Johannes van de Ven

Brazilian Incursions into the Peruvian Amazon – Desirable Interoceanic Integration or Jeopardizing a Fragile Environmental Balance?

2011-09-17T10:56:00.000-03:00

No Latin American country has witnessed a bigger political and economic transformation in the last decade than Peru. Once torn apart by guerrilla warfare and hyperinflation, the country now enjoys an envious overall record in comparison to its neighboring countries. In the last decade, Peru has obtained an unprecedented period of strong economic growth. In 2010, its economy grew 8.7 percent and its stockmarket rallied 64 percent, among the best performing markets in the world, fueled by a global surge in commodity prices.

At the same time, however, 30 percent of the population lives below the poverty line. Regions where most commodity concessions were given have hardly benefited from the exceptional economic growth figures. For example, sixty percent of the inhabitants of Quechua-dominated Puno still live in abject poverty. This is a recipee for social conflict and source of discontent, which the majority of Peruvians agree is the single most important challenge for the country. Whether Peru is glass half full or half empty therefore depends on your perspective.

The invaluable biodiverse Yuruá or Juruá river nearby
the Peruvian-Brazilian border symbolizes what is at stake
as both nations seek growing trade and infrastructure
links: integration at what price?

Peru’s foreign relations are undergoing a substantial transformation. Historically, Spain and the United States dominated Peru’s foreign affairs, diplomatic relations and foreign direct investment flows. Since the turn of the millennium, however, this scenario is changing rapidly. Both Spain and the United States are witnessing a period of retrenchment and seem to be frozen in their own economic tundra. The vacuum left by these once-upon-a-time superpowers is eagerly being filled by two emerging stars, Brazil and China. These changing economic power dynamics will have long-term geopolitical consequences.

Brazil’s politicians and captains of industry are showing a growing appetite for Peruvian affairs. This is a novelty as Peru and Brazil had traditionally turned their backs toward each other, with an – until recently – impenetrable Amazon rainforest disconnecting closer ties between Lima and Brasília. Since the advent of the third millennium, the global rally in commodity prices have made the once inhospitable Amazon basin increasingly look like a pricey target. All stars seem aligned for massive investments: growing Chinese appetite, gold bonanza, even rising timber prices and quest for hydrocarbons.

Brazilian Federal Propaganda at the Lima Airport:
Calling for Alignment or Subordination?

Even Brazilian Federal propaganda is invading the Peruvian magazine universe. Peru's widely read magazine Caretas recently featured a "separata publicitaria especial" on Brazil, 28 pages full of federal and corporate propaganda on the blessings of integration and litanies on "strategic partnerships," with paid advertisements of companies such as OAS, Odebrecht, Petrobrás, Queiroz Galvão and Vale.

In this occasional paper, I want to examine whether Brazilian incursions inside Peru are desirable. Should Brazil’s growing involvement in Peruvian affairs be interpreted as an avenue for healthy integration and sustainable development, or should it be feared as a dangerous neo-imperial incursion? Should Peru get rid of its historical distrust of its giant eastern neighbor? Should Russia’s relationship with its former satellite states and China’s incursions in Tibet be any compass? Based on my recent exposure trips to both ends of the Peruvian-Brazilian border, and across the wider Amazon basin, I want to highlight some opportunities and threats, arguments in favor and against increased integration. A deeper analysis seems warranted as there is no obvious answer readily available.

Table of Contents

1. Political Incursions: President Humala’s Brazilian Connection
2. Geographical Incursions: Brazil’s Pacific Export Route
3. Hydrological Incursions: Brazilian Dams in the Peruvian Amazon
4. Corporate Incursions: Brazilian Direct Investments in Peru
5. Financial Incursions: Brazilian Investments Flowing into Peru
6. Global Warming and the Amazon: Transcending National Borders
7. Conclusion: Avoiding Subordination

1. Political Incursions: President Humala’s Brazilian Connection

Peru’s biggest recent achievement has perhaps less to do with its exponential economic growth figures but with its smooth democratic transition. The exemplary handover of presidential power from García to Humala is a major accomplishment, especially if placed in a historic perspective. The outcome was anything but expected. At the outset of this year’s presidential elections, Humala’s prospects looked rather slim. In January 2011, four months before the elections, Humala trailed in fourth place in local opinion polls, far behind the main contenders for power, including former President Alejandro Toledo and former mayor of Lima, Luis Castañeda Lossio, with each 23 percent, and Keiko Fujimori, with 20 percent.

Political pundits argued that Peru was yearning for stability and continuity, no revolution. Peru’s stockmarket was rallying on this very prospect. Humala’s poor showing in the opinion polls at the outset of the campaign was directly related to his outspoken extreme leftwing ideas, which sounded much like the rhetoric of the Venezuelan President Hugo Chávez.

At a moment when most commentators downplayed the chances of Humala, an extreme makeover occurred. Humala’s fortunes in the opinion polls changed dramatically when he swapped his role-model from Chávez to Lula. By hiring Lula’s marketing campaigners Valdemir Garreta and Luis Favre, the presidential candidate Humala abandoned his radical Bolivarian positions, swapped his red t-shirts for blue shirts, even started wearing well-cut suits. He even launched a letter to the Peruvian people, (“Compromiso con el Pueblo Peruano”), resembling a similar letter written by Lula to his countrymen in 2002.

Humala’s surprising victory in the run-off against Keiko Fujimori on June 5 was initially greeted by distrust and panic. The Lima stockmarket knocked a record 12.4 percent off its main index. Panic on the Lima’s upper class neighborhood streets of Miraflores and San Isidro. These fears were hugely exaggerated. Dramatic falls in the financial markets became a buying opportunity as Humala’s new cabinet turned out to be a healthy mix of orthodox economists, pragmatic politicians and committed social workers.

In his inaugural speech, Humala talked about launching a conditional-cash transfer program, a program to fight childhood malnutrition and to implement a scholarship program for the poor to pursue tertiary education and the creation of a Ministry for Development and Social Inclusion. All these measures are long overdue and point at Humala’s well-balanced, moderate and gradual, consensual pragmatism. Especially Humala’s interest in promoting social inclusion scholarship programs deserves praise. The inaugural speech could be considered a Peruvian adaptation of the so-called Consensus of Brasília, which is a healthy combination of maintaining macroeconomic stability with a greater emphasis on the social inclusion.

Campaigning in the Amazon Basin:
Ollanta Humala 2011: the Great Transformation

President Humala has a unique opportunity to consolidate economic growth and include the poor, marginalized masses, which historically have been excluded from power and welfare, especially those living in the Andean highlands and Amazon wetlands. The more educated a nation, the more likely an economy will eventually be able to catch up and innovate. Humala understood the prime concern of the Peruvian people to better distribute income and to more equally divide the revenues of natural resources exploitation. His foremost challenge is to maintain the inherited macroeconomic stability, and aggregate social inclusion policies and sound environmental policies.

Going forward, President Humala should not inspire his policies on either the Toledo or García administrations, as both heavily relied on smoke-and-mirror decrees, designed at distracting citizen awareness. In February 2011, for example, former President García backed two emergency decrees in Congress, allowing accelerated bidding on 33 investment projects, by easing environmental regulations. Under the approved circumstances, the infrastructure projects in the Amazon would no longer require to obtain administrative authorizations. By ignoring pleas for indigenous consultation, public accountability and transparency got lost.

In sum, the success or failure of Ollanta Humala’s presidency will depend on its performance in addressing Peru’s urgent social problems, a better distribution of the growing economy and a decline in corruption and crime. By choosing Brazil as his first trip abroad as president-elect, Humala seems eager to side closer with the moderate leftist government of Lula heiress, President Dilma. How much Humala should borrow from Lula’s pragmatic playbook, however, remains an open question. Peru’s alignment to Brazil is not only emblematic in political affairs. As I will argue in the following chapters, Brazil's omnipresence can also be felt in areas such as logistics and foreign direct investments.

2. Geographical Incursions: Brazil’s Pacific Export Route

Historically, Brazil has disregarded or undervalued its easternmost borders. Until a few decades ago, Brazil’s enormous Amazon basin was rather underexploited and building river, land or train connections to neighboring countries like Peru and Colombia were downplayed or deemed irrelevant. Brazil’s population centered – and still centers – on its enormous coastline, where connections to Europe and North America are easier.

Brazilian efforts to logistically integrate the Amazon region initiated in the 1950s, when a special federal agency was created (SPVEA) to link Brasília with Belém (BR-153). In the 1960s, Brazilian state companies linked Cuiabá in the State of Matto Grosso with Porto Velho in Rondônia, a region erroneously considered as a 'demographic void.' The asphalting of BR-364 started as a 'penetration highway' aimed at decentralizing population and gain access to natural resources. The construction of BR-364 under the so-called Polonoroeste program was mainly financed by the World Bank. Brazilian generals expanded their presence in the 1970s by launching the construction of the Transamazon Highway (BR-230), along with an ambitious farmer colonization scheme. These federal 'development' initiatives have caused out-of-control social conflicts, led to a concentration of wealth, exploitative labor conditions and, most dramatically, led to the decimation of indigenous cultures.

The 1980s and 1990s witnessed the consolidation of conventional development schemes, as promoted and mostly financed by the Washington-based multilateral agencies such as the World Bank and Inter-American Bank of Development. Former President Fernando Henrique Cardoso (1994-2002) launched his Avança Brasil infrastructure program. The 1990s also saw the emergence of the Initiative for the Integration of the Regional Infrastructure of South America (IIRSA), for which multi-million loans are made available by the Inter-American Bank of Development (IADB). President Lula (2003-2010) accelerated the infrastructure integration scheme by launching his so-called Accelerated Growth Program (PAC) in February 2007, which is currently maintained by President Dilma.

According to a recent study of CIFOR, “the PAC has been marked by a reversion to conventional paradigms of economic growth, lobbying interests of powerful economic groups (such as construction conglomerates), patronage relations with regional political elites and the ‘politicisation’ of environmental licensing procedures.” Several of the PAC investments in the Amazon basin are opaque, lack social-environmental impact assessments and are deficient in multi-stakeholder dialogues.

Brazil’s federal infrastructure policies are increasingly reflecting the new geopolitical scenario. At the dawn of the 21st century, China has quickly displaced the United States as Brazil’s most important trading partner. In 2010 only, China accounted for $56 billion in trade flow with Brazil, which was an astonishing 25 times higher than in the year 2000. Brazil has avoided the international crises so far, not by becoming less bureaucratic or more business-friendly, but mostly due to its close trade links with China. In order to speed up even more its trade links with Asia, Brazil has started to look at shortening trade routes to the Orient. Instead of shipping its valuable commodities and natural resources across the Panama Canal or south of the African coast, Brazil has been investing in establishing a trade route over the Peruvian Andes towards the Pacific.

Just as California once changed the fortunes for the United States, now Peru seem well placed to change the destiny of Brazil. In the words of investment strategist Walter Molano: “Today, Peru is poised to become a new California by becoming an outlet for Brazil to move its enormous treasure trove of natural resources to the immense markets that lie on the other side of the Pacific.”

The Interoceanic Highway nearby Tarapoto:
Downhill racing towards

Brazil

The insatiable Chinese appetite from Brazil’s natural resources has created enormous opportunities for Peru, which itself has also recently signed a trade pact with the Asian powerhouse. The so-called Interoceanic Highway will connect two of the world’s most promising emerging markets, China and Brazil. At the present moment, the southern Peruvian port of Ilo is the most important trade link, but eventually four other ports are expected to improve strategic links between Asia and South America. Brazil’s natural resources like to soy, iron ore, grains and even cattle are expected to be increasingly transported to Peruvian ports. In the long term, even electronic cargo from the manufacturing plants of the free-trade zone of Manaus is expected to pass through the Peruvian ports instead of the Panama Canal.

Bridge over Río Madre de Diosin Puerto Maldonado:
A Golden Gate toProsperity
or Road to Deforestation?

The first interoceanic route, which runs from Brazil’s midwest, from the state capitals Cuiaba (Mato Grosso), Porto Velho (Rondônia) and Rio Branco (Acre), via Xapuri, Assis Brasil, to the Peruvian bordertown Iñabari, Cuzco, Arequipa and downhill to Ilo, is a matter of fact. After over forty years of planning, the interoceanic connection was officially inaugurated in December 2010. The last missing link, a bridge over the Madre de Dios river in Puerto Maldonado, was fixed mid-September 2011. A flow of 400 Brazilian trucks is soon expected to cross the city each day. The link has already unleashed an avalanche of illegal Wild West-type settlements.

The second interoceanic route is planned to run from Rio Branco, the state capital of Acre, via Cruzeiro do Sul, to the Peruvian town of Pucallpa, which in turn is already linked by road to Lima. Brazilian authorities are currently asphalting the final parts of Highway BR-364, between Cruzeiro do Sul and the Peruvian border. The connection further up to Pucallpa so far only exists on paper and is highly controversial. The road would cross the Serra Divisor, one of the most biodiverse spots on the face of the universe. In Acre, not only palm oil plantations are being introduced at a record pace to feed the growing overseas biofuel market, but also genetically-modified soy plantations are making inroads.

Illegal Goldmining at theInteroceanic
Highwaybetween Cuscoand Puerto Maldonado

The infrastructure project has also unleashed a gold rush. Peru’s Madre de Dios province is witnessing an avalanche of illegal gold mining. The opening of a highway between Cusco and Puerto Maldonado has attracted thousands of internal migrants in search of gold. Illegal settlements along the highway are popping up at a record pace. Guacamayo is considered one of the biggest illegal gold mining sites in the world. With gold prices globally hitting record highs, the gold bonanza has become particularly attractive. As of 2011, Peru has become the sixth-largest gold producer. Although most of its production comes from the Andean highlands, a growing portion comes from artisan mining of the Madre de Dios riverbanks, which harbors huge quantities of alluvial gold.

The artisan gold mining and illegal roadside settlements are also fastening deforestation in Madre de Dios. The newspaper El Comercio reports that 302’154 hectares have been deforested in Madre de Dios until 2010 as a direct consequence of logging, burning and illegal mining. As of 2011, it is estimated that 30’000 people are working in businesses related to mining only in the area bordering the Tambopata National Reserve.

Yet another disastrous side-effects of the gold bonanza is the destruction of fish habitats. The Madre de Dios river basin is already polluted to such an extent that its fish is no longer edible. Restaurants in Puerto Maldonado are only serving fish produced from artificial fish farms. Mercury, which is mostly imported via Spain, is notorious for entering the food chain, causing neurological disorders. This could be a prelude to a public health disaster. The long-term consequences of uprooting aquatic wildlife, depletion of fish stocks and degradation of soil quality deserve more academic scrutiny and proactive public policies.

Community Vigilance at Río Shishinahua in Loreto:
Inspecting Against IllegalLogging and Biopiracy

At both ends of the Peruvian-Brazilian border, there is a relatively weak law enforcement regime. The state is mostly absent. Historically these areas belonged to the rainforest, with hardly a state presence. As the region has an under-resourced police force, lacking a well-functioning criminal justice system, it has become a paradise for drug trafficking and resource plundering.

In sum, the interoceanic links will come at a huge cost. From the environmental viewpoint, the unintended consequences of asphalting pieces of rainforest are dramatic as it increases illegal land settlements, deforestation and resource plundering. Asphalt is historically a major culprit of forest devastation. Forest fires are already on the rise in the eastern part of the Brazilian state of Acre. The Madre de Dios / Acre / Pando corridor is becoming notorious for violence and brothels, huge supplies of chainsaws, Spanish mercury, US-manufactured guns and bulldozers.

3. Hydrological Incursions: Brazilian Dams in the Peruvian Amazon

In addition to the interoceanic highway, the other large issue in Peruvian-Brazilian relations nowadays is the construction of hydro-dams in the Amazon basin. In order to safeguard its exponentially rising energy demand, Brazil is increasingly looking to its western neighbors, especially Bolivian and Peru, to guarantee future energy supplies. The South American giant is expected to need 50 percent more electricity in the next decade.

Brazil is eager to push deeper into the Amazon basin to generate its electricity supply. Controversial hydrodams are being built on the Madeira River (Santo Antonio and Jirau) in the State of Rondônia and the construction of an even bigger one has recently started on the Xingu River (Belo Monte) in the State of Pará. As these domestic power supplies are not enough, the Dilma government recently renegotiated the contract of the Itaipu dam with Paraguay. Negotiations with the Bolivian government to construct huge hydro dams further upstream the Madeira River are also underway.

Brazilian hydro-electricity plans to push into Peruvian territory are even bigger. These plans are not new. After five years of bilateral negotiations, Brazil’s former President Lula signed a strategic deal with Peru’s former President Garcia in Manaus on June 16, 2010, envisioning the construction of several hydro dams in Peru, all financed by Brazilian public money, aimed at serving Brazil’s southeastern industrial and residential markets.

The first and most emblematic bilateral plan is to construct a $4 billion hydro dam on the Inambari River, not far from the border connecting the Peruvian region of Madre de Dios with the Brazilian State of Acre. The geographical location seems perfect as the river comes down from the Andean altitudes and pushes down through a narrow ravine. The Inambari dam is planned to be build in a few years time with a schedule installed capacity of 2’000 megawatts, which would make the fifth largest on the continent. The construction will be led by a Brazilian consortium called Egasur, which is made up by the Brazilian federal power holding group Electrobrás, Furnas and São Paulo-based Construtora OAS.

Santo Antônio on the Rio Madeirain Rondônia:
Brazilian Hydro Dams SoonComing to

Peru

The construction of the Inambari dam is not without its controversies as the agreement has mostly disregarded environmental impact studies and downplayed the importance of local consultations. Opponents also argue that the construction would violate the rights of indigenous communities. There is no doubt that the planned dam, which includes a 30-year concession and a 413-square-kilometer schedule reservoir, will severely change the ecological cycle in the Madre de Dios province. There are also negative side-effects from the global warming perspective, as the proposed dam will destroy a huge area of carbon-dioxide-absorbing rainforests.

Closer scrutiny to the Inambari project is warranted also because several other Peruvian-Brazilian hydro dams are in the pipeline. The other fives dams projected nearby the borderline include the Sumabeni (1’074 megawatts), Pakitzapango (2’000 megawatts), Urubamba (900 megawatts), Vizcatán (750 megawatts) and Chuquipampa (800 megawatts). The overall budget tops $16 billion dollars.

President Humala was hardly sworn in when he already faced a serious challenge in a region where he obtained most votes. Indigenous Quecha movements have been organizing manifestations against the constructions of the Inambari dam, which threatens to displace up to 3’000 people from 70 indigenous communities. Prior to Humala’s inauguration, indigenous the Aymará led Natural Resources Defense Front with support from the National Federation of Communities Affected By Mining (CONACAMI) staged a massive protest in another area of the Puno province, in favor of revoking the Santa Ana silver mining concession, which the previous government has granted to Canada-based Bear Creek Mining Company. Indigenous communities claim that the exploitation will irreversibly pollute Lake Titicaca and its neighboring river basins. The Vancouver-based company has already filed for a court injunction in order to regain its mining license and is contemplating further legal action against local authorities under the Canada-Peru Free Trade Agreement. Prior to the elections, the government also suspended the Southern Copper’s $1 billion Tia Maria copper mining project in the Arequipa province after several protesters died in violent police clashes.

It remains to be seen how Humala will deal with the hundreds of pending mining applications. Indigenous consultation, environmental impact studies and economic feasibility studies should be a prerequisite. Peru is a signatory of the United Nations Declaration on the Rights of Indigenous Peoples, which was adopted by the United Nations General Assembly on September 13, 2007. Article 10, for example, declares that indigenous peoples are entitled to their land and must be consulted in regard to anything affecting their territorial claims.

Peru’s 1993 Constitution moreover states that the country is a diverse and multicultural nation, which safeguards “the right to cultural identity” and “upholds customary law and special jurisdiction (indigenous and peasant justice), alongside with other rights for peasant and native communities.” Such declarations ought to be taken into consideration when dealing with hydro dams in ecologically sensitive areas. In addition, Peru is signed the International Labor Organization’s Convention 169, which highlight the importance of prior consultations as a prerequisite for enacting measures affecting indigenous ancestral territories. Environmentalists are opposing the construction of hydro dams, calling for permanently cancelling concessions.

As if these pressures were not enough, President Humala will be equally put under pressure by his Brazilian friends, who are eager to tap into Peruvians energy reserves. Choosing between the legitimate demands of indigenous and marginalized communities, which form his electoral voter’s base, and these political pressures and financial investment schemes of his Brazilian friends, can become yet another defining moment of his government.

4. Corporate Incursions: Brazilian Direct Investments in Peru

Brazil’s emergence as an economic powerhouse has direct implications for Peru. Brazil is not only pursuing a more aggressive foreign policy agenda, as can be witnessed at the G-20 and prestigious BRICs and its aspiration to become a permanent member of the United Nations Security Council, it has also become more outspoken in its foreign direct investments plans. Brazil’s local development banks and multinational firms have turned their eyes on a new and precious prize: Peru.

Former President Alejandro Toledo, who ran Peru between 2001 and 2006, opened up Peru’s Amazon basin for corporate involvement. He was the first Peruvian president granting major energy concessions across the region. Toledo’s administration was followed by President Alan García’s reign, which expanded on Toledo’s neoliberal policies. When Humala took office, over 40 percent of the Peruvian Amazon has already been divided up in energy concessions.

In 2008, President Alan Garcia granted corporate licenses to explore natural resources in the Amazon basin, including oil, natural gas and timber. The privatization of natural resources is part of the 2008 framework of the United States – Peruvian Free Trade Agreement. Former President Gracia argued that the foreign companies are bringing fresh capital considered a prerequisite to develop Peru’s interior.

As of September 2011, Brazilian multinationals have committed billions to Peru. The most visible ones are Odebrecht and Camargo Correa, Brazil's largest construction and engineering firms, which are constructing the interoceanic highways. The natural resources giant Vale operates a port concession in Bayóvar. The petrochemical firm Braskem and steel group Gerdau also started investments in Peru.

The most visible Brazilian corporate presence in Peru is Odebrecht. At the outset of the third millennium, this construction company had 460 members and a backlog worth $3.1 million. At the end of 2009, this number of employees had risen to 8'000, with its backlog surpassing $520 million. For 2011, the company projects earnings in excess of $1 billion.

Brazil’s Odebrecht has also financed the construction of a Christ Statue in Lima, which resembles the famous statue overseeing the Guanabara Bay of Rio de Janeiro. There is no consensus in the streets of Lima, however, whether the statue is a universal symbol of salvation or demonic foreign intrusion. Odebrecht might have donated more than $830’000 towards its construction, locals see the Corcovado replica more as unsuitable, excessive and spoiling the landscape.

Yet another very active Brazilian firm in Peru is the state-controlled oil company Petrobrás, headquartered in Rio de Janeiro. Brazil’s oil giant operates in Peru since 1996 but has significantly increased its investments in the last couple of years. Currently, the company produces 16’000 barrels of oil in the so-called X Lot in northeastern Peru. It recently obtained 14 additional exploration contracts for wells in Peru’s Marañon, Huallaga, Madre de Dios and Ucayali river basins, and also off Peru’s coastline.

