto’s poor relations with the Guinean government are accentuated by the fact that, as with many of its global peers, it is a company without a country. Although most of its earnings are derived from Australian mines, Rio has a dual public listing in the United Kingdom and Australia, its headquarters are in London, and very few of its board or more senior executives have any connection with Australia. But unlike national champions, companies with such confused national heritage can only expect limited support from the countries they use as domiciles of convenience. Chinese state champions like Chinalco, on the other hand, enjoy Beijing’s unswerving support.  (Michael Komesaroff, An African Romance, China Economic Quarterly 9-10  (Dec. 2010).
The insights are powerful. In Africa, at least, the forces of economic globalization that makes it possible for large economic organizations to regulate themselves--to become functionally independent of states--tends to inhibit their ability to compete against states when they enter private markets as participants.  That sort of competition requires even powerful private enterprises to access public power.  That is in part the case because, at least in the extractive sector, there is not private market--states regulate the markets in which they participate.  "Non-interference may be the official policy, but Chinese champions have leverage through their government’s funding of essential national infrastructure and the fact that Beijing can talk directly to host governments. By teaming up with Rio Tinto, Chinalco is reducing the project’s risk: the Guinean government may be prepared to snub representations from the UK and Australian governments, but it would be cautious about offending China, Africa’s major benefactor." (Michael Komesaroff, An African Romance, China Economic Quarterly 11  (Dec. 2010).
This suggests that Chinalco’s primary motivation for investing in the Simandou project is to work with Rio. Why? With most of the next generation of game-changing mineral projects in resource-rich but risky African countries, Chinalco wants to demonstrate to big Western miners such as Rio that, by reducing project risk and lowering capital costs, working with an influential Chinese champion will give them a competitive advantage. Chinalco hopes that a successful execution of Simandou will demonstrate to Rio shareholders that their previous rejection of its overtures was shortsighted, and there is value for both companies in a closer association – possibly even a merger. (Id. at 12).

But sovereign capacity tells only part of the story.  As Komesaroff notes, state enterprises, the costs of capital of which are subsidized by the state can undercut enterprises that do not have access to sovereign capital "markets."  Moreover, thus subsidized, these enterprises might also absorb the default of their trading partners.   "In addition, China’s well-deserved reputation for executing capital projects much faster and more cheaply than its Western competitors will certainly benefit the Simandou development." (Michael Komesaroff, An African Romance, China Economic Quarterly 9-10  (Dec. 2010).  Yet the ability to deliver projects efficiently also serves as the point of greatest weakness of the Chinese strategy, one that  could potentially be exploited by China's competitors as the new form of neo-colonialism.  Komesaroff notes
Yet, despite its undoubted success, cracks have begun to appear in China’s African strategy. One of the most contentious issues is labor relations. The core concern in a continent with a chronic shortage of jobs is that Chinese developers ship in Chinese labor in preference to local workers. In Gabon, where China National Machinery and Equipment Import and Export Corp has a 25-year accord with the government to build and operate a 30 mtpa iron ore mine, the number of Chinese workers required for the project has reportedly increased from 10,000 to 30,000 (five times the size of the local French community, in this ex-French colony). While imported Chinese labor is more expensive, China’s ability to deliver competitively priced capital projects depends on skills and work practices that are hard for non-Chinese to emulate. The Chinese also have difficulty communicating with local workers, especially unskilled laborers.  (Id., at 10).

The ramifications extend well beyond economic policy and  the framework of globalization.  It also begins to affect the ability of multilateral organizations, and the global community of civil society actors, to implement international norms effectively.   
African governments are ecstatic about China's increasing economic interest in their continent. The assistance provided by China is fast, easy and effective. There is little discussion of economic policy and human rights, hallmarks of western support. According to the leaked cables, Julius Ole Sunkuli, Kenya's ambassador to China, said: "Africans were frustrated by western insistence on capacity building, which translated, in his eyes, into conferences and seminars. They instead preferred China's focus on infrastructure and tangible projects".

China's success in roadbuilding has become emblematic of a new approach to development in Africa, which is pleasing African governments. But perhaps even more important is that African governments perceive cracks in the donor edifice to be in their interests. As western donors have sought ever more to harmonise their aid, generally corralling behind the analysis of the IMF and the World Bank, the power of recipients to propose alternatives is reduced. Some western pressure has been useful, on public finance reform, for example, and on human rights. But much of it has been disastrous and loaded with self-interest (the Washington Consensus policies spring immediately to mind). So, overall, African fears of coordination are justified. In the reported words of Sunkuli: "Africa would lose the benefit of having some leverage to negotiate with their donors if their development partners joined forces." (WikiLeaks cables: China's aid to Africa has strings attached, Poverty Matters Blog, The Guardian (U.K.), Dec. 10, 2010)

There is irony here as well.  China's aggressive new policy that combines economic and political objectives has put a spotlight on similar deviations from the standard model of private markets oriented economic globalization that has served as the ideological banner.  Just as China has merged its public policy with private economic activity, so has the West sought to merge private market activity with its transnational normative public law project.  