The major Peruvian prize of Petrobrás, nevertheless, is in the area of gas exploitation. In October 2010, Petrobrás announced that it discovered gas in the Picha 2X well in Block 58 in Peru’s Cuzco department, which may hold 1.7 trillion cubic feet of recoverable natural gas. This follows another major discovery in the Urubamba 1X well in 2009. The discoveries in Peru only are enough to more than double the firm’s foreign natural-gas reserves. The state-controlled firm also continues to explore for gas in the Camisea field, which is expected to be Peru’s largest gas field.

Peru, which has the largest chunk of the Amazon basin after Brazil, has now granted around 70 percent of Amazonian territory as concessions for oil and gas exploration. There are tremendous opportunities for multinational firms as the country contains the world’s second-largest producer of copper, zinc and silver, besides huge proven reserves in gold, lead and tin.

Although extracting commodities is a very capital-intensive business, multinational corporations should prepare themselves for a more outspoken Peruvian stance on resource windfall taxation. Expropriation, as has been witnessed lately in Venezuela and Bolivia, would be a bridge too far. It is only too natural, however, that sky rising commodity prices are nurturing resource nationalism but this should not alarm overseas investors. The Humala administration should not change concessions half way down the road or fiddle with royalty and taxation regimes. Firms like Petrobrás, Odebrecht and Camârgo Correa ought to convince their Peruvian hosts that they can contribute to sustainable development, recruit and train locally and reduce their ecological footprint at the minimum possible. Without showing humility and contributing to local welfare, foreign companies will be regarded as neocolonial thieves.

On August 25, 2011, prime minister Salomón Lerner announced in a speech to Peru’s Congress that the government will demand a greater share of the commodity extraction. The additional windfall tax, which will add over $1.1 billion, the equivalent of 0.7 percent of its GDP, to government revenues, was less punitive than Wall Street pundits feared. Foreign multinational firms with huge investments in Peru like BHP Billiton, Freeport McMoran, Glencore and Xstrata seemed all relieved by Humala’s decision. Under the new legislation, Peru will maintain its competitiveness with Chile. The multinational mining industry is planning to invest a massive $42 billion in direct investment until 2016.

5. Financial Incursions: Brazilian Investments Flowing into Peru

Not only corporate direct investments, but also financial ones are flowing from Brazil into the Peruvian Amazon. This is relatively new as both Brazil and Peru were until recently depending on multilateral investment programs, rather expensive trade financing and scarce direct investment mostly coming from the United States, the European Union and Japan. In the case of the Amazon, the most visible actors were the World Bank and the Inter-American Bank of Development. Both have a long and highly controversial track-record in the world’s largest river basin.

At a time when both the World Bank and Inter-American Bank Development are raising more doubts about the role of huge infrastructure financing programs, there respective role has become less relevant. Both institutions are increasingly being scrutinized by their own shareholders, European non-governmental organizations and internal monitoring teams. Their poor environmental track record has led to a bad reputation in countries the developing world, including in countries like Brazil and Peru, where multilateral development financing is often equaled to white elephants.

Right at a time when these multilateral development agencies are improving their environmental due diligence, developing countries no longer need their money. This is rather ironic. New development actors are appearing in the investment arena. In the case of the Amazon, Brazil’s National Social-Economic Development Bank (BNDES) and Chinese lenders are increasingly providing the necessary financial resources for infrastructure projects in the Amazon basin.

Neither financial sources coming from China nor Brazilian federal loans are undergoing the necessary social-environmental due diligence, which nowadays is the norm at both the World Bank and the Inter-American Bank of Development. As being argued by Marc Dourojeanni, “the case of the Southern Interocanic Highway in Madre de Dios repeats, almost 40 years later, what the World Bank and IDB did in Rondônia and in Acre in Brazil on the other side of the border.” According to this former World Bank advisor, “to build roads without regulating the ownership of land, without financing the agricultural and farming development, without avoiding unnecessary deforesting and without protecting the sanctuaries of biological diversity such as when building large hydroelectric power plants without caring for the basins that generate water, are all examples of collective suicide.”

In sum, the BNDES plays the role as the principal source of large-scale, capital-intensive investment schemes. Its role is highly controversial as its funding policies lack transparency and is based on top-down decision making. It moreover prioritizes an investment approach based on economic growth in detriment of an ecologically sustainable development path. The bank prefers investing in transportation (asphalt), in agribusiness (large-scale beef processing facilities) and energy (controversial hydodrams such as Jirau, Santo Antônio and Belo Monte). Such an investment style should not belong to a “social-economic development bank.” The true vocation of the BNDES should be in the area of promoting green economies, payment schemes for environmental services and renewable energies. Unfortunately, the BNDES under Lula and Dilma is becoming irrelevant in the sustainable development debate.

6. Global Warming and the Amazon: Transcending National Borders

The issue of global warming might be the most complex and incomprehensible challenge humanity has ever faced – and even ignored or downplayed by many US politicians – but there is a growing global awareness that it ought to be placed more prominently on the political agendas and corporate business plans. This holds especially true for Peru and other Andean countries, as these geographies are among the most vulnerable to climate change.

Peru is home to around 70 percent of the ice glaciers located in tropical latitudes. Under the current business-as-usual scenario, these glaciers are melting at a record speed, which will have tremendous repercussions for the availability of drinking water, agricultural irrigation and energy supply. In the last couple of decades, 22 percent of Peru’s glaciers have vanished. Peru’s shrinking glacial endowment will have tremendous impact for the country’s arid coastal region, including Lima. Peru’s capital city, with a population approaching nine million, is already the world’s second largest desert city, after Cairo. As of 2011, the Andean nations rely on glaciers for around 70 percent of their electricity supply. Strategic plans how to mitigate these problems are long overdue.

The causal link between deforestation and climate change is increasingly becoming evident. According to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, deforestation and forest degradation contribute to approximately 17 percent of anthropogenic greenhouse gas emissions. Deforestation itself causes the release of several harmful greenhouses gases, including nitrous oxide, methane, and nitrogen oxides. From this perspective, the rainforest ought to be seen as an air conditioner, which cannot be replaced or repaired once it is damaged.

As climate change has global repercussions, the policies to revert climate change cannot only be financed by Peruvians and Brazilians. The financially powerful North American and Western European agribusiness lobbies, for example, should realize that Peruvian and Brazilian efforts to protect the Amazon and keep their forests standing generate substantial global benefits. Both nations, however, are not receiving enough financial support from free-riding wealthier countries. This is a paradox which ought to be addressed. The international community should compensate Peru and Brazil in their effort to avoid deforestation. As it is in the interest of the entire planet to conserve what is left of the largest rainforest, a global financial mechanism ought to be put in place.

Payments for ecological services is not only desirable, it is just and fair. Financial mechanisms to pay for standing forest should therefore be a key issue on the agenda at next year’s Rio+20 Earth Summit. Both Peru and Brazil should assume a leadership role is pushing this issue.

7. Conclusion: Avoiding Subordination

The Peruvian and Brazilian Amazon are at a crossroads. Social, political and economic incursions, new trade links and migration flows are quickly altering their landscapes. Both countries’ citizens are becoming more affluent and therefore consuming more. This is already putting increased pressure on their forests and relatively abundant water resources.

The interoceanic highway, the multi-billion commodity extraction and hydro-electricity investment plans are not only linking the two nations’ geographies but also their destinies. Brazilian incursions into the Peruvian Amazon too often reflect a failure of policies and investments geared towards more broadly-shared social and economic benefits.

As correctly argued by Marc Dourojeanni, “the large and increasing amount of proposals and decisions on large public infrastructures and use of natural resources of the Peruvian Amazon is not correlated with the very limited information that is available to society, including to the population that will be directly affected.” This former senior assessor of the World Bank complains that “the official information, if any, is fragmented, confusing, untimely, and invariably presents only the point of view of the promoters, whether they are governmental or private.” He therefore concludes that “the lack of transparency is one of the main causes of the grave social conflicts that each time with greater intensity breaks out in the Peruvian jungle.”

The hydro-electricity dam agreement signed by the former presidents García and Lula, for example, are not a guarantee for future clean energy supplies, as they made you believe, but will instead cause an avalanche of negative social and environmental disasters, including forced displacement of indigenous peoples, such as the renowned Ashaninka nation.

Human Settlements alongthe Interoceanic Highway:
LawlessnessRuling Madre de Dios

Recent local development in Eastern Acre and Western Madre de Dios provinces are worrisome. The area, which until not so long ago was South America’s least populated and most inaccessible area, only reachable by boat or plane, is now mostly at the mercy of corporate greed, short-term fortune seekers, speculators and increasingly organized crime. Not only via satellite surveillance but also by driving along the Interoceanic Highway, it becomes clear that destruction is underway in massive scale.

Anthropologists and environmental law enforcement officials are urgently needed to bring order to the chaos. Irreversible damage can be afflicted upon the Madre de Dios upper watershed, one of the most important sources of the Amazon basin, with unimaginable knock-on effects further downstream. Only 15 percent of Peruvian territory is under a protected status, there is room to increase this number.

The rather chaotic integration of Peru and Brazil is the logical outcome of badly planned – or even unplanned – investment strategies of public and private actors, in which public consultation are mere window dressing exercises. Peruvian authorities need to modernize its Penal Code and urgently include illegal gold mining as a delict. Illegal gold producers and traders ought to be accused of fueling devastating the environment. Peruvian authorities should consider launching something similar to the international Kimberley Process Certification Scheme (KPCS), which establishes clean export, import and internal controls mechanisms. In addition, laws related to the forest should not only be assessed and enforced by the Ministry of Agriculture, as is still the case, but also by Peru’s Ministry of the Environment. The country should equally increase the number of environmental law enforcers, especially in Loreto, Puccalpa and Madre de Dios, the regions where Brazilians are making incursions.

A promising sign is Peru’s adherence to the Extractive Industries Transparency Initiative, which aims at making the mining industry more accountable to public and government scrutiny. Peru’s natural riches should not be sacrificed at the altar of greedy, short-term Brazilian-Chinese trade interests. If Peruvian authorities are not stepping their presence along the interoceanic highways, then its pristine biodiverse Madre de Dios, Ucayali and Loreto provinces will soon look like endless genetically-modified monoculture pastures, which are aggressively advancing in the Brazilian states of Rondônia and Acre.

Río Huallaga in the Peruvian Amazon:
from Insignificant Backwater to Invaluable Asset

Going forward, a zero-deforestation policy is a sine qua non for guaranteeing a sustainable development regime at both ends of the border. Human migration flows, construction companies and extractive commodity firms all pose a serious threat to upset the fragile ecological balance in the crystal border area between Peru and Brazil. If government agencies at both ends of the border continue to adopt a laissez-faire attitude towards grilagem (illegal land invasions) then deforestation will not be reversed. National and local governments should be wary to welcome often well-intentioned corporate ‘development plans’ to the regions. The plans are not in the wider public interest, lack transparency and multi-stakeholder dialogue.

Highway BR-364 nearby MâncioLima, Acre:
Brazilian Tax Money forAsphalting the Rainforest

Both Peru and Brazil should question the long-term advantage of exporting its natural resources to China. Chinese imports of Brazilian beef generate huge money flows and create thousands of jobs. However, the environmental footprint is not fairly priced in. In addition, Chinese consumers are not as concerned as North American and Western European consumers to ensure traceability to so-called zero-deforestation areas, where the production of soy and beef are prohibited. China is currently the biggest importer of Brazilian cattle hides, which are used to produce shoes, furniture and even cars. The end-products are ironically being imported in Brazil and carry the label “Made in China” and not the “Made in the Amazon,” which would make more sense. Neither Brazil’s long-term interests are not served by catering to Chinese growing demand, nor is Peru’s outlook enhanced by being the preferred broker of the bilateral Brazilian-Chinese trade. In this sense the IIRSA runs the risk repeating Brazil’s great historical mistake: exporting natural resources without adding human value.

In sum, it remains highly doubtful whether multiple Brazilian incursions into Peru’s Amazon basin is more a blessing than a curse. Under the current business-as-usual scenario, the negative risks are outweighing the positive opportunities by a wide margin. The integration as currently witnessed in the border regions of Acre and Madre de Dios reflects the incapacity of traditional political models to respond to legitimate demands for great social inclusion, environmental equilibrium and economic equity. The unsustainable integration path calls for a paradigmatic shift. There is a huge discrepancy between Brazilian federal and corporate propaganda campaigns and the reality on the ground. Peru’s coastline might see a surge in corporate activity, profit outlook and employment opportunities, the country’s vast interior and its ancient cultures, however, will be uprooted, its natural riches are most likely being plundered and its biodiversity devastated. If Peru and Brazil are to be taken seriously as forest stewards, then they should excel in expanding smart grids and solar arrays, interoceanic fast train connections, essential for future generations in a post-carbon world, instead of subsidizing diesel-guzzling trucks crossing the Andes. The interoceanic integration as currently being undertaken is dramatically integrating the economic frontier of deforestation.

* This article has originally been published as Swiss Consulting Group Occasional Paper # 20. The original version in pdf format, which includes footnotes and references, is available here).

Brazil's New Forest Code – A Costly Own Goal

2011-05-25T18:16:00.058-03:00

Brazil’s Congressyesterday sacrificed its most precious asset – the Amazon rainforest – at thealtar of its powerful agribusiness lobby. This is a tragic setback for acountry, which is trying to reconcile forest stewardship and economic expansion. Right at time when global public opinion isreassessing its take on the nation - Brazil is in vogue, its Congress overwhelmingly voted in favor of anew controversial Forest Code. As there is much at stake, especially for future generations, close scrutiny is warranted.

Cattle advancing in the Amazon

There are manyreasons to be disappointed. First and foremost, the nation’s medium-to-long term economic interests are jeopardized. The country's economic outlook is put at risk by recklessly glorifying short-term agribusinessgains and greed. Brazil’s new ForestCode sends the wrongmessage that agricultural output is correlated to more deforestation. Brazil’s national media obsession to pitch the agribusiness lobby against environmentalism, production against protection, is false and misleading. As a sophisticated agribusiness superpower, Brazil can easily quadruple its agricultural output just by applying modern techniques and intensifying land use, there is no need to cut down one single tree. The question is not more land, the main issue is better existing land use. By easing restrictions on clearing forests along riverbanks and on the tops of hills, for example, more might be produced in the short-term. However, in the medium term, this will only exacerbate soil erosion, water shortages and forest fires, which will negatively affect all of us, including farmers. The new Forest Code is a Pyrrhic victory for the agribusiness lobby.

Secondly, the debates in Brazil's Congress have revelead that its members are out of touch with its scientific community and citizens they represent. Brazil's most prestigious scientific bodies - the National Academy of Sciences and the Brazilian Society for the Advancement of Sciences - are opposing the new code. By a wide margin, Brazilian citizens are convinced that a so-called "zero deforestation" policy is in the nation's best interest. This trend became clear during last year's Presidential elections, when the Green Party candidate, Marina Silva, obtained a surprising 20% of the votes. This trend is likely to consolidate. In countries like Switzerland and Germany, environmentalists have become mainstream and are governing cities and provinces on a pro-business platform.

Brazilian politics, in return, is still mostly dominated by old-school clientelism. Aldo Rebelo, who was the chief architect and rapporteur in the Congress for the new Forest Code, belongs to Brazil's Communist Party, which received unconditional support from the more right-wing agribusiness lobby and conservative old land barons. This is an awkward, surreal coalition. Brazilian politics is like playing the violin: carried by the left hand, conducted by the right hand. The music played is out of tune, and jeopardizes Brazil's quest for symphonic harmony.

There are many more paradoxes in Brazil's surreal political environment. Mainstream political parties, such as the social-democrats (PSDB), supposedly the opposition, voted en masse in favor of the new Forest Code. The already fractured PSDB is likely pay the price at future elections, as at is increasingly out of touch with its urban voter's base. Since Fernando Henrique Cardoso left power in 2002, his party has been out of touch with the voter's base.

Yet another paradox is the fact that Congress members representing the Amazonian states voted also massively in favor of the new Forest Code, maintaining the false assumption that a square kilometer of clearned land has a bigger economic value than standing forest. Congress members from Brazil's largest state, Amazonas, seem more interested in expanding the controversial Free Trade Zone of Manaus than valuing its rainforest. Brazil's leading governing party, the Worker's Party (PT), is deeply divided internally on the forest issue. The only party that has consistently voiced its concern and opposition to the new Forest Code is Marina Silva's Green Party. Her party seems best placed to make electoral gains in the future.

Logging: Legitimizing the illegal

Thirdly, byproviding amnesty for illegal deforestation, Brazil is sending a wrong messageto its people, especially to its law-abiding citizens. Under the new code,small-scale landowners, who make up the majority of Brazil’s farmers, will beexempt from having to replant deforested land. The most controversial item inthe new code is that farmers with land up to 400 hectares are granted amnestyif they illegally cut down trees before July 2008. By legitimizing the illegal,the country is reinforcing the overall global perception that it is a land of weak law enforcement, governed by impunity.

Today’s amnesty will onlystimulate future misbehavior. It is no coincidencethat the voting of the new Forest Code took place at a time when illegallogging is again on the rise. According to Brazil’s National Space Research Agency(INPE), about 593 square kilometers of forest was cleared during March andApril 2011, mostly in the State of Mato Grosso, compared to just 103 squarekilometers in March and April 2010. The recent trend of falling deforestationrates seems to be broken.

Fourthly, Brazilwill increasingly face overseas consumer pressure. It islikely that the soy and beef moratoria, which are already in place, will be expanded asconscious consumers overseas have no interest in contributing to deforestation.Supply-chain certification is also likely to be enhanced. Multinationals operating in the Amazonbasin will also come under rising consumer scrutiny. Brazil’s Congress just handed a powerful argument to the European Union farm lobby to contemplate new trade barriers and tariff walls. European and North American opponents of importing Brazilian ethanol were granted more ammunication to their protectionist arguments.

The Amazon: Last Frontier

Local Brazilian corporations might receive substantial funding from Brazil’s national development bank (BNDES) but theywill face more market scrutiny, end-investor boycotts and fundingrestrictions from institutional asset managements firms, such as insurance companies and pensions funds. Brazil's private banks, such as Bradesco and Itaú Unibanco, both signatories of the Equator Principles, will have to double their due diligence efforts in order to comply with global sustainable financing standards. Both banks have no interests in being regarded as the bankers of deforestation. Looking at the heavy global media coverage of the Brazil's new Forest Law, it is clear that the naming and shaming of the culprits of rainforest destruction will rise.

Fifthly, byweakening its forest legislation, Brazil will have a tougher time to complywith international climate change legislation. The dichotomy over what is economic growth, what ought to be considered development or progress, reflects a wider global debate, in which many countries are trapped. Reducing deforestation would confer tremendousbenefits to Brazil by lowering its carbon output and hence upon the level ofglobal warming. The Amazon is crucial not only for Brazil and its neighbors,but also for regulating the global climate. As recently argued by a INPE-Hadley report, “any changes with the [Amazon] basin – be they climate change,land use changes, or a combination of the two – are likely to have far-reachingconsequences for the operation of natural systems and the people they support.”In addition, the UK-Brazilian scientific report highlights that “the hydrological cycle in the Amazonsuggests that it recycles as much as 50% of its rainfall, and that if as littleas 30% of the Amazon is cleared, it will be unable to generate enough rainfallto sustain itself, leading to a positive feedback loop of more forest loss andless rainfall.” By easing rules of conservation in the Amazon, the new Forest Code is likely to hasten the process of global warming.

Dark clouds over the Amazon

In sum, Brazil's new Forest Code is a costly own goal as it goes against the country’s long-term economic interests and geopolitical ambitions. According to the BBC World News, the new Forest Code is "retrograde." Brazil's desire to showcase its conservation expertise at next year's UN Earth Summit - Rio +20 - has received a serious beating. Countries like Bolivia and Peru, even nations as far away as Congo and Indonesia, might have to look elsewhere to better protect their natural heritages. This is rather sad as no country was more visible, engaged and proactive at last year's UN Biodiversity Summit than Brazil. It is rather tragic that as of2011, the international United Nations Year of Forests, the Amazon forest isstill regarded as worth more dead than standing. If Brazil's want to safe its face for hosting next year's Earth Summit, its Senate and PresidentDilma Rousseff should veto the new Forest Code as just endorsed by the Congress.

Connecting Suriname to Brazil – Avenue to Economic Development or Highway to Forest Destruction?

2010-12-03T12:44:00.091-02:00

Government officials of Suriname and Brazil are conducting negotiations to build a road to directly link their nations. Suriname and Brazil are currently the only two South American nations not directly connected by land. At the present moment, the countries are connected by land, either via Guyana in the west (Boa Vista - Lethem - Georgetown - Nieuw Nickerie) or via French Guyana in the east (Oiapoque - Cayenne - Saint-Laurent-du-Maroni - Albina).

The masterplan is to connect Paramaribo via Pokigron, in Southeastern Suriname, via the Tumucumaque Park and Pedra Branca do Amapari, located at the existing highway BR-210, to Macapá, the capital of the Brazilian State of Amapá. The 625-km long Tumucumaque Park, which covers 3'867'000 hectares, is not only Brazil's largest protected area but also the world's largest protected continuous piece of pristine rain forest.

Interest to build a Trans-Amazon highway is coming from both sides of the border. Since the election of President Desi Bouterse earlier this year, the Brazilian government has been eager to advance economic cooperation. In seminar recently held in Paramaribo's Torarica Hotel, Brazil’s Ambassador to Suriname, José Luiz Machado e Costa, has offered cooperation in strategic areas such as infrastructure, energy, education and announced incentives for small-to-medium size companies. Brazil's Instituto de Pesquisa Rodoviária (IPR), Departamento Nacional de Infraestrutura de Transportes (DNIT), the Institutional Security's Group of Brazil's Republic Presidency (GSI) and the Superintendency of the Tax Free Zone of Manaus (Suframa) are all currently engaging in feasibility studies.

Suriname's President Desi Bouterse and his Mega Combination, which holds 23 out of 51 seats in parliament, have often highlighted the multiple benefits of a direct link to its southern neighbor during the presidential campaign. First and foremost, there are important economic benefits to be made. A highway would open up a vast area to commerce and other economic activities. The Precambrian rocks of the Guyana Shield hold huge proven deposits of diamonds, gold, silver and platinum. In addition, it holds huge reserves of industrial minerals such as bauxite, copper, iron ore, manganese, tin and zinc.

Its major bounty, nevertheless, might well reside in less well-known minerals such as beryllium, kaolin, nobium, tantalum, titanium and zirconium, which are essential for applications in modern aerospace, automobiles, computers and oil and gas drilling equipment. All these natural deposits belong to the Surinamese government. It is no coincidence that the World Bank recently ranked Suriname as among the 17 potentially richest countries.

Under Suriname's current legislation, only around 16% of forest lands is earmarked and managed as protected areas, including Multiple Use Management Areas, nature reserves and national parks. In addition, around 15% of national forest coverage is reserved for commercial exploitation, such as forest logging, hydropower and mining concessions. Some 55% of its forest lands, however, mostly located in the south, has not a special allocation yet. The Bouterse government is eager to exploit these riches.

A second reason for establishing a direct link is political. As of 2011, Suriname will no longer receive Dutch development aid. When Suriname gained its independence in 1975, the Netherlands pledged the sum of 3.5 billion Dutch guilders as development aid. This program has now come to an end. Some might deplore the termination, but the new government is not regretting the move. According to Bouterse’s political assistant, Winston Lackin, Suriname will only benefit from cutting off aid ties with its former colonial power. According to Lackin, Dutch development aid has not delivered on its promises, "it has only perpetuated dependency." Suriname's discontent on how the Dutch booted Suriname into independence still runs deep.

Like most other South American nations, Suriname will increasingly look at Brazil and China for trade ties. Instead of continuing entertaining rocky relations with its former colonial master, Suriname has more to gain from bilateral negotiations with these two rising powers. There is no doubt that Brazil and China are eager to exploit opportunities and capitalize on Suriname's rocky diplomatic relationship with the Dutch. Also France is poised to take advantage as its overseas territory, French Guyana, is well-positioned to become Suriname's main commercial entry point into the European Union.

A third reason is related to Suriname's population. The Bouterse government argues that the lack of a land connection to southern Suriname represents a significant barrier to migration to the central and southern part of the country. Around 95 percent of its relatively small population of less than half a million live in the Coastal Plains and hardly anybody ever visits its interior. Suriname has one of the lowest population density in the world, only 3 people per square kilometer. There are no major roads into the jungle and it is one the most densely covered countries with pristine rainforests on the face of the universe.

A more profound assessment, however, makes the paving of a direct link between Suriname and Brazil less obvious or attractive. Are Suriname's and Brazil's interests really served by carving a tarred road through virgin rain forest territory? Does Suriname's continental destiny hinge on the road’s asphalting, as its recently reelected President Desi Bouterse makes us believe? Linking the two nations would have huge repercussions for the northeastern part of the Amazon basin and Guyana Shield, not only environmentally, but also politically and socially.

Logistically Unnecessary

Even from a strict logistical viewpoint, many question marks ought to be raised. The geographical area is sparsely inhabited. The Atlantic Ocean is still relatively close, which makes a highway unnecessary for cargo or freight. Moreover, Suriname's existing East-West Highway is not used to its full potential and capacity with passengers suffering assaults and harassment. There are not even bridges crossing the Courantyne River to Guyana and Marouini River to French Guyana. Logistical disadvantages to engage in a North-South Highway seem to outpace economic benefits by a wide margin.

Short-Term Economic Gain

Although there are many proven reserves of natural resources in the areas surrounding the proposed highway, there is no evidence that the extraction enhances overall prosperity. Historical evidence suggests that the endowment of natural assets for a given country has only positive social side-effects if the prevailing levels of governance and law enforcement are solid. In the case of Suriname, there is no reason to assume that the private gains will be larger than the overall social losses. A middle ground ought to be found between on the one extreme, a long period of neglect, and at the opposite end, a reckless gold rush. A major challenge for Suriname is how to deal with the available riches and avoid the natural resources curse.

The most likely scenario is that Chinese business groups will continue to dominate the market for Amazonian products. Commodities are characterized by raw natural resources rather than value-added manufactured goods. Under this business-as-usual scenario, the Amazon will continue to be subject to market fluctuations, perpetuating the boom-and-bust cycles, which is a typical feature of the region ever since it was first discovered by overseas European pirates.

Devastating Environmental Impact

Any highway linking the two nations would cross a delicate ecosystem, to date one of the best preserved virgin rain forest territories in the world, a biodiversity hotspot. Suriname is situated on the Guyana shield, a massive granitic formation of the pre-Cambrian era, near the northern terminus of the world’s largest continuous area of unspoiled, uninterrupted tropical rainforest. Suriname totals 146’101 square kilometers, of which still nearly 90 percent is covered by pristine rainforests, with a rate of destruction of under 0.1% annually. By bringing tar to the forest, this dynamic would change.

It is worth reiterating the impressive numbers of Suriname. According to a recent study of Conservation International, Suriname has 200 species of mammals, 674 species of birds, 152 species of reptiles, 99 species of amphibians, and 790 species of fishes. As most of its rivers flow directly into the Atlantic Ocean and are not part of the Amazon or Orinoco drainages, Suriname’s associated fauna is mostly endemic and has therefore huge intrinsic value. Its dense rainforests still host animals that are increasingly threatened at the other edges of the Amazon, including the Giant River Otter (Pteronura brasiliensis), Lowland Tapir (Tapirus terrestris), Giant Armadillo (Priodontes maximus), American Manatee (Trichechus manatus) and the Blue Poison Frog (Dendrobates azureus).

Paving a highway across these fragile areas, resulting from an intentional or conscious choice of governments and corporations, would inflict permanent damage. By cutting an substantial area, not only carbon would be released into the atmosphere, the affected areas would also no longer absorb carbon in the future. Critics might say that the area affected in southern Suriname and northern Amapá and Pará is relatively small. However, the areas form an integral part of a wider mosaic which ought to maintain its natural equilibrium.

Secondly, the water cycle would be negatively affected. The Amazon basin is the largest freshwater hydrological system on the face of the universe, containing the world's largest underground aquifer. Southern Suriname is located at a strategic area of the Amazon, where the evapotranspiration cycle, driven by Atlantic winds, starts. Less trees means less cloud formation, which in return causes less rain and more fires. By interrupting or interfering with the Amazon water cycle, remote agriculture areas as far away as Texas, the Chaco and the Rio Plata basin will be affected. Scientists already warn that the tipping point for causing major irrevocable changes in the Amazon basin is not far away, which would dry out the rain forest and turn it into grassland savannahs.

Inauspicious Historical Precedents

Although historical experience is a relatively poor predictor of future behavior, some important lessons can be drawn from Suriname's track record. The biggest human incursion in the rainforest occurred in the 1960s, with the completion of a dam in the Suriname River at Afobakka to fuel aluminum smelters of Suralco/Alcoa. This resulted in the formation of the hydroelectric reservoir Lake Brokopondo. This artificial lake destroyed 1'560 square kilometers of pristine rainforest.

In the 1990s, several gold mining companies made incursions into Suriname, equally causing loss of rainforest and, worse, mercury pollution. The area around the Bakhuis Mountains has become notoriously polluted. Issues concerning mining regulations are increasingly making headlines in the parliament and newspapers. During the presidential campaign, Bouterse opposed a proposed terms of an investment by Newmont Mining, arguing that it amounts to exchanging the country’s natural bounty for a mere “apple and an egg.”

Brazil's track record is even more worrisome. In South America's largest nation, there is a direct correlation between highway corridors in pristine rainforests and rising wildfires, more deforestation, forest fragmentation, species extinction and increasing migration flows. Asphalt is historically one of the worst villains of deforestation. Experience learns that transnational highways increase the density of secondary roads. Deforestation will lead to land speculation and colonization along a grid of primary and secondary roads, leading to a fishbone pattern. The human dimension of expanding highway corridors is moreover historically linked to increasing incidence of alcoholism, prostitution and the spreading of contagious diseases.

The paving of a Paramaribo - Belém corridor would facilitate human migration from the so-called Arc of Deforestation in the Brazilian States of Mato Grosso and Tocantins to new frontiers in the so-called Calha Norte (States of Pará and Amapá). The paving would provide additional impetus for appropriation of public land by both small squatters and by grileiros (large-scale illegal claimants), at both ends of the border of Suriname and Brazil. Local authorities will have a huge responsibility to mitigate the impact of bringing asphalt to the forest.

Jeopardizing Indigenous Communities

Future rainforest stewards

The land area which nowadays forms the nation of Suriname historically belongs to a wide variety of indigenous peoples. The Arawaks are considered to be its first inhabitants. Later on, other indigenous peoples arrived such as the Akurio, Caribs, Trió,Wayarekule, Warrau and Wayana. The relatively small remaining Amerindian population posses an intimate and invaluable knowledge of foods, fibers, medicines, and other useful forest plants.

All across the Americas, indigenous communities have not only historically been the best curators of the continent’s natural assets, they have also been the best custodians of their intrinsic value. Indigenous communities have the rain forest as their natural habitat, which is intrinsically part of their cosmovision and economic survival. It is unlikely that the centuries-old stewards of the Amazon would welcome road asphalt into their areas.

As the proposed Trans-Amazon highway would cross indigenous territories, it is a precondition to map, define and secure forest tenure rights of Maroon and indigenous communities. These communities ought to be treated as a special class of stakeholders, who are in fact rights-holders under both national and international law.

Plundering and Illegal Occupation

A major preoccupation of the Surinamese government, which is widely shared by its population, is how to deal with illegal Brazilians, which are increasingly invading central and southern parts of the country in their reckless quest for natural resources. After being expelled from the gold mines in the Brazilian State of Pará (the infamous Serra Pelada open-pit mine) in the 1990s and from French Guyana in the early 2000s, Brazilian gold-seekers, the so-called garimpeiros, are increasingly crossing the Litani and the Maroni Rivers into Suriname.

Illegal trespassing is increasingly causing frictions and clashes. In December 2009, a dispute between Brazilian gold prospectors and a local Maroon community in Albina, a town of 5’000 people located on the border with French Guyana, ended up in a bloody riot in which a shopping mall was looted and dozens of innocent citizens were killed. The Albina riot does not bode well for the future. Brazilian garimpeiros are notoriously bad stewards of the environment as they pollute river streams. Mercury and cyanide is used to leach the mineral gold from the bulk ore, with devastating health consequences for downstream Maroon and indigenous communities, including neurological birth defects and leukemia.

For the first time in Suriname's young history, the contentious garimpeiros issue dominated Suriname's presidential election campaign earlier this year. Measures to enforce environmental laws against illegal garimpeiros are long overdue.

Facilitating Illegal Trafficking

The paving of a direct link between Suriname and Brazil is likely to increase illegal trafficking between the two countries, both notorious for weak law enforcement. Suriname is often accused for facilitating drug trafficking and for providing trans-shipment for arms-for-drugs dealing. Suriname is also increasingly being used as a transit point between South America and Europe for human trafficking. In many cases, Brazil is the main intermediary (drugs), manufacturer (arms) or provider (prostitution) for these commodities or illicit trades.

According to a recent report of the US State Department Trafficking in Persons Report, "Suriname is a destination and transit country for men, women, and children from the Dominican Republic, Brazil, Guyana, Colombia, Haiti, Indonesia, Vietnam, and China trafficked for the purposes of commercial sexual exploitation and forced labor." It moreover argues that "Suriname is also a source country for women and children trafficked within the country for sexual exploitation and forced labor, as well as women trafficked transnationally for forced labor."

The same dreadful conclusion was drawn at a conference on human trafficking organized by the Suriname Bishop's Conference, under guidance of Bishop Wilhelmus de Bekker, which was held in Paramaribo in November 2010. In the final statement of the conference, the Surinamese delegation committed itself to a more proactive approach to enforcing national and international laws, and improvement of its border control mechanisms.

Law enforcement is Suriname's Achilles heel. The Inter-American Children's Institute argues in a recent study that Suriname's main obstacles reside in "limited institutional capacity both on government and non-governmental organization’s level; lack of specialized and trained personnel, lack of community awareness and lack of appropriated legislation." The paving of a Trans-Amazon highway would only put additional pressure on the authorities on both sides of the border.

Unresolved Disputed Areas

Suriname has a long-running conflict with both its eastern and western neighbors involving land claims. French Guyana is claiming the area between Litani and the Maroni Rivers. At its western front, Suriname claims a triangle of land along the Kutari River in a historic dispute over the headwaters of the Courantyne River.

Guyana is currently seeking arbitration of the United Nations Convention on the Law of the Sea in order to resolve the issue. It is unlikely that a highway could cross these disputed areas. Only 15 kilometers of the borderline between Brazil and Suriname is not crossing indigenous territory or environmentally protected areas.

The remaining border territory on the Brazilian side belongs to Tumucumaque Park, which covers almost the size of Switzerland. The park is famous for several endemic species, especially fish and aquatic birds, but also for its jaguars, sloths and freshwater turtles. The park is also home for three indigenous peoples. Besides the Tumucumaque, it belongs to the Waiapi and the Rio Paru d’Oeste people.

There is no doubt that the paving of a highway, regardless of the exact route, would cross a variety of disputed or restricted areas, which in turn will accelerate loss of biodiversity, cause legal disputes and endless lawsuits.

Controversial Multilateral and Corporate Financing

Business links between Suriname and Brazil are already sharply on the rise due to the paving of a road over the Oiapoque River, which links the northeastern edge of Brazil in the State of Amapá with French Guyana. The rehabilitation of Macapá - Cayenne Highway, co-financed by the Inter-American Bank of Development, will also improve trade and transportation links between Paramaribo and Belém. The paving is part of the controversial Initiative for the Integration of the Regional Infrastructure of South America (IIRSA).

Private financial institutions and global investment banks won't be eager to provide financing as they are allergic to reputational damage and will have to comply with the Equator Principles. Construction companies, however, won't be depending on the mood and goodwill of international capital markets as financing will be readily available from public sources. Brazil’s National Social and Economic Development Bank (BNDES), under Brazil's new incoming developmentalist President Dilma Rousseff, will be interested in increasing infrastructure funding in the Amazon basin. Opaque Chinese investment vehicles will also be interested to participate.

The fact that most funding will come from public and not private sources makes the investment process less transparent and accountable. Brazilian and Chinese development lenders have a poor environmental record, enjoy weak governance and compliance structures and often turn a blind eye to civil unrest or protests. In general, multilateral discourse regarding the construction of highway corridors systematically overestimates the benefits and underestimates its impacts. The financing agencies, nevertheless, should be fully aware of the synergistic nature and negative side-effects of their investments.

Preliminary Conclusion

The most likely scenario is that the planning of a Trans-Amazon highway from Paramaribo to Belém will go forward, driven by the development vision of President Desi Bouterse and incoming Brazilian President Dilma Rousseff. Both have a developmentalist agenda primarily motivated by short-term economic and financial gains, mostly disregarding or downplaying long-term negative impacts. Both presidents have clearly opted for a growth model in which the state assumes a predominant role in economic planning and execution. Their main argument is that there are no viable alternatives to a highway and that the region cannot be denied its right to development.

In my opinion, however, there are legitimate concerns that short-term economic advantages do not weigh up to a manifold of long-term negative consequences. By partially tarring the forest, Suriname has much more to lose than to gain. The debate should therefore shift and focus on alternatives to building a highway.

Toward Viable Alternatives

In the first place, the purpose of the highway, which is to facilitate transport in the region, including from factories in the far-away Manaus Free Trade Zone, would be better served by enhancing the already existing ports of Paramaribo, Macapá and Belém. French Guyana is investing millions of its euros into modernizing port facilities in Paramaribo and Macapá as its capital, as its capital Cayenne lacks a deep water port. There are no plausible economic arguments to justify a new highway.

In the second place, Suriname is well-positioned to monetize on carbon credits on avoided deforestation schemes. There are economic and financial arguments that the pristine forest is more valuable that the alternative use of the land. There is a need to raise awareness at the global level that sustainable forest management can equal or even surpass economic gains from deforestation. There are plenty opportunities in the area of sustainable forest management, including the creation of additional protected areas, ecotourism, sustainable timber and non-timber forest products extraction, payments for ecosystem services (PES) and forest carbon, reduction of emissions from deforestation and forest degradation (REDD). These mechanisms should be able to generate enough cash flows to sustain or compensate forest communities. Unfortunately, carbon sequestration and avoided deforestation projects have so far only been funded by the voluntary market.

At the moment, the monetary contribution of the forest sector to the public finances of Suriname is less that 3% of its Gross Domestic Product. The forest economy employs less than 4% of its population and exports derived from forest-related goods and services are less than 1% of the total national exports. Potential sustainable forest production and services ought to be much bigger. If the Amazon basin and Guyana Shield are global assets worth preserving, then it is only reasonable that the Surinamese stewards are being paid for their efforts.

Instead of financing a controversial highway, multilateral development agencies should rather focus on long-term strategies. For example, Suriname deserve priority assistance of new funding opportunities offered by the World Bank, such as the Forest Carbon Partnership Facility (FCPF) and its Strategic Climate Fund (SCF). Unfortunately, these mechanisms are relatively small with insufficient pledges to seriously make a difference. At the present moment, there is a serious mismatch between the urgency of calls for sustainable forest management and the financial support available from these agencies. Moreover, international environmental organizations and multilateral development agencies so far have not been successful in creating effective market-based mechanisms to pay for ecosystem services.

A broader debate should also involve the latest developments in international law. The precautionary principle, for example, states that if an action or policy has a suspected risk of causing harm to the public or to the environment, then - in the absence of scientific consensus that the action or policy is harmful - the burden of roof that it is not harmful falls on those taking the action. This principle of law implies that there is a huge social responsibility to protect the wider public from exposure to harm, when scientific investigation has found a plausible risk. There are good reasons to argue that in the case of the highway Brazilian and Surinamese federal authorities should make the application of the precautionary principle a statutory requirement.

A wider public discussion on the desirability of building a highway is a sine qua non. A major step toward solving an issue is usually realizing that there is something serious at stake. Not only politicians and corporate analysts, indigenous community leaders and policy think tanks, but also investigative journalists and bloggers, have an extraordinarily important mission to raise awareness of possible scenarios. Indifference and ignorance are the worst enemies of progress and development.

As local financial resources in Suriname are limited, corporate giving and strategic philanthropies should consider funding research and development. Suriname’s sole university, Anton de Kom University, has an excellent track record of research. The university deserves to be better equipped to study and monitor it own backyard.

Suriname is notoriously absent or underrepresented on the international environmental and diplomatic scene, mainly due to a lack of human resources. However, not only Suriname's diplomatic capacity is to blame. The proliferation of forest or climate change related public and private processes - from GEF, UNFCC, UNFF, COP, FAO-NFP to CBD and others - causes confusion and is detrimental for smaller nations such as Suriname. This is rather tragic as Suriname ought to be rewarded for protecting its carbon reservoirs, safeguarding its biodiversity sanctuary and for being a so-called high forest cover, low deforestation rate (HFLD) country. Action is warranted as a Paramaribo - Belém highway corridor could potentially become the grandest and most expensive of white elephants in the Amazon basin.

The Bumpy Road from Zanderij to Pokigron in Suriname:

Paving the Brazilian Garimpo Highway?

* This article has originally been published as Swiss Consulting Group Occasional Paper # 19. The original version in pdf format, which includes footnotes and references, is available here). A revised version has also been published at the online guardian environment network O Eco Amazonia in English, Portuguese and Spanish.

Nagoya's Convention on Biodiversity– A Glass Half-Full or Half-Empty?

2010-11-05T12:47:00.016-02:00

Opinions on the outcome of the 10th Meeting of the United Nations Conference of the Parties (COP-10) to the Convention on Biological Diversity (CBD), which recently took place in Nagoya, Japan, are divided.

Pessimists stress the fact that the convention was a waste of time as earlier promises have not been met. It is indeed true that commitments made at the 1992 Earth Summit in Rio de Janeiro, the 2002 Summit in Johannesburg and previous CBD meetings have not lived up to expectationsy. The UN Global Biodiversity Outlook Report, presented in Nagoya, shows evidence on multiple violations against its three major components, which include genes, species and ecosystems.

Naysayers had hoped that the Nagoya would follow the disastrous Copenhagen climate summit, banging the final nail in the coffin of intergovernmental environmental diplomacy. Obstructionists seemed to post another victory as well publicized reports, such as the impressive and well-documented Economics of Ecosystems and Biodiversity study (TEEB) have manifestly neither delivered on so-called ‘environmental integrity’ nor realized political breakthroughs in really addressing carbon emissions.

The Nagoya summit, nevertheless, turned out to be a surprising success. The major breakthroughs were mostly due to Japan’s outstanding leadership capabilities and low profile soft diplomacy. Without Japan's extra effort, no consensus would have been reached.

Reduced expectations have also let to a better outcome. Although a record 10’000 representatives of governments and their partners from 193 made their presence felt, only five heads of state headed for Japan. This is a sharp contrast with the Copenhagen Summit last year, where 120 heads of state, including Barack Obama and Nicolas Sarkozy, depressingly failed to deliver. Obama absence was even hailed as helpful as his nation has not even ratified the underlying treaty, the United Nations Convention on Biodiversity. As the United States and the Obama Administration are still in denial on climate change issues, his presence would not have been taken seriously. After his crushing mid-term electoral defeat back home this week, President Obama appears to be more interested in protecting his national interest than reversing the precipitous decline of animal and plant life on planet earth.

The Nagoya summit resulted in rules and procedures for implementing the third objective of the Convention on Biological Diversity (CBD). The most important achievements include access to genetic resources and the fair and equitable sharing of benefits arising from their utilization, popularly known as Access and Benefits Sharing (ABS). The meeting also adopted the CBD Strategic Plan for the period 2011-2020, including a mission, strategic goals and targets for marine and coastal biodiversity, climate change, forest biodiversity, biofuels and traditional knowledge. In addition, the summit adopted a decision to a de facto moratorium on geo-engineering and urged governments to apply the precautionary approach to the field release of synthetic life into the environment.

Emerging markets, especially the eight countries and one overseas territory which form the Amazon basin, have commemorated the summit’s affirmation of the crucial role of CBD in reducing emissions from deforestation and forest degradation and conservation, sustainable forest management and enhancement of forest carbon stocks (REDD+).

It is impossible to overstate or overvalue the benefits to protect the planet’s biodiversity or the achievements of reaching a consensus at Nagoya. The annual cost of damaging the natural environment exceeds by far that of the current financial crisis. According to the UN Economics of Ecosystems and Biodiversity Report, for example, the monetary price to damaging our natural capital such as forests, wetlands, grasslands and marine habitats runs between $2 and $4.5 trillion per annum. To make things worse, these tremendous losses are not priced into our GDP as loss of biodiversity is not an item in GDP calculations, which in turn perpetuates and obliterates destruction. There ought to be placed a price on the priceless. Nature is not priceless. As emphasized by Oxford Professor Paul Collier in his excellent recent book The Plundered Planet, "we have an ethical responsibility to bequeath to unborn generations either the natural assets bequeathed to us, or other assets of equivalent value." To be greener is to be happier.

The lack of proper valuation of the ecosystems and the services they provide ought to addressed by accounting and audit firms, but also by the multilateral agencies. A first attempt to integrate the valuation of biodiversity into national accounts has been launched by the World Bank. In Nagoya, the president of the World Bank, Robert Zoellick, argued that the natural wealth of nations should be a capital asset valued in combination with its financial capital, manufactured capital and human capital. In the forthcoming World Bank publication The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium, it is argued that the commercial value of farmlands, forests, minerals and energy worldwide tops $44 trillion. The total amount belonging to developing countries is close to $29 trillion. Nature asset valuation and the pricing of ecological services will increasingly dominate the agenda of governments and investment banks.