It is not surprising, then, that the consequences  are usually focused on the perverse effects of this sort of aid on African states and their people.  The first focuses on the effects of Chinese policies and the creation of a new form of neo-colonialism, in which a formal policy of non-interference is belied by a public willingness to project power into small and now dependent African States.  "China's interest in Africa is not driven by poverty concerns, but clear foreign policy and commercial objectives. China is now almost as interested in African politics as the west. In 2006, the Chinese ambassador to Zambia threatened to cut ties with the country should an opposition candidate that had criticised Chinese investment practices win power."  (Id.).  The second focuses on the ultimate effect of neo-colonialism: the erosion of popular sovereignty as local elites are transformed (again) into dependent subalterns.  This is couched in terms of "the interests of African governments should not be confused with those of African people. The majority of Africans have no idea what land, minerals and other resources are being sold to the Chinese in their names. They have valid concerns about losing contracts and jobs or seeing their wages undercut by imported labour and cheap deals." (Id.).  
Populist politicians such as Zambia’s opposition leader Michael Sato have campaigned vigorously on an anti-Chinese platform. Even previous sup- porters of Chinese investment are becoming cautious. Angola has long been China’s biggest oil supplier, but in 2009 it refused permission for Ohio-based Marathon Oil to sell its 20% stake in an offshore oil lease to two Chinese companies, CNOOC and Sinopec. Similarly, the Libyan government blocked Canadian company Verenex from selling an offshore well to CNPC. (Michael Komesaroff, An African Romance, China Economic Quarterly 10  (Dec. 2010).
But far more substantially important are the effects of this policy on China and its obligations under emerging international normative frameworks. In particular, current Chinese efforts may expose China to liability for complicity.  Chinese enterprise exposure to charges of corporate complicity may be augmented under the developing normative standards of business and human rights, and in particular under the United Nations Protect-Respect-Remedy Framework.   The “Protect, Respect and Remedy” Framework rests on three pillars: the state duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation, and adjudication; the corporate responsibility to respect human rights, which means to act with due diligence to avoid infringing on the rights of others and to address adverse impacts that occur; and greater access by victims to effective remedy, both judicial and non-judicial.  The U.N. "Protect Respect, Remedy" Framework for Business and Human Rights (Sept. 2010).
Complicity in the business and human rights context refers to the indirect involvement of companies in human rights abuses. In essence, complicity means that a company knowingly contributed to another’s abuse of human rights. It is conceived as indirect involvement because the company itself does not actually carry out the abuse. In principle, complicity may be alleged in relation to knowingly contributing to any type of human rights abuse, whether of civil or political rights, or economic, social and cultural rights. Allegations of company complicity typically have concerned involvement in abuses by State or non-State actors. For example, legal uses of the term refer to both indirect involvements in government abuses and those of non-State actors, such as paramilitaries.15 Additionally, shareholder divestment decisions have been made in response to alleged indirect involvement of a company in a supplier’s violations of human rights in the workplace. (Clarifying the Concepts of “Sphere of influence” and “Complicity” Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and other Business Enterprises, John Ruggie, A/HRC/8/16, 15 May 2008 at Paras. 30-31)
The potential application of these standards on China's Africa policies and activities can be understood as touching on one of two aspects of its engagement.  First, China's state to state activities, and especially its relationships with governments that may in time come to be judged to have violated human rights and humanitarian law, may expose the Chinese state to charges of complicity.  Second, China's engagement in economic activity within states that may be responsible for human rights violations may expose Chinese state companies, and the Chinese state itself (as thew effective owner of these enterprises) to charges of corporate complicity.  Chinese enterprise exposure to charges of corporate complicity may be augmented under the developing normative standards of business and human rights.  

This framework is quickly moving toward institutionalization at the international level.  On 22 November 2010, Special Representative Ruggie proposed draft "Guiding Principles for the Implementation of the United Nations 'Protect, Respect and Remedy' Framework" (Announcement [PDF] and Draft report by Special Representative Ruggie with full text of Guiding Principles & commentaries [PDF]).  The draft Guiding Principles are open for comment at Special Representative Ruggie's online consultation forum until 31 January 2011.  "The Guiding Principles elaborate and clarify for companies, states, and other stakeholders how they can operationalize the UN ‘Protect, Respect and Remedy’ Framework, by taking practical steps to address business impacts on the human rights of individuals. The UN Human Rights Council had endorsed the Framework unanimously in 2008, and asked Ruggie to provide this additional concrete guidance."   (Announcement [PDF]).

Michael Komesaroff, then, has drawn back the curtain on a development that has implications not merely for China, its competitors, African states, global civil society, but also for the development of the basic framework within which economic globalization operates. What Chinalco and Rio Tinto point to, in the dealings of both, and the African governments with and through which they operate.  At one level, China is pointing toward new patterns of global engagement by states, through economic enterprises in global markets as participants. It also suggests the increasingly powerful way in which economic actors, whether state owned or private, continue to increase their ability to influence smaller or weaker states. On another level, global economic activity is making clearer that conventional notions of states and the relationship of states with their citizens and outsiders, are increasingly less connected to the ideological foundations from which they draw a certain amount of legitimacy.  Not only do states produce powerful corporate actors, but private corporate actors have a greater incentive to acquire public authority if they mean to compete without a state "sponsor".   At yet another level, these activities suggest the growing importance of international normative frameworks for the regulation of economic activity--whether conducted in state-to.-state activity, or between states and economic actors (public or private).  More importantly, it points ot the growing importance of international soft law as  the basis on which such conduct is likely to be measured.  While states, including China and others, may dismiss emerging soft law governance frameworks like the U.N.'s Protect-Respect-Remedy framework as not binding as a matter of law, it is likely that to the extent  conformity to those standards may affect China's efforts to reach customers and markets,  or affect host state willingness to deal (in part as a result of popular reaction), even the most powerful public actors will begin to conform their operation to  new governance realities. 

All of this points toward a future that is not all that far  from the present.  For the moment, Chinese activity in Africa suggests the new face of public engagement in markets, the importance of host states as market participants and regulators when dealing with foreign states seeking to project their economic activity outside their national borders, and the importance of the private corporate form for public policy objectives. 

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