In addition, the global pharmaceutical industry increasingly depends on creating drugs from plants in developing countries, especially from virgin rain forests. The Nagoya summit correctly argued that Big the pharmaceutical industry should share the benefits that come from exploiting genetic resources in biodiversity hotspots with development countries. According to the United Nations Environment Program, Big Pharma earns around $250 billion a year from medicines directly derived from biodiversity. As of today, less than one percent of the gains of industrialized products derived from biodiversity is held by those countries holding the underlying resources. Biopiracy is no longer acceptable. This is yet another major victory of Nagoya.

A clear diagnosis made in Nagoya that human activity is the biggest burden on biodiversity destruction is a significant step in the good direction. This might be an obvious statement but it should have major policy implications as prevention is better than cure. In practical terms, each party who signed thet Nagoya consensus is morally obliged to take further action in the field of, for example, fertilisers, pesticides, fishing, logging and deforestation.

There seems to be a growing consensus that global warming and biodiversity loss are intricately connected and mutually reinforcing. These issues are increasingly shaping the political agenda in the world. Green parties now not only dominate the political agenda in traditional countries like Germany and Switzerland, but also in rising increasingly self-assured nations like Australia and Brazil. Young people in Brazil recently massively backed Marina’s Green Party as they want sustainable development strategies at the very core of the political agenda. This shift has not yet received the mainstream media attention as it deserves.

Another rather positive development is the growing attention worldwide to social-environmental conflict resolution and transformation. Up until the late 1990s, multinational conduct in the area of natural resources hardly had to deal with stakeholders. The monetary benefits of exploiting natural resources were believed to much higher than any environmental cost incurred. This is no longer the case. In countries like as far away from each other as Bolivia and Indonesia, Suriname and Congo, Ecuador and Laos, non-governmental organizations such as FFLA and PIEB-PIA are increasingly monitoring political and economic transactions in the field of natural resources. There is growing consensus in academia that multinationals ought to behave in a responsible and sustainable way. The debate is gaining momentum.

In sum, Nagoya is a major step forward. Turning the tide of environmental pessimism, which took over the debate after the frustration in Copenhagen, was in itself a major victory. Nagoya has taught us that the best argument to protecting the planet’s rich biodiversity is the fact that it is not one of green idealism or tree-hugging, but rather self-interest or sheer human survival. Natural resources and biodiversity are the largest assets available to our societies. The failure so far to properly value natural resources or harness natural capital is the single-most missed opportunity in development economics.

Illegal Loggin in the Yungas Rainforest in Bolivia:

Irreparable Environmental Damage and Irreplaceable Loss of Biodiversity

Brazil’s Upcoming Presidential Elections – Marina’s Moral Victory

2010-09-15T22:17:00.005-03:00

Brazil is on the eve of presidential elections. There seems no doubt that President Lula’s chosen heiress, Dilma Rousseff, is going to obtain an electoral victory. It is nevertheless not Dilma Rousseff but Marina Silva, who is the moral victor of the presidential campaign.

Dilma’s surprising victory will not come as a surprise as she has received unconditional support from President Lula, who enjoys an almost cult-like following. The outgoing president deserves economic credit as the country has moved ahead under his guidance. The Gini coefficient, a standard statistical measure of inequality, has fallen steadily in the last couple of years. According to Fundação Getulio Vargas, the number of people living in abject poverty has fallen from 49.5 million (or 28.5% of the total) in 2003 to 29 million (16% of the total population) in 2008. Brazil’s economy is growing at an impressive annualized rate of 8 percent.

Critics, however, say that President Lula has harvested what has been sown by former President Fernando Henrique Cardoso. It was Cardoso and not Lula who stabilized Brazil's economy by launching Plano Real and by implementing a most crucial Law of Fiscal Responsibility. Lula has moreover governed under a relatively benign external environment, tremendously benefiting from China's rise.

There are many other reasons not to celebrate Lula's achievements. In order to compare Lula at the global level, it is worth to highlight the Global Competitiveness Report, just published by the World Economic Forum. The report highlights several of Brazil’s shortcomings. Among the 134 countries examined in the report, Brazil ranks 134th in “extent and effect of taxation,” 133rd in “burden of government regulation,” 127th in “number of days required to start a business,” 123rd in “business cost of crime and violence,” 119th in “quality of primary education,” 117th in “reliability of police services,” 110th in “quality of roads,” 91st in “labor market efficiency,” 79th in the health and primary education and 78th in infrastructure. Brazil is ranked in the same development stage as countries like Albania, Algeria, Jamaica, Namibia and Suriname. Not a prideful legacy for Lula. The outgoing president might have been popular, Brazil is still underdelivering, underperforming, and not living up to expectations. Brazil under Lula is rather a glass half empty than a glass half full.

The presidential election campaign has highlighted other shortcomings, especially at the political level. The campaign has highlighted Brazil’s lack of a tradition of public debate and consensus-building, with Dilma most absent in public debates. Brazil's leading political columnist, Miriam Leitão, has condemned in a recent publication such attitude as an affront to democracy: "her silences and her contradictions leave a emptiness in the air." The campaign was more about mudslinging, spreading rumors and rhetorical accusations. Debates how to transform creative ideas into concrete policy proposals were mostly absent. National media coverage has also been weak on content, sometimes bordering on ridicule. Most candidates have moreover been preaching before their own audiences and parishes, without much engaging in an open dialogue with the wider civil society.

At the outset of the presidential campaign, Dilma’s biggest contender was expected to be José Serra, representing the PSDB, the party that governed Brazil under Fernando Henrique Cardoso (1994-2002). His lack of charisma, astonishing lack of new ideas and rather awkward alliances, however, have led to a poor campaign.

A notorious exception has been the refreshing campaign of Marina Silva, representing the Green Party (PV). Marina Silva used to be Brazil’s Environment Minister under President Lula. She resigned in 2008 out of frustration and ongoing disputes with fellow minsters, especially Dilma, on controversial environmental issues in the Amazon biome. She has also grown tired of political scandals within the Worker's Party (PT).

Although Marina started out as an underdog in the campaign and has no prospect for winning the presidency, she has led the best campaign by a far margin. She has engaged in a wide variety of public debate, launched new ideas and has built a consistent and coherent platform. Marina’s successful campaign is all the more surprising as she has managed to overcome a deep-seated suspicion of environmentalism, in a country proud of becoming a agribusiness powerhouse. Due to Marina's persistent call, environmentalism or the quest for sustainable development has gained serious momentum. Marina has been the only candidate who frankly talks about the conundrum the country ought to tackle if it is to reconcile economic development and environmental degradation.

Marina's approach is especially popular among young people, who are more sensible to issues related to sustainable development. Among youngsters, there are strong consensus that deforestation is incompatible with Brazil’s long-term economic prospects. The first-generation voters are moreover more conscientious consumers. Unlike Dilma and Serra, Marina’s campaign is less about short-term opportunism or green marketing, and more focused on addressing and protecting socio-economic concerns and long-term prospect.

Marina has moreover distanced herself from the outdated oligarchy, which has run the country in the 20th century. Both Dilma and Serra have lost credibility by seeking controversial alliances. Marina’s serene presence and moral uprightness not to seek opportunistic alliances have reminded Brazilians that politics can be clean from horse-trading. Marina will get a lot of votes from people disenchanted with the Workers’ Party record of widespread corruption. Her ethical stance gives legitimacy to politics in a time when Brazilian politicians have little public credibility.

Despite these noble intentions, opponents try to paint Marina as a romanticizing, tree-hugging environmental populist. A closer look at Marina's policy speeches and campaign, however, leads to a rather different conclusion. Her modern and moderate policy proposals resemble the more progressive, pro-market political parties in Europe, such as Switzerland’s Vert Liberaux or Grünliberalen. Marina shares the conviction with her enlightened Swiss counterparts that economic development demands innovation, not predatory growth.

Marina's ascension also resembles the successful campaign of Colombia's Green Party's presidential candidate Antanas Mockus. The rise to occasion of a progressive, sustainability platform in Latin America is force to be reckoned with in the years ahead. Almost all Latin American nations have gone through similar political waves, from several decades of bloody dictatorships, followed by decades of neoliberalim and, nowadays, several forms and shapes of socialism. There are strong indications that the next wave will be green.

Marina’s platform to defend and increase the visibility of social, political and economic stewardship is Brazil’s best hope for the future. Her campaign has placed environmental consciousness at the core of the political agenda. This is a significant achievement in a country where millions struggle for survival. By engaging her young voter’s base, she has been sowing the seeds of a brighter future. There is no country as profoundly intertwined with both the challenges and solutions of long-term global environmental sustainability as is Brazil. Anyone interested in the country’s rise and future should pay attention. Marina’s ideas will outlast Dilma’s presidential term.

Marina Silva campaigning in São Paulo

on September 13, 2010

Amazon Forest Fires – Who’s to Blame and What's to Expect?

2010-08-28T18:29:00.003-03:00

While media attention is focused on Spain, Portugal and especially Russia, few global attention is paid to wildfires in the Amazon biome. This is unfair and unbalanced as the forest fires in the world’s largest rainforest have a bigger negative impact at the global level. The Amazon biome is a major reservoir of stored carbon. Forest fires are releasing similar amounts of carbon as deliberate deforestation. In addition, wildfires are producing record levels of carbon dioxide, carbon monoxide, and millions of tons of other particles and nitrogen oxides. Fires also inhibit cloud formation and reduce rainfall, and therefore affect global climate patterns. As it is losing its sinks of carbon, the Amazon might be on the verge of becoming a source of atmospheric carbon dioxide. Is the Amazon increasingly putting its carbon exchange equilibrium in jeopardy, as it is giving off more than as it takes in?

The number of fires partially destroying the Amazon, not only at its edges but also at the inside, are reaching record levels. Only in Brazil, over 23’000 fires have been reported year-to-date in the Amazon basin, which is up from 'only' 9’000 during the same period last year. The smoke has not only caused airport closings in Bolivia and Brazil but also crowded hospitals for respiratory diseases and increased pollution levels in already heavily contaminated urban areas such as São Paulo.

An “Amazon fire season” is a relatively new phenomenon and directly linked to widespread human settlements. Forest fires are the worst at the Amazon’s southern and southeastern edges, located in Brazil, where overall rainforest destruction levels are the worst. Fires have especially grown in areas where agribusiness is advancing over the rainforest, such as the States of Mato Grosso and Rondônia in Brazil.

Most out-of-controle fires are caused by the devastating practice of "slash and burn," which is a cheap method widely used by subsistance farmers, land speculators and ranchers in order to clear secondary forests and allow food crops to be cultivated. The soil of the Amazon, however, is mostly infertile and not well suited for intensive farming. The Amazon is rich in living organisms, in flora and fauna, as dozens of layers of plants, fungi and bacteria have continuously recycled the ecosystem's nutrients. Fires devastate its biodiversity, without enable farming. Once forests have been burnt down, farmers face the dilemma of how to enrich the soil. The only alternative technique is the use of chemical fertilizers and toxic pesticides to combat intruding, unwanted weeds, which in return have harmful side-effects for plants, animals and humans.

It should not come as a surprise that most fires are concentrated around major Amazon roads, especially the unpaved portions of the infamous BR-163, which links Cuiabá, in the State of Mato Gross, to Santarém, in the State of Pará. Throughout the Amazon biome, there is direct link between road-building, which enables damage up to at least 50km inside pristine areas, human settlements, loss of biodiversity and, increasingly, forest fires.

Forests which have been partially damaged or burnt down are twice as likely to be completely deforested later on. The main reason is that initial fires leave a lot of combustile material, which eventually become a source of ignition. Initial fires also thin out the canopy making the rainforest less dense and therefore more vulnerable. The occurance of El Niño is making forest fires worse.

In sum, governments of the nine countries in the Amazon, especially in Brazil, should therefore revert the downward spiral that compromises the health of the biome. Action to drastically reduce forest fires is warranted in order to protect the Amazonian carbon stocks and its tremendous biodiversity. If no coordinated effort is made then the Amazon biome could witness similar destruction levels that have seriously damaged Indonesia in the last decade. The Amazon is on the verge of a significant environmental transformation that might cause severe climate events.

Wildfires at the Edge of the Madeira River and the Outskirts of

Porto Velho, in the State of Rondônia, Brazil:
A Growing Concern of Policy Makers

Ecuador's Yasuní-ITT Trust Fund – A Paradigmatic Shift in Global Development Cooperation

2010-08-12T13:56:00.214-03:00

On August 3, 2010, Ecuador and the United Nations Development Program (UNDP) signed a historic deal in Quito to establish a trust fund, which aims at financially compensating the South American country for refraining from oil drilling in its Yasuní National Park. The Ecuadorian government, under leadership of the Louvain graduate, President Rafael Correa, had initially proposed the idea at the United Nations General Assembly in New York on September 24, 2007.

Although this groundbreaking new vehicle at the western edge of the Amazon has been hotly debated in academic and environmental circles, it has hardly received any global media attention. It is regrettable that major news agencies have not picked up on this event. The terms of reference of this innovative trust might herald a new era in development cooperation. In order to make local Latin America voices more heard, I want to elaborate on the background, highlight the huge advantages, and recommend the spreading of this noble initiative to other regions and continents.

The Yasuní National Park is located at the eastern edge of Ecuador, covering 982’000 hectares in the basin of the Napo River, and is considered one of the planet’s most biodiverse hotspots. Three major oilfields in Yasuní, the so-called Ishpingo-Tambococha-Tiputini (ITT) fields, bordering Peru, have crude oil reserves of 846 million barrels or 20 percent of Ecuador’s proven reserves. To some, these are untapped riches, to others priceless resources.

The so-called Yasuní-ITT Trust Fund will have two windows, a so-called Capital Fund Window and a Revenue Fund Window. The UNDP will administer the fund and will hold the proceeds of bond sales. The funds collected will in principle be invested in several areas, including investments in conserving and preventing deforestation; reforestation; natural regeneration and appropriate agro-forest management; environmental services payments, and poverty alleviation programs in the areas directly surrounding the Yasuní National Park. It also includes an attempt to transform the domestic energy matrix away from fossil-fuel dependency towards environmentally friendly and socially inclusive renewable energy sources such as hydro, geothermal, solar, wind and biomass. These key development objectives are intrinsically part of the globally agreed Millennium Development Goals.

The formula to create a trust fund to protect biodiversity has proven to be successful so far. Governments of the more environmentally conscious and enlightened countries in Europe have already signed up. Initial donor countries include Germany, Sweden, and Switzerland, which have collectively committed around $1.5 billion. The Ecuadorean government is requesting a compensation or indemnification totaling $3.6 billion, which is the equivalent of roughly half the expected financial value if the oil were extracted. So far, overseas governmental commitments come to around half of what Ecuador is requesting to forgo oil drilling. Donations are not restricted to sovereign nations, profit and non-profit organizations, corporations and even individuals are encouraged to donate.

Contributors to the trust fund will Yasuní-ITT Guarantee Certificates (CGYs), holding the Ecuadorian government’s pledge the crude oil will remain underground for the indefinite future. The bond certificates will not pay any interest and have no expiration date. Instead, the CGYs are supposed to reflect the amount of carbon-dioxide emissions that will be avoided. The dividend is therefore only environmental.

The establishment of the Yasuní fund is a historic move for several advantages. In the first place, there is huge environmental gain. By leaving the oilfields unexploited, UNDP estimates that Ecuador will prevent the discharge into the atmosphere of around 410 million metric tons of carbon dioxide, which is the equivalent to the annual emissions of France. Ecuador will easily meet its international climate commitments.

In the second place, by leaving a pristine rainforest area intact, Ecuador protects its biodiversity by leaving a tremendous biological treasure untouched. According to a joint research on the global conservation significance of the Yasuní National Park, the area contains 2’274 registered species of trees and shrubs, around 567 species of birds, some 80 species of bats and more than 100 species of amphibians and reptiles. The area is also renowned for its wide variety of some 4’000 species of vascular plants. The area holds around 100 thousand number of insects per hectare, which is supposedly the largest on the face of the universe. The extraordinary biological importance of the area led UNESCO to declare it a World Biosphere Reserve in 1989.

In the third place, by leaving the area untouched, Ecuador preserves and respects the way of life of several indigenous communities. The indigenous peoples of Tagaeri, Taromenane and the Huaorani, are the natural and historical inhabitants of Yasuní. These peoples have a history of resisting outside involvement, including the expulsion of unwanted missionaries, illegal timber loggers and greedy oil company workers. Several communities still live in voluntary isolation, which ought to be respected. The long-term survival of these communities is intrinsically linked to the success of the Yasuní trust fund.

In the fourth place, it is highly uncertain whether Ecuador would gain from oil drilling in the Yasuní park. In other words, there is no reason to believe that Ecuador and its inhabitants will collectively sacrifice billions of dollars, which they would reap upon drilling. If history is a guideline, the opposite might rather be the case. Ecuador has been a net oil exporter since 1972, without reaping substantial benefits. Instead, the country has paid an enormous social and environmental price for oil drilling. Ecuador is a typical example of the resource curse. Ecuador’s overreliance on oil since the early 1970s has seriously eroded the country’s social and cultural foundations and weakened government accountability. Previous governments’ access to a wealth of natural resources has fostered political and social pathologies. The Yasuní trust fund should therefore also been interpreted as a strategy to overcome the recourse curse.

In the fifth place, the Yasuní-ITT initiative highlights a new-born protagonism of the South. Global media and political attention is wrongly focused on the United States Congress cap-and-trade systems. The Ecuadorian plan has a better chance to change the direction of the post-Kyoto negotiations, away from the developed, industrialized nations, and towards those nations mostly affected by global warming and climate-induced social conflicts. Ecuador offers an innovative local response to the procrastination of the disappointing Obama Administration in the United States. The Yasuní model provides new avenues for avoided carbon emissions schemes, not a currently accepted methodology by the United Nations Framework Convention on Climate Change (UNFCCC). Ecuador has a trump card at the upcoming UN Climate Change Conference or COP16/CMP6, to be held in Cancún, Mexico, from November 29, to December 10, 2010.

Last but not least, in the sixth place, Ecuador has shown the world that the price of a barrel of oil is not merely dictated by volatile financial markets, the mood of commodity markets, oil speculators or the demand of North American owners of gas-guzzling Hummers. The basic assumption that oil only has intrinsic value based on its availability for use has proven to be false.

Although the advantages are numerous, the future is still unclear. Firstly, momentum to advance global warming deals in the United States is quickly deteriorating. President Obama might have good intentions, his political will to press for a bolder approach is unsatisfactory.

Secondly, it is highly questionable if Ecuador manages to honor the 200-page agreement and to get additional funding to make up for lost revenues. Domestic opposition and the country’s notorious political instability can still jeopardize the endeavor. President Correa has made clear that the bold initiative would not become a reality until the total amount of funds is collected. If the Yasuní-ITT trust fund fails, Petroamazonas, a unit of state-run Petroecuador, might develop the ITT oil project. Foreign oil firms such as Industria Petrolera de Venezuela, China’s Sinopec and Brazil’s Petrobrás have already shown interest. The launching of the Yasuní-ITT trust fund morally calls for a moratorium on oil extraction in the Amazon basin and a revision of the large-scale infrastructure plans under IIRSA, especially in adjacent northern Peru and western Brazil.

Thirdly, to save Ecuador’s Yasuní National Park from the negative impacts of oil exploitation also depends on the goodwill of its neighbors. Its direct neighbor Peru has huge exploitation plans on fields immediately bordering the park. It such drastic plans are going to be executed, it will have dire consequences for Ecuador. Opening the park to drilling would lead to the same destructive processes historically observed throughout the Amazon basin: annihilation of indigenous communities, degradation of natural environment, forest fires, and so on. These human-induced processes disregard national borders.

It remains to be seen whether the Yasuní-ITT initiative trust fund will turn Ecuador into a “post-petroleum” country. The stakes are high. If the nation manages to place a price tag to untapped resources and to keep in pristine rainforest untouched, then the value of a barrel of oil will never be same. The deal to leave oil underground indefinitely might have inaugurated an era of new instruments of development cooperation, which places the natural environment and the human development in symphony. Transforming the proceeds of forest carbon bonds into sustainable development policies is a paradigmatic shift, capable of moving the country out of its resource curse.

Ecuador's President Rafael Correa deserves praise for showing leadership. No other Ecuadorian government has gone further in strengthening its plurinational identity, cultural diversity and environmental conservation. President Correa’s bold initiative follows up on the successful implementation of the new reconciliatory Constitution, which was adopted in 2008. It now has the huge challenge to keep the momentum growing. The Yasuní roadshow to raise money is now under way, starting at the Shanghai Fair in China. Nigeria and Guatemala are the first countries that have requested technical assistance at the UNDP to replicate it.

In sum, the Yasuní-ITT Trust Fund is not utopian environmentalism but a pioneering method of financing the preservation of Ecuador’s forest ecosystem. The model should be forcefully implemented in order to maintain the park’s outstanding global conservation significance, also as a buffer to anticipated climate change-induced droughts coming from the eastern edge of the Amazon. If the trust fund manages to become successful, it would be among the largest global environmental trust facilities. It would moreover make Ecuador the country with the largest amount of protected areas, around 38 percent of its total land mass. The international community ought to cooperate with Ecuador, which cannot solely carry the burden of emissions reductions as around 60 percent of its population is unemployed or sub-employed. Failure to implement the Yasuní trust fund is not an viable option, as it would be an insult to the indigenous communities and would result in an unacceptable loss of biodiversity, deforestation, pollution of water and air, and spreading of tropical diseases. The outside-the-box Yasuní initiative is a pilot toward a new scheme of development cooperation, containing important lessons for academics, public policymakers and corporate strategists alike.

The bold Yasuni Initiative points at a brighter

future for Ecuador and its inhabitants

Uncovering Suriname – Between Political Turmoil and Ecological Abundance

2010-07-30T15:42:00.006-03:00

When my Suriname Airways flight took off in Belém do Pará, after a 12 hour delay, flying via Cayenne in French Guyana, towards my final destination Paramaribo, I was excited to finally discover this northeastern edge of the Amazon rainforest. I was not sure what to expect from a trip to this former colonial outpost of my mother country, the Netherlands, as it continues to be South America’s least known and examined country. Major news agencies hardly ever report on this country. Unknown makes unloved.

The first impressions are overwhelmingly positive. The taxi ride from the airport at Zanderij to downtown Paramaribo, a UNESCO world heritage site, is relatively long and brings you to areas reminiscent of the country's Asian, Caribbean and Dutch heritage. The 45-kilometer trip from the airport to the capital's center is an introduction into Suriname's rich religious heritage is, as the landscape is dotted with flamboyant Hindi temples, sober Protestant churches, gigantic Pentecostal places of worship, ostentatious Roman Catholic chapels and even a magnificent Islamic mosque. The Suriname universe is a world apart from Latin America.

It immediately becomes clear that Suriname has a unique culture. The around 470’000 Surinamese have distinctive cultural backgrounds: around 37 percent are Hindustani, 15 percent of Javanese decent, 31 percent Creoles, 10 percent Maroons, which represent the only intact communities directly descended from runaway slaves remaining in the New World, 3 percent are native Amerindians, 2 percent Chinese and another 2 percent from several smaller groups of European origin, mostly Dutch. Suriname has been multicultural well before the concept became in vogue.

A History of Bloodshed

The land area which nowadays forms the nation of Suriname historically belongs to a wide variety of indigenous peoples. The Arawaks are considered to be its first inhabitants. Later on, other indigenous peoples arrived such as the Akurio, Caribs, Trió,Wayarekule, Warrau and Wayana. The relatively small remaining Amerindian population nowadays still posses an intimate and invaluable knowledge of foods, fibers, medicines, and other useful forest plants.

The first European invaders who passed along its coastline were Spaniards. Soon afterwards, Dutch pirates visited its coastline in their bloody quest for spices and commodities. The first serious attempt to establish a foothold in the region took place by the British, led by Captain Marshall in 1630. The British tried to cultivate tobacco along its coastline but were defeated by mother nature. Twenty years later, the governor of Barbados, Lord Willoughby, made a more successful endeavor by setting up a plantation called Willoughbyland.

In 1667, the Dutch led by Abraham Crijnssen reconquered the settlement. The Anglo-Dutch Treaty of Breda, signed on July 31, 1667, established that the Dutch could keep Willoughbyland in return for surrendering New Amsterdam (later renamed into New York) to the British. In 1683, the Dutch Republic formalized the so-called Society of Suriname, as a colony equally belonging to the city of Amsterdam, the family of Aerssen van Sommelsdijck, and the Dutch West India Company.

The plundering of Suriname by the Dutch would last several centuries. Just like to British before, the Dutch would also rely on imported slaves from Africa for their illicit gains. At the outset of the 18th century, the Dutch had created 200 plantations with some 13’000 African slaves for the production of cocoa, coffee, cotton and sugar, mostly destined for the Amsterdam commodity market. These slaves would often try to escape forced labor by forming Maroon communities deep into the jungle interior. Some of these Maroon communities are still alive these days.

The Dutch would only abolish slavery in 1863. Initially, the Dutch tried to replace slaves by importing workers from India and the former Dutch East Indies, modern day Indonesia. These controversial practices would only come to an end when Mahatma Gandhi successfully marched against colonial oppression.

In 1954, Suriname obtained a limited form of self-governance, with the Dutch retaining control over defense and foreign affairs. On November 25, 1975, the Dutch prime minister Joop den Uyl finally granted total independence. Although the handover was long overdue, the process of giving up overseas territory was rather chaotically handled by the Dutch socialist government. Fearing for the worst, roughly one-third of the local population opted for migrating to the Netherlands instead of becoming a citizen of Suriname.

Less than five years into independence, Suriname descended into warfare. The government of President Henck Arron was overthrown by a military coup, led by Sergeant-Major Desi Bouterse. The dawn of a “Socialist Republic,” with close ties to the Soviet Union, the Sandinistas in Nicaragua, Grenada’s Marxist prime minister Maurice Bishop and Cuba’s Fidel Castro, would only bring bloodshed and oppression. The low point was reached on December 8, 1982, when 15 members of the political opposition were killed at Fort Zeelandia in Paramaribo. Although almost 18 years have passed ever since, the massacre trial has not been resolved and perpetrators still go unpunished. Yet another low-point was 1986, when the Ronnie Brunswijk's Jungle Commando launched a Maroon offensive against the illegitimate Bouterse rule. This insurgency spread fear and destruction throughout the country.

The violence of the 1980s is haunting the country again in 2010. In the recent parliamentary election, the Mega Combination of Desi Bouterse surprised political observers by winning 23 of the 51 seats in parliament. The outgoing President Ronald Venetiaan has deepened the democratization process but has not been able to capitalize on its stability. The young electorate seems to have forgotten about Bouterse’s dark past. Bouta, as his supporters call him, already took power twice before through coups but is now poised to legitimately gain power on August 12. This development contradicts the wider region, where former dictators are increasingly put into jails or into exile.

At several press conferences, the incoming President Bouterse has repeatedly promised to respect the laws of democracy while in power. If such a controversial person is capable to guide nation into the unknown future is questionable. The elected president is a convicted drug trafficker. In 1999, the Appeals Court in the Hague, the Netherlands, convicted him in absentia of cocaine trafficking and sentenced him to 11 years. Ever since, Bouterse has avoided traveling to countries with extradition treaties with the Netherlands. An international arrest warrant issued by the Dutch is still outstanding. Once he is sworn in as president, Bouterse will not be immune from prosecution in Suriname but, ironically, he could grant himself an amnesty if convicted. In addition, there is also a trial outstanding for his participation in allegedly murdering opponents during his military rule in the 1980s.

International reaction has not only been negative. Bouterse is on good terms with Venezuela’s President Hugo Chávez. President Nicolas Sarkozy of France was the first European country to congratulate the new president of Suriname. In a letter, Sarkozy wrote that his country is open to intensive cooperation with Suriname. Hans van Ballen, a Dutch Member of the European Parliament, however, voiced criticism at Sarkozy for congratulating Bouterse, arguing that new president of Suriname should be refused entry to the European Union.

President Bouterse will inherit a heavy political and social agenda. One of the many issues which the outgoing President Venetiaan has been unable to tackle is the growing business in illicit drugs. Suriname has often been accused for facilitating drug trafficking and for providing trans-shipment for arms-for-drugs dealing. Suriname is also increasingly being used as a transit point between South America and Europe for human trafficking. According to a recent report of the US State Department Trafficking in Persons Report, “Suriname is a destination and transit country for men, women, and children from the Dominican Republic, Brazil, Guyana, Colombia, Haiti, Indonesia, Vietnam, and China trafficked for the purposes of commercial sexual exploitation and forced labor.” It moreover argues that “Suriname is also a source country for women and children trafficked within the country for sexual exploitation and forced labor, as well as women trafficked transnationally for forced labor.” The the Inter-American Children's Institute argues that Suriname's main obstacles reside in “limited institutional capacity both on government and non-governmental organization’s level; lack of specialized and trained personnel, lack of community awareness and lack of appropriated legislation.”

President Bouterse will also have to resolve many outstanding disputes with its eastern and western neighbor. French Guyana is claiming the area between Litani and the Maroni Rivers. At its western front, Suriname claims a triangle of land along the Kutari River in a historic dispute over the headwaters of the Courantyne River. Guyana is currently seeking arbitration of the United Nations Convention on the Law of the Sea in order to resolve the issue.

The most pressing and urgent challenge however is coming from the southern neighbor: how to deal with the growing problem of illegal Brazilians. In December 2009, a dispute between illegal Brazilian gold prospectors and a local Maroon community in Albina, a town of 5’000 people located on the border with French Guyana, ended up in a bloody riot in which a shopping mall was looted and dozens of innocent citizens were killed. Brazilian garimpeiros are notoriously bad stewards of the environment as they pollute river streams with mercury and tear up streambeds in their search of gold. They are also known for bringing violence, prostitution and diseases to indigenous communities. Most of the illegally operating garimpeiros nowadays active in Suriname have previously worked in the Serra Pelada mine in Brazil’s State of Pará. After this infamous mine was shut down, they moved to French Guyana, who in return expelled them. The contentious gold issue has also dominated the presidential election campaign. Measures to enforce environmental laws against illegal garimpeiros, who are increasingly infesting Suriname's interior, are long overdue.

Under incoming President Bouterse, the country will no longer receive Dutch development aid. When Suriname gained its independence in 1975, the Netherlands pledged the sum of 3.5 billion Dutch guilders as development aid. This program has now come to an end. Not everybody regrets this move. According to Bouterse’s political assistant, Winston Lackin, Suriname will only benefit from cutting off aid ties with its former colonial power. According to Lackin, Dutch development aid has not delivered on its promises, "it has only perpetuated dependency." Suriname’s discontent on how the Dutch booted Suriname into independence still runs deep. Like most other South American nations, Suriname will increasingly look at China for trade ties. Instead of continuing entertaining rocky relations with its former colonial master, Suriname has more to gain from bilateral negotiations with other South American and Asian countries, especially Brazil and China.

Environmental Wealth

To picture Suriname only as a country with a nasty colonial past and ongoing political instability would be unfair and unbalanced. It is important to highlight that Suriname has been a country well ahead of the curve is the area of nature conservation.

The South American nation is situated on the Guyana shield, a massive granitic formation of the pre-Cambrian era, near the northern terminus of the world’s largest continuous area of unspoiled, uninterrupted tropical rainforest. Suriname totals 146’101 square kilometers, of which still nearly 90 percent is covered by pristine rainforests, with a rate of destruction of under 0.1% annually. Around 95 percent of its relatively small population of less than half a million lives in the Coastal Plains and hardly anybody ever visits its interior. Suriname has one of the lowest population density in the world, only 3 people per square kilometer. There are no major roads into the jungle and it is one the most densely covered countries with pristine rainforests on the face of the universe.

Not only these numbers impress by their size and magnitude. According to a recent study of Conservation International, Suriname has 200 species of mammals, 674 species of birds, 152 species of reptiles, 99 species of amphibians, and 790 species of fishes. As most of its rivers flow directly into the Atlantic Ocean and are not part of the Amazon or Orinoco drainages, Suriname’s associated fauna is mostly endemic and has therefore tremendous intrinsic value. Its dense rainforests still host animals that are increasingly threatened at the other edges of the Amazon, including the Giant River Otter (Pteronura brasiliensis), Lowland Tapir (Tapirus terrestris), Giant Armadillo (Priodontes maximus), American Manatee (Trichechus manatus) and the Blue Poison Frog (Dendrobates azureus).

The fact that only half a million people live in the country is a major boon for the conservation of its extremely rich biodiversity. It is one of the lowest population densities of any tropical country in the world. The country has a rich soil, holding tremendous and invaluable natural resources, including bauxite, fish, diamonds, gold, hydropower, kaolin, oil, shrimp and timber, and small amounts of copper, iron ore, nickel and even platinum. Due to these huge huge natural resources, the World Bank recently ranked Suriname as among the 17 potentially richest countries.

In 1998, the federal government created the so-called Central Suriname Nature Reserve, covering 10 percent of the country. In 2000, UNESCO named it a World Heritage Site. The Coppename River is considered to be one of the largest, most intact and pristine watersheds in the world. As of 2010, Suriname has 12 nature reserves, covering around 14 percent of the size of the country. It has one of the few truly pristine areas remaining in the world almost completely free of human impact. The further one pushes into the interior, the less people one will encounter. This is rather exceptional, even for global standards.

A major challenge for Suriname is how to deal with these riches and avoid the natural resources curse. Multinational firms are increasingly attracted by the huge natural resources still available in the jungle interior.

The biggest human incursion in the rainforest occurred in the 1960s, with the completion of a dam in the Suriname River at Afobakka to fuel aluminum smelters of Suralco/Alcoa. This resulted in the formation of the artificial hydroelectric reservoir Lake Brokopondo. This artificial lake destroyed 1560 square kilometres of pristine rainforest.

In the 1990s, some gold mining companies made incursions, equally causing loss of rainforest and, worse, mercury pollution. The area around the Bakhuis Mountains has become notoriously polluted. Issues concerning mining regulations are increasingly making headlines. During the presidential campaign, Bouterse opposed a proposed terms of an investment by Newmont Mining, a US multinational, arguing that it amounts to exchanging the country’s natural bounty for a mere “apple and an egg.”

The Association for Tropical Biology and Conservation has requested the government to take necessary steps to protect the unique natural heritage of Nassau Plateau and halt all activities directed toward establishment of a bauxite mine. It argues that the isolated bauxite plateaus of northeastern Suriname, located at Brownsberg, Lely, and Nassau, constitute a rare and imperiled landform, which harbors the highest diversity of trees, bromeliads, orchids, and some other plant groups known in Suriname. The Nassau Plateau, an area of around 400 square kilometers, is the most threatened of the three bauxite plateaus because of its high accessibility and lack of protected-area status.

Threats are not only coming from the north, but also increasingly from the south. Business links with Brazil are on the rise due to the paving of a road over the Oiapoque River, which links the northeastern edge of Brazil in the State of Amapá with French Guyana. The rehabilitation of the road, co-financed by the Inter-American Bank of Development, will improve trade and transportation links between Paramaribo, Cayenne and Macapá/Belém. The paving is part of the controversial Initiative for the Integration of the Regional Infrastructure of South America. Opponents of the plan argue that enhanced regional integration and better accessibility will come at a high price for the natural environment. Historically, there is a direct correlation between highway corridors in pristine rainforests and rising wildfires, more deforestation, forest fragmentation, species extinction and increasing migration flows. The human dimension of expanding highway corridors is moreover linked to increasing incidence of alcoholism, prostitution and the spreading of contagious diseases. Local authorities will have a huge responsibility to mitigate the impact of bringing asphalt to the forest.

Local authorities should inspire their governance model by carefully analyzing best practices in the South America. A good example of how to combine exploitation of natural resources without destroying the natural environment is the sustainable Juriti mining project of Alcoa to the southwest of Suriname in the Brazilian Amazon, monitored by Funbio. The proposed local development model holds several valuable lessons for Suriname, including how to establish a local development forum, how to monitor development indicators and implement a sustainable development fund.

Multinational firms can be better environmental stewards than garimpeiros as they can be held accountable to the wider public. Reputational damage control nowadays is a top priority of multinational corporations. The recently compiled Guidance on Responsible Business in Conflict-Affected and High-Risk Areas of the UN Global Compact also offers plenty resources for corporate managers and public policy makers.

Suriname is also well-positioned to monetize on carbon credits on avoided deforestation schemes. Ecosystem services should be able to generate enough cash flows to sustain or compensate forest communities, which in return will limit deforestation. There are however still a lot of caveats and unknowns with regard to carbon finance initiatives. Efforts to base compensation scheme for avoided deforestation on a historical reference period, for example, would not be beneficial for Suriname. A good analysis of the pros and cons of carbon monetization has been published by Conservation International. As correctly argued by Timothy Killeen, “if the Amazon forest is a global asset worth preserving, then it is only reasonable that the custodians be paid for their efforts.”

As local financial resources are limited, corporate giving and strategic philanthropiesshould consider funding research and development in the country. Suriname’s sole university, Anton de Kom University of Suriname, has an excellent track record of research. The university deserves to be better equipped to study and monitor the natural environment. Suriname deserves more funding as it has one of the world’s best track records of nature conservation. If the country can get is political act together then it potentially can make a rapid ascension.

Arawak People:
Suriname's Best Nature Conservationists

Revising Brazil’s Forest Code – Serving Whose Interests?

2010-07-20T18:50:00.005-03:00

The last couple of weeks, Brazil has witnessed a huge political and media outcry over a proposed revision of its Forest Code. Brazil’s current Forest Code was endorsed as Law 4'771 on September 15, 1965, and addresses the delicate balance between agricultural development, forest management and biome preservation. Although conceived more than 45 years ago, this landmark piece of legislation is a most progressive and modern one, perhaps even the best in the world. In theory, the law requires landowners to preserve 80 percent of private properties in the Amazon basin, 35 percent in the savannas and 20 percent along its vast coastline. These are the so-called effective legal reserve requirements for rural properties.

There is no equivalent anywhere in the world. In practice, however, these reserve requirements have not been respected. The Forest Code has largely been a fiction, used and abused by small and big landowners, cattle ranchers and energy barons, landless peasants and multinationals alike. Law enforcement has been weak due to federal mismanagement, omission and lack of financial resources. Action is therefore warranted. Nobody in Brazil doubts that a structural reform geared towards a better, more efficient and more effective land management is long overdue. There a nationwide consensus that the law should be modernized and, most importantly, legally enforced.

The effort to overcome the many practical shortcomings of the existing Forest Code was led by Aldo Rebelo. The deputy of the Communist Party of Brazil from the State of São Paulo headed a commission, who dedicated a lot of time and effort to overhaul the existing legislation. Aldo Rebelo's findings were put together into a bill and presented to a Special Congressional Commission. On July 6, 2010, this commission approved Rebelo’s reform bill, by a surprising 13 to 5 margin. In a typical scene of Brazilian federal politics, proponents of the projects commemorated the adoption by shouting “Brazil, Brazil, Brazil”, while opponents screamed “regression, regression, regression.” The scene was reminiscent of a bad gangster movie about the last frontier on the Western front.

The endorsement was made possible due to an awkward agreement between the Communist Party and the ruralist bloc, which votes according to the interests of large landowners and the agribusiness lobby. The extraordinary coalition was surprisingly backed by some members of the government coalition (PT/PMDB) and the major opposition party (PSDB/DEM). The only party that strongly opposed to Rebelo's bill was Marina Silva's Green Party.

The overwhelming victory for this ad hoc coaltion calls for a more profound analysis. Approval has come as a huge surprise not only for environmental groups but also for the science community. Scientists and environmentalists have highlighted in several press communiqués that Rebelo was ill-advised. The highly regarded IPAM, Brazil’s Environmental Research Institute of the Amazon, for example, has calculated that Rebelo’s proposal could unleash an extra 25 to 31 billion tonnes of carbon dioxide emissions in the open space. This would be the equivalent of around six times the size of the reduction in carbon dioxide emissions that Brazil has promised to the international community. The endorsement is a clear vote of non-confidence in international climate talks.

Aldo Rebelo’s proposal is controversial for several other reasons as well. The most contentious proposal consists of providing amnesty from fines to landowners, who illegally cleared their land prior to July 22, 2008. This would be a major concession as illegal logging on more than 40 million hectares of savannas and forest in the Amazon region has been recorded, only between 1996 and 2009. Amnesty would pardon an equivalent of 14.6 billion tonnes of carbon dioxide emitted illegally. Granting amnesty would send the wrong signal, not only to who trespassed the law but also to the law-abiding citizens. In addition, by providing amnesty for past crimes, legislators encourage illegal logging in the future. Proposing a new compliance system based on a track record of amnesty is not credible and is incompatible with the well-functioning of a rules-based democracy. Brazil should first reverse its international reputation of a land where impunity reigns. Above all, the federal government should first try to get rid of the image of a land where the risk of prosecution is low. Instead of discussing how to forgive crime, the Brazilian Congress should debate how to prosecute criminals. The Special Congressional Commission is setting the wrong priorities.

Another divisive aspect of Rebelo's bill is related to the effective legal reserve requirements for rural properties. The new bill could shrink the proportion of legal reserve requirement in the Amazon basin down to 50 percent. The ruralist bloc backs such drastic move by arguing that the current reserve requirements hinder agricultural development. The science community has another opinion. According to IPAM estimates, the geographical area of rainforest that can be legally cleared could double, to around 85 million hectares or the size of England and France combined. This would be desastrous as tropical rainforests soak up substantial amounts of carbon dioxide as they grow. According to UN estimates, destruction of tropical rainforests accounts for around 20 percent of greenhouse gas emissions that spur global warming. An unintentional consequence of Rebelo's proposed changes to the landmark 1965 Forest Code would be the spreading of deforestation at a rate not seen since the 1980s. His proposal could herald a new era of booming deforestation, by undermining protection of its pristine rainforests, which are global biodiversity hotspots, its savannas, invaluable for water supplies, and its long coastline, which increasingly suffers from soil erosion and damaging pesticides.

Yet another controversial alteration under discussion is Rebelo’s recommendation to decentralize the decision-making process at the federal level and increase the power of state and municipal governments. This is questionable as by decentralizing, the Brazilian federal government would lose control over its greenhouse gas emissions goals. It is recommendable to maintain controling the Forest Code’s so-called Areas of Permanent Preservation (APPs) at the federal level. This is crucial as many riverbanks and basins, slopes and hilltops cross way beyond muncipal and state lines.

The wider debate has only started. The proposal is now on the table of the full Congress, where support is not guaranteed. With the presidential elections looming at the horizon later this year, the three main candidates are forced to justify their positions. Marina Silva of the Green Party has placed her opposition to Rebelo's bill at the very center of her presidential campaign. Her support base is growing, also driven by her campaign plea for "zero deforestation." Marina's support base comes mainly from disenchanted social leaders at the grassroots level, who have grown tired of the corruption scandals in which Lula's Workers Party has been involved. She also enjoys the endorsement of business groups who have placed sustainability at the core of their corporate agenda. The two other presidential candidates, Dilma Rousseff (PT/PMDB) and José Serra (PSDB/DEM), also favor less deforestation but lack crediblity for enforcement. Their political parties and alliances represent Brazil's lost decades based on populism and assistentialism. As President Lula's Workers Party backed Rebelo's bill, the current president is finishing his second term with a tainted environmental legacy.

In order to keep the momentum for passing the bill in the Congress, Rebelo and his ad hoc coalition have been vocal on television channels and written in newspapers columns. In a recent article, Rebelo argues that the research report “Farms Here, Forests There” of the Washington, D.C.-based Avoided Deforestation Partners (ADP) is evidence that some US lawmakers conceive stopping deforestation in the Amazon basin as a way to enhance multi-billion dollar markets for US agribusiness at the expense of Brazil. ADP argues that ending deforestation in Brazil through US and global climate incentives would net $190 to $270 billion by 2030 for US beef, soy timber and oil seed producers. In other words, by promoting forest preservation in Brazil, US farmers would be protected from rising competition from overseas agribusiness powers.

Opponents of Rebelo's bill argue however that a more recently released study by the same ADP, entitled "More Forests, Better Farms: Gains for Brazil from Forest Protection," finds that Brazilian agriculture is well-positioned to benefit from a gradual shift away from deforestation-based production. Brazilian farmers and ranchers have indeed no need to destroy pristine rainforests in order to increase agriculture production. Brazilian soils that are already in use by commodity farmers and cattle ranchers are notoriously underproducing in comparison to North American and Western European standards. By using more sophisticated equipment and pasture management techniques, Brazilian farmers can significantly raise output, increase productivity and obtain higher yields. In short, Brazilian agribusiness needs to become more productive rather than to become more destructive.

The momentum for a national debate is rising quickly. Environmental and scientific groups are closely monitoring the situation and launching campaigns. If the debate concerning the Forest Code becomes a major issue in the presidential campaign, the society will gain. The question of deforestation should be addressed seriously. There is global consensus that zero deforestation should be norm going forward. A prelude of what will happen if deforestation continues at current rates could be witnessed in Brazil in the last couple of months. Around last New Year's Eve the Rio de Janeiro coastline at Angra dos Reis suffered from massive mudslides. More recently, heavy rainfall has caused massive flooding in the States of Pernambuco and Alagoas, located at the northern edge of the Atlantic Forest biome, causing death and mayhem. Rainfall and flooding well above the average has been caused by soil erosion and poor agricultural management. The misery inflicted should be interpreted as a warning sign of what can happen down the road of deforestation. Unless Brazil’s public opinion and enlightened legislators turn the tide, climate events of greater frequency and destruction can be expected.

More deforestation would result in an inevitable race to the bottom, especially in those areas that receive less global media attention than the Amazon. Brazil's most fragile areas include the endangered Atlantic Forests along Brazil’s coastline and the vast savanna areas of the Cerrado, which include headwaters of significant Amazon tributaries and the source of the springs for the Pantanal wetlands. The Cerrado biome is simultaneously situated at the four agricultural expansion fronts of the production of food, fiber, fuels and feed.

In sum, the Forest Code should not be downgraded to a Farm Bill or to a license for deforestation. Brazil and its future generations deserve better. The current Forest Code is not hindering economic activity in Brazil, it should only be updated and, most importantly, be practically enforced. More devastation will make Brazil's economy less competitive as it will increasingly suffer from consumer boycotts and eventually hasten climate events. Consumer consciousness is sharply on the rise, not only in far-away markets but also in Brazil's major urban areas, and end-clients would increasingly want to impose restrictions, controls and product moratorium. A good example of the spreading of best practices can be witnessed at the Roundtable for Responsible Soy and the Better Sugar Initiative. These initiatives are the most effective measure implemented to date of seriously adddressing deforestation without hurting the local agribusiness lobby. The Brazilian government and political parties, along with agribusiness lobby and non-governmental organizations, should equally launch massive campaigns in favor of forest carbon monetization by means of avoided deforestation. There is a growing global consensus that such schemes provide the key to establishing a healthy balance between demands of consumer groups and the agribusiness lobby. In such a scheme, all Brazilian parties would be winning, farmers and conservationists alike.

Flying over the border between Mato Grosso and Amazonas:
the Small Path Between Soy Cultivation and Forest Preservation

O espantoso leilão de Belo Monte – Uma cadeia de equívocos

2010-04-21T10:09:00.002-03:00

Apesar de décadas de batalhas ambientais, políticas e judiciais, o governo Lula fez um leilão pela construção da Usina Hidrelétrica de Belo Monte. A usina tem previsão para entrar em funcionamento em 2015, atendendo a necessidade energética de 26 milhões de brasileiros.

Lula defendeu a obra faraônica ressaltando que a construção da usina deve gerar 18 mil empregos diretos e 23 mil indiretos. Se depender do governo Lula, a hidrelétrica de Belo Monte será a terceira maior do mundo em capacidade instalada, atrás apenas das usinas de Três Gargantas na China e da binacional Itaipu, na fronteira do Paraguai e o Brasil.

O consórcio vencedor do leilão foi o Norte Energia com participação da Chesf (49,98%), Queiroz Galvão (10,02%), Galvão Engenharia (3,75%), Mendes Júnior (3,75%), Serveng-Sivilsan (3,75%), J Malucelli Construtora (9,98%), Contern Construções (3,75%), Cetenco Engenharia (5%) e Gaia Energia e Participações (10,02%). Este consórcio ofereceu R$77,97 por megawatt/hora (MWh) que serão cobrados das distribuidoras de energia. Este preço representa um deságio de 6,02% em relação ao teto que havia sido estabelecido pelo governo - que era de R$ 83 por MWh.

O leilão de Belo Monte que aconteceu no dia 20 de abril de 2010 não deu legitimidade ao projeto. Ainda existem muitos argumentos contra a construção:

Argumentos ambientais:

* Técnicos do Ibama ressaltam que não garantem a viabilidade ambiental da hidrelétrica. Em fevereiro de 2010, o Ibama concedeu sim uma Licença Prévia para a construção, mas impondo 40 condicionantes socioeconômicas e ambientais ao projeto. É duvidoso que todos estes condicionantes sejam implementados rigorosamente.

* Uma área de 516 quilômetros quadrados será alargada com enorme perda de biodiversidade.

* O alagamento reduzirá enormemente o fluxo da água do leito do Rio Xingu, causando impactos ainda pouco conhecidos, mas sim muito temidos.

* O plano prevê canais a serem escavados de 30 quilômetros de extensão. A fim de construir esses canais, mais terra precisa ser removida do que o Canal do Panamá. Além do mais, o terreno é geologicamente desconhecido.

* O plano prevê a construção de 260 quilômetros de estradas de acesso aos vários pontos do canteiro. Abrindo estradas historicamente tem provocado queimadas adicionais, novas pastagens para gado e cultivo de soja que, por sua vez, aumenta a destruição de nascentes e de matas ciliares. Segundo dados do governo, 33% da cobertura vegetal orginal da Bacia do Xingu no Mato Grosso, o equivalente a 4,48 milhões de hectares, já foi dematada nos últimos 40 anos. Vale ressaltar que o cerrado matogrossense é o berço do Rio Xingu.

* Ambientalistas alertam que a usina provocaria uma interrupção do Rio Xingu em um trecho de cerca de 100 quilômetros, reduzindo de maneira significativa a vazão do rio.

* Ao provocar tanta destruição ambiental nos arredores do Rio Xingu, a construção da usina aumentará a probabilidade de eventos climáticos extremos.

Argumentos econômico-financeiros:

* A construção da usina é orçada em R$19 bilhões. Esta valor representa o segundo mais caro projeto do Programa de Aceleração do Crescimento (PAC) do governo Lula, atrás apenas do trem-bala entre São Paulo e Rio de Janeiro, que tem um orçamento de R$34 bilhões. Vários analistas de bancos de investimento avaliam que o custo da construção da usina seja muito mais elevado. A verdade é que ninguém sabe quanto vai de fato custar essa obra.

* As maiores empreiteiras do Brasil, incluindo Odebrecht e Camargo Corrêa, desistiram do leilão porque acharam arriscado demais. As opiniões de outros dois grupos fortes como Vale e Votorantim, que tem operações importantes na região, foram menosprezadas.

* A fim de garantir o leilão, o governo Lula lançou um pacote de medidas para estimular a entrada de capital privado na construção. O governo federal ofereceu um desconto de 75% no imposto de renda da usina nos primeiros dez anos de operação, além da ampliação para 30 anos do prazo para o financiamento pelo BNDES. Com esta jogada, o BNDES acaba financiando até 80% da obra. Ou seja, a construção é basicamente um projeto federal: quem paga a conta financeira é o contribuinte, o povo brasileiro. Só no capitalismo brasileiro para ver uma licitação com duas holdings contendo duas subsidiárias estatais.

Argumentos políticos:

* A decisão de levar o leilão adiante a apenas seis meses das eleições presidenciais é altamente questionável, pois não existe nem consenso político, nem base popular a favor da construção.

* Houve várias audiências públicas contra a construção com zero de retorno. O governo Lula menosprezou as reivindicações e não soube responder às dúvidas levantadas por funcionários do Ibama, por grupos ambientalistas, eclesiásticos, indígenas e ribeirinhos. A Conferência Nacional dos Bispos do Brasil, por exemplo, divulgou uma nota noa dia 10 de fevereiro de 2010, reafirmando sua posição contra a construção, destacando que não são contrários às ações que visem apenas o progresso, mas sim “contra medidas que são tomadas de forma arbitrária”. Segundo os bispos católicos, devemos seguir o exemplo de respeito à natureza seguido pelos povos indígenas: “devíamos aprender com os índios, os guardiões da floresta, que respeitam a mãe terra, rios e matas e sempre promoveram uma vida compartilhada em meio a tanta ganância humana”.

* O Ministério Público Federal promoveu audiências públicas na capital sobre a usina hidrelétrica mas organizações federais e estatais como o Ibama, Funai, Eletrobrás e Eletronorte nem compareceram.

* Em novembro 2009, 284 indígenas de 15 diferentes etnias, reunidos na Aldeia Piaraçu, se manifestaram contra a construção. Várias outras entidades também reunidas nesta aldeia denunciaram a obra, incluindo o Conselho Indigenista Missionário, Instituto Socioambiental e Conservação Internacional.

* A ausência de diálogo como os povos indígenas na região do Xingu viola o direito internacional. Várias convenções das quais Brasil é signatório oferecem garantias especiais não somente aos recuros naturais e às terras indígenas, mas também à sobrevivência cultural. Como signatário, o Brasil não pode ignorar a Declaração das Nações Unidas sobre Direitos dos Povos Indígenas.

Argumentos técnicos:

* A usina de Belo Monte é apresentada pelo governo como a terceira maior do mundo que vai gerar 11 mil megawatt. Este número, porém, é enganoso. A produção média mal ultrapassará de quatro mil megawatt.

* A usina provavelmente vai gerar abaixo de um mil megwatt durante uns três a quatro meses no ano por causa do regime das águas do Rio Xingu. A usina prevista corre o grande risco de ser ineficiente em termos de produção de energia.

* Transportar a energia por milhares de quilômetros para atingir os mercados e consumidores corre sérios riscos. Haverá grande desperdício nas linhas de transmissão, que chegarão a mais do que dois mil quilômetros de distância dos grandes centros urbanos.

Argumentos jurídicos:

* O leilão durou apenas sete minutos e foi realizado após a cassação de uma liminar da Justiça Federal do Pará que havia determinado sua suspensão. O processo parece pouco sério.

* O leilão parecia mais uma decisão política, quase uma imposição governamental. O consórcio que venceu o leilão foi uma surpresa geral foi montado em pouco tempo. Até uma semana anterior ao leilão, apenas um consórcio liderado pela Andrade Gutierrez estava oficialmente no páreo. Um outro consórcio encabeçado por Camargo Corrêa e Odebrecht desistiram do leilão já no início de abril. O processo foi pouco transparente.

* Não resta dúvida que haverá enormes riscos de novas paralisações e novos liminares durante a construção. Ações serão julgadas e a sua legitimidade continuará em xeque.

Argumentos históricos:

* A primeira iniciativa de construir uma hidrelétrica no Rio Xingu foi em 1975, no auge do poder do regime militar. Apesar do poderoso Ato Institucional 5 e a falta de democracia, o projeto não foi levado para frente por falta de apoio popular.

* Várias outras tentativas foram feitas no decorrer das décadas de 80 e 90 mas os sucessivos governos nunca ousaram levar a proposta mais para frente. Vale lembrar, por exemplo, que o governo Fernando Henrique Cardoso listou uma usina no Rio Xingu como uma das obras estratégicas no seu Programa Avança Brasil.

A cadeia de equívocos parece não ter fim. Apesar desta litania de argumentos contra, o governo Lula argumentou que a única alternativa viável à construção seria uma dependência ainda maior à energia fossil, gerada do carvão ou petróleo. Este argumento, porém, é completamente enganoso pois descarta e menospreza os últimos avanços no setor. Brasil tem um enorme potencial nas áreas de energia eólica, solar e biomassa. Pela sua geografia privilegiada, Brasil tem tudo para avançar pesado nessas áreas.

Além do mais, o presidente Lula foi pouco diplomático ao acusar organizações estrangeiras pelas críticas levantadas, ressaltando que "eles já destruíram a floresta deles” e agora querem se meter na nossa. A postura do Lula mostra pouca sensibilidade aos argumentos levantados. Seja qual for o ponto de vista, a usina de Belo Monte traz incertezas demais. Bilhões de reais serão alocados num projeto extremamente arriscado, cuja decisão de ir a leilão foi tomada sobre inúmeras incertezas, insuficiências e ilegitimidades. O governo Lula obviamente forçou a barra diante desta grande polêmica pública e precisa urgentemente renovar seus conceitos.

O governo Lula e a pré-candidata do Partido dos Trabalhadores à presidência, a Dilma Rousseff, estão cantando vitória, mas isto é de pirro. Numa época em que a consciência ambiental tem aumentado exponencialmente ao nível local e global nos debates políticos e na mídia, é inacreditável que o Lula e a Dilma tem mostrado tão pouca sensisbilidade desta avalanche de argumentos contra a licitação de uma usina no Rio Xingu.

Em suma, o PAC do Lula e Dilma é um programa que anda na contramão do desenvolvimento integral e sustentável, é um afronto à Agenda 21. Trata-se de uma Amazônia leiloada sem critérios modernos. A construção da hidrelétrica na chamada Volta Grande do Rio Xingu é o prelúdio de uma catástrofe ambiental e social, o começo de um novo ciclo de destruição. Mais um elefante branco na maior floresta do mundo.

Asfalto avançando sobre a floresta:

progresso ou regresso?

Rethinking the Amazon

2009-12-25T12:00:00.002-02:00

I am currently working on yet another Swiss Consulting Group Occasional Paper, which will provide some personal impressions on current state of affairs in the world’s largest rainforest, the Amazon. My first journey to Manaus, the megalopolis located in the heart of the Amazon, took place in 1991. During my internship at the PUC-Rio, I escaped for a backpacking adventure across the Eastern and Southern edges of the Amazon basin. As a graduate student in liberation theology and development economics, I was enchanted by the overall pristine character of the region. Nevertheless, I also remember being shocked by the horrendous land conflicts and illegal gold mining in the region around Serra Pelada and Redenção in Southeastern Pará. Both rather conflictive impressions of shock and awe always remained in my living memories.

Now, twenty years later, I am back in the region on professional duty. Field trips have recently taken me to the very outskirts and heartlands of the Amazon: from the Putomayo region in Colombia, the Azuay province in Ecuador, to the state of Rondônia in Brazil and Arawak region of Suriname. During these visits, I have had the honor and privilege to meet with leading social entrepreneurs, indigenous leaders, politicians and church officials. These people are crucial to define the development debate going forward.

My forthcoming paper is an attempt to both shed some light on urgent development dilemmas, as well as a humble effort to highlight some groundbreaking new efforts to seriously tackle today’s most pressing issues. Question being addressed include among others whether the Amazon is a victim or villain of global warming; whether Manaus should continue being a free trade zone; whether the cattle and soy industries pose a serious threat to the rainforest; whether multinational corporations operating in the Amazon basin are mostly immune or impune.

In short, I will argue that the current unsustainable state of affairs of the Amazon basin reflects the failure of policies to deliver broadly-shared social and economic benefits, as well as the incapacity of traditional political and economic models to respond to demands for greater social inclusion, environmental equilibrium and economic equity. The disastrous consequences call for a paradigmatic shift.

RETHINKING THE AMAZON

- TOWARDS A NEW DEVELOPMENT PARADIGM

Swiss Consulting Group Occasional Paper

Preliminary Table of Contents

1. Introduction: Journey through the World’s Largest Rainforest

2. Case Studies on Development Dilemmas in the Amazon Basin

2.1. Manaus Free Trade Area in Brazil: Villain of Sustainability

2.2. Privatizing Natural Resources in Peru: Legal but Illegitimate

2.3. Mining in Colombia: Pricing Extraction and Discounting Plundering

2.4. Multinationals in Ecuador: the Limits of Environmental Liability

2.5. Illegal Trafficking in the Guyanas: the Cost of Lawlessness

3. Promising New Directions in the Development Debate

3.1. Financial Incentives: Paying for Avoided Deforestation

3.2. Consumer Pressure: Campaigning for Product Moratorium

3.3. Renewable Energy: Towards a Revolution and Evolution

3.4. International Pressure: from Backyard to Center of Concern

4. Conclusion: the Quest for Equilibrium

References

Sunrise over Rio Negro between Barcelos and
São Gabriel da Cachoeira in Brazil:
Green Hell or Garden of Eden?

A Moral–Theological Critique of Business Ethics – Between Pharisaic Moralism and Prophetic Morality

2008-03-23T20:59:00.004-03:00

* This Swiss Consulting Group Occasional Paper # 15 is a revised version of my Ph.D. dissertation in moral theology and business ethics, which was defended at the Catholic University of Louvain, Belgium, on January 25, 2008. The original published version in pdf format, including footnotes and references, is available here. A hardcopy has been published by Edições Subiaco in Brazil.

Introduction

Proposing a moral–theological critique of business ethics seems a rather pretentious – if not moralizing – claim. At first sight, a lack of understanding and communication characterizes the relationship between theology and economics, between church officials and business people. Most theologians are educated in an environment, which is either inimical or ignorant about business. Theological reflection is a rare commodity within economics, and most of what goes on is outside the professional mainstream. Religious leaders and theologians in most parts of the world downplay the relative importance of economics at best, or have an anti–business attitude at worst. Capitalism smells bad in most sacristies, seminaries and religious charities.

The widely held viewpoints of library cubicles and ghetto parishes is that commerce and multinational corporations are inherently characterized by an abundance of evils, including deceit, envy, lust, vanity, and avarice. In theological circles, money has too often been regarded as the radix malorum cupiditas or the root of all evils. These assumptions of theologians are based on a false or distorted perception of the economic reality. Personal experience has taught me that there is a great deal of ignorance on the part of clergy and theologians with regard to discipline of economics. Economics might be characterized as the dismal science, but that does not justify ignorance.

By the same token, business people too often feel awkward or are unwilling to discuss ethical dilemmas. In the business community, it is mostly not done to discuss questions regarding morality. The popular axiom “church on Sunday and work on Monday” is widely applicable on modern society. Most economists seem happy to ignore or neglect organized religion. In the world of finance, religion is often regarded as a vestige of an earlier stage of human development, which would wither away as humankind becomes more sophisticated and rational. At the personal level, it has been demoralizing and disheartening to see people in Rio de Janeiro’s Baixada Fluminense released from material poverty by free markets, only to embrace the consumerist lifestyle.

Contemporary students of economics and finance will rarely encounter any discussion of relationships between economics and religion. At best a discussion is ignored, at worst it is considered illegitimate or irrelevant. From the business viewpoint, the pope is a Chief Executive Officer of a huge multinational corporation, specializing in moral and theological products. For economists, church attendance is based on a rational choice, pleasure and a desire for social networking, but not necessarily driven by faith. Whereas theologians articulate religious beliefs, economists are interested in studying the causal relationship between religion and economic performance. It seems that sharply diverging assumptions and worldviews drive economists and theologians.

Objectives

This occasional paper is primarily an effort to understand how the large issues of business and ethics – and business ethics and moral theology – are, or ought to be, interconnected. What has been missing so far in the business ethics debate is a serious engagement or dialogue between the depth of Christian social teachings and the contemporary challenges posed by corporations. In order to make the contemporary business ethics debate more relevant, moral theologians should get more involved.

The age–old standoff between theologians and economists challenges us to reframe the debate. At this moment, business ethics can be regarded as an area of pioneering moral–theological inquiry at best. The main objective of this study is therefore an attempt to make a moral–theological contribution to the business ethics debate. Neither is the church only about collecting money, nor is business only about making money. In other words, passing the collection basket on Sundays is not necessarily different from paying the bills during the week. The fashionable executive leadership coaching programs and the Spiritual Exercises of Saint Ignatius are not separated by four centuries because ultimately they have the same ultimate objectives. An appeal will goes both ways. Whereas church officials and theologians ought to take a closer look at economics, business people and economists are encouraged to pay more attention to matters related to faith and morals. This is not borne out of sudden conversion, but out of necessity. Although the strictly economic arguments are valid and plausible, the quest for business ethics can also be driven by personal morality and/or religious convictions. Such approach will make corporate responsibility stronger, more deeply rooted and more convincing.

At the outset, the philosophical foundations of what is regarded as the dominant academic view in the contemporary business ethics debate are examined. The assumptions of Adam Smith, Friedrich Hayek and Milton Friedman will be examined on their wide–ranging social, economic and political ramifications. The premises of the case for and against business ethics are highlighted as they are crucial to advance the debate. Advocates of business ethics argue that corporations cannot only look at shareholder desires, as if they were operating in a socio–political, environmental or legal vacuum. Supporters furthermore claim that corporations cannot turn a blind eye to stakeholders. In return, opponents argue that only self–interest and self–preservation warrant that a corporate manager does not get engaged in dubious tricks that erode shareholder value. Critics also argue that mere profit maximization is in the biggest stakeholder’s interest. This argument is based on the premise that the management of a corporation is under strict fiduciary duty to advance the interests of its shareholders, who are its owners. Throughout this study, it will become clear that in a world where corporate managers are encouraged to think big, show no mercy, cut losses, advance only the most profitable deals, and where toughness is a virtue, it is hard to make the case for ethics in business. In corporate boardrooms, where time is money, there seems to be no place for ethics. At first sight, it seems that a winner–takes–it–all and super–size–me mentality necessarily has to reign in the business world.

After highlighting the dominant academic view, this study will examine how business ethics can or should be a contemporary challenge to moral theology. The underlying or implicit hypothesis is that business ethics should not solely be driven by a corporation’s public relations or marketing departments. Branding agents are aware that religion can be a powerful marketing tool. Corporate branding campaigns often look like ritual liturgies. Corporations are more and more portrayed as identities with a soul. Marketers are modern capitalist missionaries looking to convert customers and increase shareholder value. It is increasingly becoming clear that religious identities and convictions have a direct impact on economic behavior. Religious values, norms and beliefs stimulate and affect political and economic developments and vice versa.

It is important to stress that there is no intention to supplant mainstream economics with Christian economics. A moral–theological inquiry of business ethics is not necessarily the same as promoting Christian economics. In the era of globalization, a push for a specific Christian agenda within economics is often regarded as problematic. Arguing strictly from Christian premises pollute mainstream economics. Economics is not an exact science, in which objective, cumulative, definitive knowledge is possible. Despite opposition from neoclassical economists, economic analysis is driven by tentative hypotheses that can never be fully proven. Economists differ greatly in their worldviews and policy descriptions, which often involve different beneficiaries and victims. Although the ultimate concern of economics is not to make value judgments, it mostly operates on the borderline of value and scientific judgments. In return, the task of a moral theologian is not to merely moralize or strictly push for moral teachings.

The ultimate objective of this study is therefore to examine how business ethics can or should be a contemporary challenge to moral theology, which can seriously overcome the shortcomings of a narrow–minded economistic or merely financial worldview. Economics and theology will be regarded as distinct and separate disciplines, which can be enriched by an interdisciplinary exchange.

At the heart of this paper, I will systematically examine the social magisterium of the Roman Catholic Church. A special emphasis will be placed on the pertinent social encyclicals and Compendium of the Social Doctrine for being chief custodians of Christian ethics. As emphasized by Pope John XXIII in his encyclical Mater et Magistra, “it is essential that this doctrine be known, assimilated, and put into effect in the form and manner that the different situations allow and demand.” Examining official Catholic social teaching (CST) is equally pertinent beyond a strict theological or intra–ecclesial perspective, as the Vatican is increasingly wielding influence at the global stage by means of political diplomacy. It is generally acknowledged that the Vatican’s faith–based diplomacy delivered the decisive knockout blow to the Soviet empire. Nowadays, the Vatican’s theological grammar and vocabulary on the Iraq War is going far beyond the institutional boundaries of Catholicism and powerfully resounds in Islamic circles. The current dialogues between the Vatican and Islamic regimes in the Middle East and communist governments in Vietnam and China are invaluable and are a clear sign of the persuasive power of the Vatican.

Next, I will examine two contextual theological perspectives of business ethics. The two contextual theologies are Latin American liberation theology and North American neocon theology. These contextual theologies are chosen for two specific reasons. First, the influence of both theologies has gone way beyond intra–ecclesial and theological circles. In the second place, I have experienced both contextual theologies at the personal and professional level. Since the early 1990s, I have had the privilege to work in base communities in the Baixada Fluminense, the metropolitan area of Rio de Janeiro, Brazil. Liberation theology has a huge impact on the pastoral practices of local church communities in this economically impoverished area. Since the mid–1990s, I have also been working on Wall Street as an investment banker, an environment heavily influenced by North American neoconservatives. The main part of this occasional paper is therefore an attempt to systematize my personal experiences and evaluate the epistemological tools and ideological assumptions of these contextual theologies.

It is my working hypothesis that moral theology and business ethics should be publicly argued in order to remain vibrant, alive and accessible. Such is the only method to make the business ethics debate a voice heard in the corporate boardrooms, governments, churches and academia alike. A critical assessment of the business ethics hype is therefore a must.

Terminology

In order to avoid conceptual misunderstandings or cultural bias, a few comments on terminology are necessary. I will highlight the terms and concepts, which will be used or avoided throughout this occasional paper.

In the United States, academics use the concept of business ethics as an umbrella term to encompass matters related to social and environmental sustainability or stewardship. In continental Europe, the most widely used umbrella term is corporate social responsibility. One of the better definitions of the concept comes from Louvain–la–Neuve Professor Philippe Van Parijs, who describes CSR as “as doing more for the good of society (or less for the bad of society) than what follows from effective–law–abiding, image–insensitive profit–seeking.” Within the scope of this occasional paper, both terms are inter–exchangeable. Both terms are born in the West and largely devoted to the study of Western multinational corporations.

Despite a vast and ever–growing body of academic literature and corporate manuals, defining business ethics or corporate social responsibility is not as easy as it might appear at first. Research on the issue still lacks a comprehensive framework for the systematic collection and analysis of corporate data. As will become clear, diverging levels of economic development result in different assumptions. Advocates of business ethics or corporate social responsibility argue that corporations have entered a stage in which their activities are expected to create value in three dimensions. On the first level, corporations have responsibilities towards people, as its policies affect issues related to employment, health, education, and human rights. The second dimension involves the planet. In this sense, corporations are expected to contribute towards a clean environment, preservations of resource stocks or ecological balance. The third level concerns profit. At this level, corporations are expected to be financially sound, at least warranting economic and financial continuity. The tripod people–planet–profit is also referred to as triple bottom line management. In theological jargon the tripod respectively refers to human dignity, stewardship and co–creation.

The notion of corporation will play a key role throughout this paper. A corporation is created by a group of shareholders who have ownership, represented by their holdings of common stock. Shareholders elect a board of directors and generally receive one vote per share. The board appoints and oversees the management of the corporation. Although a corporation does not necessarily have to be for profit, the vast majority of corporations are set up with the goal of providing a financial return for its shareholders. By going public, a corporation often gets a listing on a stock exchange, where it is traded and priced according to the laws of supply and demand. When you purchase stock, you are becoming part owner in a corporation. A corporation should also be regarded as an agent of change or social constructor, receptive to signals from society and directly interfacing with the natural environment. Nowadays corporations move, operate and exist beyond nation’s borders and make their presence felt. The global corporations gathered at the 2007 World Economic Forum in Davos, for example, have combined annual revenues of $12 trillion, almost the value of the entire economy of the United States. As will become clear throughout this study, corporations no longer only make products; they also define and market culture.

The concept of corporation – and not company – will be employed throughout this study because the former is the most commonly used legal name for a for–profit business association. Although the concept of company nowadays connotes a commercial enterprise, historically it has also referred to religious organizations – the Jesuits are know as the Company of Jesus – and military groups. The concept is derived from the Latin word cum and panis, which when put together mean breaking bread together. The notion corporation, moreover, comes from the Latin corpus, which means body.

In general, economics will be understood as a critical study of production, distribution and consumption of wealth in society. In the line of Adam Smith and Amartya Sen, economics is also regarded as a moral science. Such understanding highlights the fact that moral philosophy and the discipline of economics are intrinsically intertwined.

The term free market will be used throughout this study and is defined as a mechanism for producing, distributing and exchanging, buying and selling of goods and services. The free market encompasses the entire set of human interactions that occur when such goods and services are offered. The economic model of competitive free markets analyzes and predicts how prices are determined when private, unregulated markets operate under certain assumed conditions. In the United States, the term free has mostly a positive connotation. Milton Friedman even argues that departures from the competitive free market model are irrelevant. According to Harvard Professor John Kenneth Galbraith, “money is a singular thing [...] it has oppressed nearly all people in one or two ways: either is has been abundant and very unreliable or reliable and very scarce.” In contrast, Joseph Stiglitz argues that the free markets model is far from ideal. The winner of the 2001 Nobel Prize in economics blames market fundamentalism for endorsing the view that free markets solve all problems flawlessly. In continental Europe, especially in France, the term has often gained a rather negative connotation and is often depicted as a caricature. Former French Prime Minister Edouard Balladur once memorably asked: “What is the market? It is the law of the jungle, the law of nature. And what is civilization? It is the struggle against nature.” Former French Prime Minister Lionel Jospin has said “yes to market economy, no to market society.” As will become evident throughout this study, there is no consensus in academia and the business community on the pros and cons of the free market model.

In this occasional paper, the term capitalism will be avoided, because it is a broad and ill–defined concept, often used and abused in political agendas and ideological debates. Only in the United States, the concept has a profoundly positive connotation as a legitimatization of the free market, implying liberty, entrepreneurship, initiative and progress. In Europe, the notion is more linked to the dark forces of globalization and economic monopoly or cartels. In Latin America, the concept is thoroughly negative and has become a synonym for oppression, marginalization and exploitation. In order to avoid an ideological debate, which would go nowhere, the controversial term will not be used.

Although still used in too many academic and ecclesial circles, I will avoid using the obsolete concept of Third World. This concept is denigrating as it systematically categorizes two–third of the world’s population as third–class citizens. Historically, the notion connotes countries receiving development aid and countries not as industrialized or as technologically advanced as OECD countries. Instead, I will use the term emerging markets, which has a more positive connotation as it points at the tremendous socio–economic and political potential of countries in the South. The term emerging markets was first coined by World Bank official Antoine van Agtmael in 1981.

Business ethics started to surface in the 1970s sparked by a new environmental awareness and suspicion or even outright hostility towards multinational conduct. The empowerment of non–governmental organizations – especially Amnesty International, Greenpeace, and Oxfam – concerned with social justice and humanitarian relief services, took center stage. Ever since the early 1970s, non–governmental organizations have been busy publicizing corporate misconduct. Highly publicized cases involved Nestlé, Union Carbide, Exxon and Shell, which have led to consumer boycotts and huge reputational damage. Public scrutiny has led these and other corporations to adopt stringent business ethics policies, aimed at enhancing moral legitimacy. Some popular sociology and economics books related to business ethics have even become bestsellers.

The vogue of business ethics, however, does not mean that there is a consensus on theoretical models and professional implementation. Corporations are nowadays inundated with requests to implement business ethics policies without a clear consensus on what should to be achieved. Harvard’s Michael Porter warns that business ethics often looks like an “all a defensive effort, a PR game in which companies primarily react to deal with the critics and the pressure from activists.” His concern is that corporations are reacting to pressure rather than having their own affirmative strategies. Amnesty International’s Frankental classifies much business ethics as “corporate PR,” stressing that free markets do not reward ethical business. Gauging a “good corporate citizen” is indeed hardly a straightforward business. Google, for example, made the 2007 “World’s Most Ethical Companies” list of governance–tracker Ethisphere, because of its strong code of conduct. At the same time, the internet powerhouse has been widely criticized by consumer groups over privacy infringements and its China policy. The business ethics debate seems never short of prophets, preaching either prosperity or doom. From the outset, it is clear that there are no clear–cut formulas for resolving ethical quandaries.

(to be continued at "Older Posts" below)

A Moral–Theological Critique of Business Ethics – Between Pharisaic Moralism and Prophetic Morality

2008-03-23T20:58:00.008-03:00

PART I -

PHILOSOPICAL FOUNDATIONS OF BUSINESS ETHICS

1. The Modern Debate in Historical Perspective

In order to better understand the dynamics of business conduct in the era of globalization, it is imperative to first examine the philosophical foundations of the free–market economy. The roots of the dominant academic view can be found in the writings of Adam Smith, Friedrich Hayek and Milton Friedman. Each writer has a rich tradition of debating morality, freedom of choice and justice. As their viewpoints have been crucial in establishing and consolidating free–market economics, an inquiry in contemporary business ethics necessarily has to start with an examination of their assumptions and positions.

1.1. Adam Smith

Contemporary business ethics has its philosophical roots in the ideas of the Scottish moral philosopher and political economist Adam Smith (1723–1790). His extensive writings were a revolutionary event for the emancipation of the discipline of economics and the formation of the free–market economy. Any inquiry on business ethics should therefore necessarily start with the father of capitalism.

Before examining his writings, a few words on the world in which Smith lived. The belief that there exists a direct link between religious values and business concepts was commonplace. In his time, the clergy exercised power over all dimensions of community life. Religious principles claimed direct authority over economic affairs. Commodity prices and wages were governed by what was considered a fair standard, not by market forces. Obtaining a profit in economic life was justified in religious terms. In other words, religious and economic realities were closely intertwined.

Smith’s major concern was related to freeing economics from the tutelage of theology and making it an independent discipline. It is crucial to realize that his free–market theories sought first and foremost freedom from church authorities and theologians, not necessarily from the state. Although it would take another century before economics was freed from political sciences, it was Smith who kicked off the debate. This contribution is often underestimated or overlooked in contemporary economics textbooks.

When Smith published An Inquiry into the Nature and Causes of the Wealth of Nations (1776), he stated that the Church of Rome (the Vatican) posed the greatest threat to the civil order, liberty and happiness of humankind. His magnum opus, which was coincidentally published in the year of the American Declaration of Independence, is often cited as the bible of capitalism and free enterprise. He argued that church charities should be contained so it would not “disturb the state.” In this book, he conducted an empirical study on why England, France, and Poland were wealthier than other European nations in the 18th century. Smith concluded that the division of labor and the free competitive market contributed significantly.

According to Smith, an important step toward the achievement of “perfect liberty,” was to increase the power of the state over the power of the church. In attacking the so–called Poor Laws, Smith attacked the charity, which he considered as oppressive and only creating dependence. He also argued that the educational system had to be transformed: “The alterations which the universities of Europe thus introduced into the ancient course of philosophy were all meant for the education of ecclesiastics, and to render it a more proper introduction to the study of theology.” Because of the temporal powers, which the church was enjoying, Smith argued that “the greater part of what is taught in schools and universities [...] does not seem to be the most proper preparation for the real business of the world.”

Smith argues that a free–market mechanism legitimizes the pursuit of self–interest: goods can be produced more efficiently and cheaply if each person strives to maximize his or her self–interest in the market place. By pursuing one’s own interest in a perfectly competitive market, one automatically attains an optimal social outcome. The interests of morality are best served by business selfishness: “Every individual generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it [...] he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectively than when he really intends to promote it. I have never known much good done by those who effected trade for the public good.” By acting as such, individuals promote general prosperity and therefore unintentionally help others. From a utilitarian point of view, price agreements between corporations are undesirable as they reduce market efficiency. Although the metaphor of an invisible hand is only used twice in his entire works, it is regarded as his most noteworthy contribution to the debate.

In his optimistic theories on the reality of human sympathy, there is no room for conspiracy theories: “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from regard of their self–interest. We address ourselves, not to their humanity but to their self–love, and never talk to them of our own necessities but of their advantages.” This famous phrase is often considered to be a problem for Christian ethics because of its explicit endorsement of self–interest. By legitimizing the maximization of self–interest, Smith changed a widely spread perception in society. He hoped that governments would understand the real driving force behind wealth creation and therefore slap punitive tariffs on imports and condone similar anti–competitive favors to industries and adopt free–market measures.

Unfortunately, Smith is mostly known by the doctrines exposed in the previous paragraphs. In his other often–undervalued masterpiece The Theory of Moral Sentiments, published in 1759, Smith recognizes benevolence as a primary but also scarce virtue. In Smith’s worldview, self–interest and the ethical concern for the well–being of the other are not antagonistic but rather complementary and mutually reinforcing. It is therefore unfair to accuse Smith of defending blindly the pursuit of self–interest at the expense of social and civic duties or overall moral restraints. As Patricia Werhane points out, Smith “does not set up a dichotomy between egoism and benevolence. Rather, he criticizes both moral theories that derive the basis for moral judgments from self–interest and moral theories that find the sole end of morality to be benevolence.” In other words, Smith’s notion of self–interest is not asocial or anti–social, it is intrinsically social, nor as a matter of moral duty or social pressure, but rather a genuine source of pleasure for its own sake.

In the same line, Amartya Sen emphasizes that “the fact that Smith noted that mutually advantageous trades are very common does not indicate at all that he thought self–love alone, or indeed prudence broadly construed, could be adequate for a good society.” Smith’s ethical theory is based on a utilitarian acceptance of human desire for material prosperity as the ultimate concern of society. Toon Vandevelde equally reiterates that the relationship between economics and ethics in Smith’s writings is more complex and more interesting than often suggested. He emphasizes that Smith has a much broader understanding of economics than is the case in neo–classical economics. Smith did not disconnect economics from moral philosophy.

In sum, by overemphasizing the theory of the invisible hand and the moral justification for the profit motive, Smith has erroneously been regarded as the ultimate defender of unfettered competition. The widespread belief that ever since Smith labor, land, and capital have become equivalents for wages, rent, and profit, is not true. The misinterpretation of his theories of sentiment, sympathy, benevolence and prudence has been causing a widening of economics and ethics with dramatic consequences. According to Smith, justice is a derivative of perfect liberty, which in turn is a prerequisite for the well–functioning of the free–market system. Smith’s popular reputation as the rationalizer of greed is therefore incorrect. As convincingly argued by outspoken business ethics Professor Luc Van Liedekerke: “Adam Smith said that there is a positive side to greed, because it encourages spending and hence bolsters the economy. That was in the eighteenth century, and was a new concept at the time. However, he was not defending a laissez faire capitalism with no structure: he realized that greed must be kept within certain bounds, otherwise things will go seriously wrong.”

1.2. Friedrich Hayek

The first distinguished intellectual after Adam Smith, who defended the free–market model with the same vigor, was the Austrian–born Friedrich August von Hayek (1899–1992). He won the Nobel Prize in Economics together with Swedish economic liberal Gunnar Myrdal in 1974. This great intellectual was also characterized by the fact that he hardly ever attributed to opponents anything beyond intellectual error. According to Hayek, knowledge is something that is hard to claim ownership over since others can absorb it free of charge. Hayek’s social and economic philosophy elaborates on Adam Smith’s line of thought and is integrated in a comprehensive and remarkably consistent manner. For the scope of this study, this study will concentrate on two of his masterpieces, The Road to Serfdom (1944), and The Constitution of Liberty (1960). These two books stand out among his 25 books and 130 articles in economic theory, political and legal philosophy, intellectual history and psychology.

Hayek is best known for writing The Road to Serfdom. This book was an instant success and transformed Hayek into a leading albeit controversial social theorist. In this non–t technical book, first published at the end of the Second World War, he warns the greater public that the road to political hell is paved with the best intentions. His primary concern was to show that classical liberalism and central planning had one shared goal – enhancing the well–being of the greatest number of people – but had sharply diverging proposals to achieve such goal. His main objective was to show that one state intervention would inevitably lead to another governmental intervention.

Against the consensus of the post–Second World War period, Hayek rejected economic planning, comprehensive state welfare services, and the redistribution of incomes. The unintended consequences of market interventions are economic distortions and political intrusions. Governmental policies might have noble intentions but they are based on a misguided epistemology of collectives and institutional arrogance. In his own words: “That democratic socialism, the great utopia of the last few generations, is not only unachievable, but that to thrive for it produces something so utterly different that few of those who now wish it would be prepared to accept the consequences, many will not believe till the connection has been laid bare in all its aspects.”

For Hayek, socialism is a false secular religion, doomed to fail. Arrogation of economic control by social planning is a fatal conceit. The socialist interventionist dynamic leads a society down the road to serfdom. He rejected socialism as it has a mistaken view of reason and rationality. Socialism erroneously imagines that a society should be organized from top to bottom, geometrically, like a pyramid. In arguing as such, socialism does not allow for the contingency inherent to temporal events and also for liberty aspired by humanity. Hayek dedicated his book The Road to Serfdom “To the Socialists of All Parties,” without claiming ever that socialists had bad intentions, but only warning their followers of the fallacies at the theoretical and practical level. The fact that Hayek gave such warning in 1944, at the eve of naive leftist belief, which led to misleading collectivist policies, makes this book remarkable.

In his monumental The Constitution of Liberty, Hayek first tries to define the concepts of freedom and liberty. According to Hayek, this is crucial since these notions have been abused and their meaning distorted. He argues that “the word liberty means nothing until it is given specific content, and with a little massage it will take any content you like.” Hayek warns that there is a danger of confusion in the definition of political freedom as people may vote or contract themselves into slavery and thus consent to give up freedom in the original sense: “It would be difficult to maintain that a Jesuit who lives up to the ideals of the founder of his order and regards himself ‘as a corpse which has neither intelligence nor will’ could be so described.”

According to Hayek, the definition of liberty depends on the meaning of the concept of coercion, arbitrariness and general rules or laws. By coercion, Hayek understands “such control of the environment or circumstances of a person by another that, in order to avoid greater evil, he is forced to act not according to a coherent plan of his own but to serve the ends of another.” Hayek favors the observance of general non–discretionary rules instead of arbitrary laws in order to derive fundamental political and economic policies of a free society. This is regarded crucial since society is too complex, beyond the capability of any single mind to understand and therefore impossible to plan: “If we are to understand how society works, we must attempt to define the general nature and range our ignorance concerning it.”

Hayek equally stresses the limits of law and legislation. The ability to address and solve social problems through statutory enactment of rules is severely limited and has serious downsides. Inspired by Kant, Hayek argues that laws should not seek to achieve particular, concrete consequences but, instead, establish general rules that set a broad framework where people in a free society can interact. Law, nevertheless, is for Hayek not identical to coercion or arbitrariness. Again inspired by Kant, Hayek argues that the absence of law would not lead to the elimination of coercion but rather to the proliferation of it. Law, as an institutionalized use of coercion by the government, is meant to maximize the degree of freedom that each person can enjoy without impinging on the liberty of others. According to Hayek, the best way to guarantee such a situation is to only focus on general rules of conduct. In summary, the only purpose of a freedom–maximizing and coercion–minimizing legal framework is to provide a level playing field. Any attempt to impose particular legislation is doomed to failure since it always produces an unknown and unpredictable number of unintended damaging social side effects.

Hayek applies the same logic to the field of social justice. According to Hayek, this notion “is not, as most people probably feel, an innocent expression of good will towards the less fortunate.” He warns: “It has become a dishonest insinuation that one ought to agree to a demand of some special interest which can give no real reason for it.” Moreover, it is “wholly devoid of meaning or content, is one which by its very nature cannot be proved.” The employment of the concept of social justice has furthermore become an instrument of ideological intimidation, for the purpose of gaining the power of legal coercion in redistribution of wealth of which money is a proxy. For Hayek, social justice will only worsen the chances of just relationships between individuals and eventually undermine the well–functioning of the wider society. Ruthless politicians and careless thinkers have transformed social justice into a utopian goal. Hayek concludes that the social justice has become an excuse for people who lack the patience and faith to build up voluntary organizations or charities and an excuse for the state to centralize power.

Hayek does not justify free markets by reference to a preferred set of moral principles. He defends the market mechanism by praising its capacity to generate, transmit and use knowledge in an efficient way. The market does not depend on people working hard, but rather depends on providing goods and services desired by people at the right time and the right place. For Hayek, the market represents no intrinsic value but instead value to others of goods and services and the efforts of the individual who supplies it. The market is driven by an incentive to future action and to deliver on the desires of others. Unlike Karl Marx (1818–1883), who argued that the value of a product was determined by the amount of labor invested in it, Hayek argues that free–market forces inform producers how much labor and expertise is worth putting into a product.

The market is a human institution, like language and law, not devised by a conscious plan but gradual, constantly changing, evolutionary process. The market is not a means of efficiently allocating known resources, but rather a discovery procedure. The main benefit of the market system is that it provides a method for coordinating human activity without political interference or governmental enforcement. The role of profit is stimulating individuals to discover new opportunities and untapped resources. Profits enhance society.

With regard to religion, Hayek argues that it has played a crucial role in the development of humankind throughout all ages of history. Religions are important in reinforcing a moral code on a society, especially in enshrining the institutions of private property, honesty and the family. Only religions that protect and preserve these institutions have the ability to survive in history. Along the same lines as Smith, Hayek argues that “even agnostics ought to be grateful to the religious traditions which, for reasons they cannot accept, have preserved long enough [...] non–rational beliefs that made available the building elements of the extended order which we call civilization.” Hayek attributes the declining influence of religion in his time to a “lack of intellectual and moral orientation.” In this same spirit, he would declare fifteen years later that “unlike the rationalism of the French Revolution, true liberalism has no quarrel with religion, and I can only deplore the militant and essentially illiberal anti–religionism which animated so much of nineteenth–century Continental liberalism.” He emphasizes: “What distinguishes the liberal from the conservative here is that, however profound his own spiritual beliefs, he will never regard himself as entitled to impose them on others and that for him the spiritual and the temporal are different spheres which ought not to be confused.” For Hayek, religion should be confined to the family living room and not be extended to the public square.

In sum, Hayek restored economics as a field worthy of investigation by moral philosophy. He argues that honest dealing, security of property, and the sanctity of contract are the bulwarks of liberty and safeguards of capitalism. He has convincingly argued that society is tragically open to being manipulated by fundamentalist doctrines or secular religions such as Marxism. In one of his last publications, released in 1979, Hayek declared that “the final conclusion of forty years” of study was that “we must shed the illusion that we can deliberately create the future of mankind.” Hayek’s extraordinary insights should remain mandatory reading not only for monetary economists but also for business ethicists and moral theologians.

1.3. Milton Friedman

The fourth child of European immigrants in America and recipient of the 1976 Nobel Memorial Prize for economic science has equally been crucial for shaping the contemporary economics debate. As a professor at the University of Chicago, Milton Friedman became the leading advocate of the monetarist school of economics, which holds that the business cycle is and should be determined primarily by money supply and interest rates rather than by a governmental intervention. Although mostly famous for his interpretations on monetarism, this study will only focus on his contributions in the field of moral philosophy and business ethics.

The concept of freedom is crucial to understand Friedman’s theories. He asserts that “freedom of the individual or perhaps the family” is the “ultimate goal of judging social arrangements. Freedom is the ultimate criterion to judge or advance a society. It is also the basis for self–interest and motivation for human action. Along the same lines as Hayek, he argues that individual freedom should be encouraged, while restriction or coercion should be avoided. Friedman’s belief in personal freedom and free markets extends to a very wide variety of areas. He even regarded American anti–drugs laws as virtually a government subsidy for organized crime.

Friedman’s main hypothesis is therefore that an optimal condition for the whole society will be achieved naturally if all individuals and corporations alike pursue their own self–interest. To put it even more bluntly, it is a moral duty of corporations not to get involved with moral demands. In Friedman’s conception, a corporation is an artificial personality. Only its employees have moral duties. The moral duty of an employee is to act amorally. In Friedman’s classic stockholder model, corporations have a primary responsibility towards the stockholders only, to whom they are bound in a fiduciary relationship. A business is property of shareholders. Business relationships are not immoral but they are simply not subject to the moral constraints and practices covering social relationships. Moral responsibility is therefore a void concept in the context of corporate business. This does not imply that corporate managers have a moral blank check that allows them to close their eyes to all ethical constraints in the relentless pursuit of profits. According to Friedman, corporations have to pursue profit by legal, non– deceptive means only.

According to Friedman, individuals should be guided by the concept of self–interest. His definition of self–interest is not “myopic selfishness,” but rather “it is whatever it is that interests the participants, whatever they value, whatever goals they pursue: the scientist seeking to advance the frontiers of his discipline, the missionary seeking to convert infidels to the true faith, the philanthropist seeking to bring comfort to the needy, all are pursuing their interests, as they see them, as they judge them by their own values.” Friedman compares business to a game, which goal is to maximize profit while staying within the rules of the game.

In his widely read Capitalism and Freedom, published in 1962, Friedman equals the social responsibility to a “fundamentally subversive doctrine.” He argued that the view that “corporate officials and labor leaders have a social responsibility that goes beyond serving the interest of their stockholders or their members” is based on “a fundamental misconception of the character and nature of a free economy.” In a free economy, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception and fraud.” In his view, business relationships are not immoral but they are simply amoral, not subject to the moral constraints and practices covering social relationships. Corporations cannot possess responsibilities.

According to Friedman, businessmen who believe that “business has a social conscience and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers,” are “preaching pure and unadulterated socialism.” Moreover, “businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” He compares corporate donations with hypocritical window–dressing, unauthorized taxation and even tactics approaching fraud. In other words, a non–business oriented donation is tantamount to theft and it equals unjustified appropriation of the owners’ property. Friedman argues that business managers who employ funds for anything going beyond the explicitly and legitimately stated business objective are simply embezzling. The fact that the diverted resources are applied to supposedly noble ends does not make the act of diverting any less larcenous. Wrongdoing is not annulled by worthy motives. For example, if employees are using telephone lines for personal use rather than to solicit or engage in business, he is cheating the business’ owners.

For Friedman, businesspeople should not intentionally seek to promote justice because the beneficial impact for society is not empirically evident. The use of stockholders’ money for non–profit purposes is morally wrong. Corporate employees are only encouraged to spend their private money towards social ends and use their spare time towards social goals. Only the owners or shareholders can decide whether a corporation should have any social goals. Friedman asserts that the debate on the social responsibilities of business is notable for their analytical looseness and lack of rigor. He equates social responsibility with the pursuit of social ideals at the personal levels. Such ideals have to be realized at the individual’s own expense. He concludes that “freedom of the individual or perhaps the family” is the “ultimate goal of judging social arrangements.”

Besides this deontological argument, Friedman also uses teleological arguments for defending his thesis that corporations and business executives only should pursue profit. In paraphrasing Smith, he argues that individuals best promote the well–being of society by pursuing one’s own interest. In his own words: “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine. If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self–selected private individuals decide what the social interest is? Can they decide how great a burden they are justified in placing on themselves or their stockholders to serve that social interest?”

According to his logic, social engineering is doomed to failure for several reasons: corporate managers do not have the necessary skills or expertise to arbitrate between competing claims of different sections of society – such competence is only given to an elected government; corporate managers are not elected and have therefore no political mandate to decide between competing claims for resources – again, such competence is only given to an elected government; and, finally, corporate managers do not have the means and resources of elected governments to make things happen once society has decided what the appropriate trade–off must be. Friedman concludes that social engineering leads to money politics, undermining the legitimacy of both business practices and politics. In short, managers should stay out of the business of politics, as much as politicians should refrain from the business of management. According to Friedman, governments and firms do have a social responsibility to keep prices and wage rates down in order to avoid price inflation. He argues that “price controls, whether legal or voluntary, if effectively enforced would eventually lead to the destruction of the free–enterprise system and its replacement by a centrally controlled system.” Friedman’s doctrine of fiduciary duty has dominated the business culture in the United States and the United Kingdom since Reagan and Thatcher took power in the early 1980s.

Friedman rigorously defends personal freedom combined with a belief that free markets are the best place to coordinate the activities of dispersed individuals to their mutual enrichment. In the academic debate, it too often goes unmentioned that he himself added an important qualifier to making money or profit seeking, namely that it should be done “while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.” Scholars therefore have often incorrectly written him off as a rightwing Republican, overlooking the fact that he has often vigorously attacked governmental subsidies and protectionist measures. Friedman’s arguments are flexible enough to permit and even encourage today’s managers to engage in corporate actions protective of both profits and community well–being.

It can be concluded that Friedman’s assumptions have led to a widespread belief that modern economic theory should be quantifiable and rational. Human beings have increasingly been assumed to behave rationally in subsequent economic modeling. A growing academic consensus grew that economics should be driven by ahistorical, rational, econometric modeling. The arguments were been further advanced by economists at the University of Chicago in the late 1960s. The neoclassical approach reached its peak at the 1969 Annual Meeting of the American Finance Association, when Professor Eugene Fama famously argued that “in an efficient market, prices fully reflect available information.” When UCLA–economist William Sharpe received the 1990 Nobel Prize in Economic Sciences, the neoclassical theory had also reached the temple of Wall Street. By creating a simple measure of risk based on past asset volatility, the efficient–market gospel became a global belief. His sophisticated risk measurement tool – the so–called beta – measures whether active money managers can outperform the market by taking on extra risk.

Neoclassical economics has also led to the stockholder model. This model was introduced in the 1960s and basically holds that the owners of shares of stock should be the prime beneficiaries of the activities of a corporation. The stockholder model is based on the so–called agency theory. This theory holds that shareholders differ from other constituencies by virtue of being residual risk–bearers, and therefore best placed to exercise control over a corporation. The agency theory asserts that shareholders are in the best position to ensure that firms operate efficiently and focus incessantly on profit maximization.

The most influential free–market economist of the twentieth century died in November 2006, aged 94. According to Harvard Professor Lawrence Summers, “no contemporary economist anywhere on the political spectrum combined Mr. Friedman’s commitment to clarity of thought and argument, to scientifically examining evidence and to identifying policies that will make societies function better.” Or in the words of Mario Vargas Llosa, “millions of people who have never heard of him lead better lives today in part because his ideas proved more resilient than the prejudices that surrounded his name, than the social engineers who tried to impose their bureaucratic whims under the cloak of altruism, or the police states that thought themselves eternal.” Friedman’s legacy is here to stay.

2. Contemporary Ethics Models at Business Schools

The free–market doctrine as formulated by Smith, Hayek and Friedman still dominates much of Wall Street and permeates mainstream economics textbooks but their views are increasingly being questioned in academia and business headquarters. Due to theoretical inconsistencies and manifold practical deficiencies, the supreme reign of the free–market mindset or the stockholder model is no longer apparent.

In the next section, I will start highlighting the first cracks in the edifice of the dominant academic view. Next, I will present three contemporary business ethics models, which are popular, both at the academic and corporate level. Thomas Donaldson’s integrative social contract theory, Michael Porter’s context–focused strategic corporate social responsibility and Roger Martin’s virtue matrix have taken the center stage at leading global business schools. These models are slowly being incorporated into business ethics coursework and are becoming integral parts of applied ethics. In the final section of this chapter, I will raise the question whether establishing a paradigmatic shift in the debate is desirable and feasible.

2.1. Beyond the Dominant Academic View

One of the first economists, who seriously questioned the dominant neoclassical academic view, was John Kenneth Galbraith (1908–2006). In his magnum opus The Affluent Society (1958), he rejected the abstract, mathematical models of neoclassical economics as being divorced from reality. In A Short History of Financial Euphoria (1990), he argues how irrational speculation often drives financial markets. More recently, the business ethics has been enriched by welfare economics, which is also directly relevant for the debate.

The second notable academic attack on the stockholder model occurred in the 1980s, when business ethicists started to systematically condemn Friedman’s model. Wharton Professor Thomas Donaldson argued that the stockholder model is an outmoded relic of corporate law that even the law itself has evolved. He argued that such model is related to a “myopic view of corporate responsibility,” which would lead to “corporate Neanderthalism [...] with morally pernicious consequences.” Donaldson’s criticism was followed by Princeton Professor Robert Solomon, who argued that Friedman’s model is misguided “from its nonsensically one–sided assumption of responsibility to his pathetic understanding of stockholder personality as homo oeconomicus.” Salomon argued that Friedman’s proposition “is not only vacuous and misleading, it eclipses the larger picture and all those other purposes that business is designed and managers are hired to serve.” In a similar vein, he argued that “to give profits this sort of status is not only foolish in theory, but cruel and dangerous in practice.” University of Minnesota Professor Ian Maitland also argued that the free–market model “releases self–interest from moral restraints; it erodes all social ties other than purely economic open and/or converts social relationships into instrumental ones (commodifies them); it promotes a preoccupation with narrow individual advantage at the expense of responsibility to the community or social obligations; it substitutes competition for voluntary cooperation; it favors materialistic or hedonistic values.” University of Santa Clara Professor Manuel Velasquez argued that Friedman’s position on profit can only be “used to justify a manger’s unethical or illegal conduct.”

These and other sharp indictment of the shareholder model led the appearance of the so–called stakeholder model, which basically holds that not only stockholders have a stake in a corporation’s operations. The alternative view argues that corporations must balance the interests of multiple constituencies – shareholders, employees, customers, communities and, increasingly, the environment. According to University of Virginia Professor Edward Freeman, stakeholders include “those groups which have a stake in or claim on the firm: [...] suppliers, customers, employees, stockholders and the local community, as well as management in its role as agent for these groups.” The stakeholder theory is therefore based on the premise that the employees of a corporation, especially its managers and directors, can be held accountable for harmful side–effects of corporate behavior. A widening of responsibility is moreover deemed essential since stockholders’ liability is often remote and financially limited.

Besides being an empirical management theory, the stakeholder model has also become a normative theory of business ethics. The stakeholder concept, as a coherent construct, provides a broad umbrella under which a wide range of normative positions can be accommodated. According to Georgetown University Professor John Hasnas, “when viewed as a normative theory, the stakeholder theory asserts that, regardless of whether stakeholder management leads to improved financial performance, managers should manage the business for the benefit of all stakeholders.” As managers must give equal consideration to all stakeholders involved, conflicts of interest may arise. Hence, in its normative form, the stakeholder model does imply that corporations do have social responsibilities.

Despite its widespread acceptance in corporate and academic circles and increasingly sanctioned by law in local or national jurisdictions, the stakeholder model has also been increasingly criticized as insufficiently addressing business dilemmas. The model is inadequate to address the existing conflict of interest among stakeholders. Stakeholders are not a monolithic block with a coherent voice; they are mostly sectional and competing constituencies seeking extra–market privileges from a corporation. The more widely the model has been introduced, the broader the claims of rather arbitrary constituencies to be included as a stakeholder. It is indeed rather arbitrary whether groups like competitors, the media, future generations, animals and other living organisms can be regarded as stakeholders.

The inability of the stakeholder model to provide measurable standards for assigning relative weights to the interests of the various constituencies is a serious shortcoming. Stakeholders have not the same weight to business owners as citizens have to governments. According to University of San Diego Professor Robert Phillips, it is difficult to assign stakeholder status: “Must managers consider the well–being of competing organizations in decision making? In general, the answer is no.” Phillips refers to John Stuart Mill to make his point: “Society admits no right, either legal or moral, in the disappointed competitors, to immunity from this kind of suffering; and feels called on to interfere, only when means of success have been employed which it is contrary to the general interests to permit – namely, fraud, treachery, and force.” Phillips defends a fairness–based stakeholder model, which suggests “a reconceptualization of many business interactions from that of cutthroat competition – even with those on whom the corporation depends in various ways – to that of a cooperative scheme.” It has moreover been argued that the stakeholder model subverts complex property and contractual relationships. According to Elaine Sternberg of the London School of Economics, the stakeholder model here is “popular but pernicious mischaracterization of business” and based on confusion about the nature of accountability. For example, business cannot be held strictly accountable to competitors and media coverage. A corporation must take such constituencies into account, but cannot be held accountable. Sternberg correctly highlights that the essence of contractual relationship is missing in the stakeholder approach.

Along the same lines, University of Michigan’s Kenneth Goodpaster argues that the duty to stockholders is more general and proactive than what other constituencies can claim. Moreover, the legal asymmetry between stockholders and stakeholders leads to a potential conflict of interest, where corporate management in most circumstances will find themselves having to make a choice between fulfilling a fiduciary duty and serving stakeholder interests. Goodpaster calls such phenomenon the stakeholder paradox: “It seems essential, yet, in some ways illegitimate, to orient corporate decisions by ethical values that go beyond strategic stockholder considerations to a concern for stakeholders generally.”

Although it is primarily a legal term, Goodpaster uses fiduciary duty to describe the purely ethical duty of a person in a position of trust. It seems that Goodpaster considers a corporation’s ethical orientations as illegitimate as they represent a betrayal of trust. Cambridge’s John Hendry argues that stakeholder theory failed to explore the space that exists between “impossible idealism and mundane realism.” This means that it “runs the risk of presenting a weakened challenge to the primacy of stockholder interests and an inadequate basis for policy discussions.” As a possible way–out, he defends on the one hand a “pragmatic examination of the potential for institutional reform,” and on the other hand a “differentiation and mundane empirical understanding of different stakeholder interests on the other.”

The dominant view is also increasingly being questioned by a wide variety of other academic disciplines. New insights question conventional wisdom that humans act rationally, behave consistently, react predictably and selfish. Physics is no longer the main supplier of ideas and explanations for the discipline of economics. The importance of behavioral psychology for explaining economics was highlighted with the Nobel Prize for Economics in 2002, jointly awarded to Princeton psychologist Daniel Kahneman and Vernon Smith. Kahneman’s work has made decisive contributions in the field of behavioral economics, a field that challenges the neoclassical assumption that economics agents (both individuals and institutions) are driven by rational choices. Since 2002, cognitive psychology has become a legitimate discipline to analyze economic motivation. It has increasingly invaded the business ethics debate as well.

According to Eric Beinhocker, modern economic behavior should be explained as an evolutionary process. Economics has become so complex that only the laws of biology can explain how humans survive in a fast–changing, dynamic and complex environment. According to Beinhocker, economy is a complex adaptive system, which works under the same logic as biological evolution. The biological laws of differentiation, selection and amplification are crucial to understand economic behavior nowadays. Criticism has also been voiced in the area of political sciences. German philosopher Jürgen Habermas, for example, has argued that the dynamics of economic globalization and free markets are clearly out the control of consensual rational judgments. Habermas warns that citizens are increasingly becoming depoliticized.

In addition to these serious questionings from the fields of psychology, biology and political sciences, there has also been growing criticism from inside Wall Street. Corporate scandals, including the high profile bankruptcies of Enron, WorldCom and Parmalat, have questioned the desirability of a free–market system. Only days before collapsing, Enron exerted an almost mythical fascination to stock traders and financial commentators. The hype around its sky–rising stock price in the late 1990s made Enron an irresistible phenomenon. The spectacular collapse of Enron, the subprime mess and the rapidly heightening concerns about global warming have done more to business ethics than well–intentioned corporate governance structures ever could have imagined. In the European Union, corporate misconduct is making a decisive impact on new legislation and initiatives to make business sustainable, just and equitable. In the United States, public opinion is increasingly becoming the main driver of litigation.

Even Wall Street guru Bill Gross, who manages the world’s largest bond fund out of California’s Newport Beach argues that “asset prices are no longer entirely a function of the real economy: it can be just the reverse.” He argues as follows: “The real economy is being driven by asset prices, which in turn are influenced by financial flows of non–historic, composition, and uncertain longevity.” By squeezing into one single number matters that are rather too complicated to be fully understood, no progress is achieved and alienation is often the result.

Louvain’s outspoken Economics Professor Paul de Grauwe warns for another related problem: “Asset bubbles create optimism and euphoria, stimulating economic activity. The crashes that follow can lead to pessimism and downturns in economic activity.” Crashes are especially painful for emerging markets. Econometric modeling might satisfy our psychological desire, but it is unable to thoroughly understand complex realities. Columbia University Professor Edmund Phelps, who was awarded the Nobel Prize for Economics in 2006, rejects orthodox neoclassical economics for similar reasons. According to Phelps, the distinctive character of the modern economy is revealed by its endemic uncertainty, ambiguity, diversity of belief, specialization of knowledge and problem solving. This is especially urgent for underdeveloped countries, which face destructive economic imbalances, misuse of political power and suppression of liberties, not only because of deliberate efforts of its leaders, but often also due to erroneous judgments and false glorification of the positive scientific character of economics.

2.2. Thomas Donaldson’s Integrative Social Contract

Due to various deficiencies of the stockholder, shareholder and corporate governance models, there has been a renewed interest in the social contract models. The reemergence of the social contract model is mostly visible in continental Europe, where social welfare legislation has been more pronounced than in the Anglo–Saxon countries. Before highlighting the two most widely praised contemporary social contract models of John Rawls and Thomas Donaldson, this study will provide a quick historical overview of the rather rich tradition of contract theory.

The first hints at social contract reasoning are to be found in Book 2 of Plato’s dialogue The Republic. Hugo Grotius (1583–1645) defined social contract in the light of natural law theory. Hobbes (1588–1679) presented his social contract theories in Leviathan in 1651. The ethical foundation of Hobbes’s theory is the view that all humans are psychologically driven by selfish interests. According to Hobbes, individuals are better off living in a world with moral rules than one without moral rules for purely egoistic reasons. Selfishness alone leads to the adoption of a basic set of rules which will allow individuals to live in a civilized community. John Locke (1632–1704) developed the idea that individuals have a natural right to freedom and to private property. His reasoning starts with the so–called state of nature, an imaginary circumstance in which there is no government. Under such conditions, individuals would be the political equal of all others.

Unlike Hobbes, the Swiss–French philosopher Jean–Jacques Rousseau (1717–1778) argued that the state of nature is not a state of war, but a state of individual freedom where creativity flourishes. In his widely read The Social Contract of Principles of Political Right, published in 1762, he argues that a social contract is established to regulate social interaction in civil society. By entering into a social contract, people place restraints on their behavior, which in return enables a process of community building. In Rousseau’s viewpoints, rationality and morality are only possible within civil society if people agree to a social contract. Rousseau moreover holds that a social contract between citizens establishes an absolute democracy, which is ruled by the general will, or what is best for all people. This communitarian perspective finds its clearest expression in the general and abstract laws of the state.

A major breakthrough in the business ethics debate was provided by the American philosopher John Rawls (1921–2002). His book A Theory of Justice (1971) presents “a conception of justice which generalizes and carries to a higher level of abstraction than the familiar theory of the social contract as found, say, in Locke, Rousseau, and Kant.” His social contract theory is not directed at a particular government or society. Instead, the guiding idea is that the principle of justice for the basic structure of society should be the object of an original agreement. The so–called principles of justice are determined by the choices which rational egoists would make in a hypothetical situation of equal justice.

Rawls uses a constructivist technique comparable to the one Kant used in the formulation of the categorical imperative for his moral philosophy. The method is called veil of ignorance, a concept that enables us to perceive a just state. This original position is devised behind a veil of ignorance, so that rational men would not know who they were, where they are, in which culture they live or even what generation they belong to. By conceiving of ourselves as potential constructors of an imaginary just future society, but being ignorant of our ethnic and socio–economic background within that society, Rawls strips away all those elements of information which he deems irrelevant to key questions concerning justice. Rawls moreover defends the employment of a veil of ignorance to ensure impartiality.

According to Rawls, the two basic principles of justice that a rational person would choose in the original position are (1) each person is to have an equal right to the most extensive basic liberty comparable with a similar liberty for others; (2) social and economic inequalities are to be arranged so that they are both (a) reasonably expected to be to everyone’s advantage, and (b) attached to positions and offices open to all. The first principle is related to basic liberties of citizens such as political liberty (the right to vote and to be eligible for public office); freedom of speech and assembly; liberty of conscience and freedom of thought; freedom of the person along with the right to hold personal property; and freedom from arbitrary arrest and seizure as defined by the concept of the rule of law. The second principle applies to the distribution of income and wealth and to the design of organizations that make use of differences in authority and responsibility, or chains of command. Concerning equality of opportunity, Rawls envisions only one way to prevent the stronger or richer in his just state from overpowering the weaker or poorer by enforcing the maxim “no redistribution of resources within such a state can occur unless it benefits the least well–off.” Rawls stresses that “these principles are to be arranged in a serial order with the first principle prior to the second. In his quest for distributive justice, Rawls finally argues that “all social values – liberty and opportunity, income and wealth, and the bases of self–respect – are to be distributed equally unless an unequal distribution of any, or all, of these values is to everyone’s advantage.”

Rawls admits that thus far the whole concept of justice is rather abstract and therefore requires interpretation. In an attempt to bring it down to practical arrangements, Rawls justifies that it is possible for men to give up some fundamental liberties in return for social and economic gains. In this sense, he launches the principle of redress, which holds that in order to treat all persons equally, to provide genuine equality of opportunity, society must give more attention to those with fewer native assets and to those born into the less favorable social positions. He also introduced the difference principle which holds that social and economic inequalities are just only if they are “to the greatest benefit of the least advantaged” and “open to all under conditions of equality of opportunity.”

Rawls’ egalitarian principles have not been immune to criticism. In social contract theories, morality is based exclusively on uniform social agreements that supposedly serve the best interests of those who make the agreement. But who should be in charge of making those decisions? A contractarian approach is questionable as it includes morally arbitrary choices. From the right, Rawls’ principles have been criticized as unsympathetic to talent, superior achievement, individual excellence or entrepreneurship do not bring the best out of a society. In the context of business or economics, performance will be meager. Recognizing this criticism, Rawls argues that talented people do not deserve moral credit and social rewards for developing their talents and for using them for society’s benefit. As a compromise, Rawls wants to redirect society’s educational resources from students of high capability to those of lower capacity. From the left, Rawls has been criticized for his general conception of justice, which is based on the trickle–down effect. Critics claim that there is nothing just about his theories as it is a familiar approach to legitimizing injustice. Rawls’s hypothetical definition of justice implies a justification of present socio–economic inequalities by claiming that things will improve in the long run.

Wharton Professor Thomas Donaldson integrated the all above mentioned contract theories into a modern normative business ethics model. He describes a contract as “between productive organizations and individual members of society, not between productive organizations and some supra–individual, social entity.” In Donaldson’s interpretation, a contract is a form of moral legitimation of corporations understood as productive organizations. His main goal is not to legitimize or delegitimize an existing order but to merge philosophical concepts and practical realities for people facing the ethical challenges posed by business. His model is integrative as it tries to combine the hypothetical or macro contract, reflecting a hypothetical agreement among rational members of a community on one side, and the extant or micro contract, which reflects an actual agreement within a community, on the other side.

According to Donaldson, an implied social contract is based on three principles: “A productive organization should enhance the long–term welfare of employees and consumers in any society in which the organization operates; a productive organization should minimize the drawbacks associated with moving beyond the state of nature to a state containing productive organizations; a productive organization should refrain from violating minimum standards of justice and of human rights in any society in which it operates.” Local economic communities may specify ethical norms for their members through microsocial contracts within a so–called moral free space. Mangers, moreover, should act consistently with hypernorms, which he defines as “principles so fundamental to human existence that they serve as a guide in evaluating lower level moral norms.” The process of identifying hypernorms is considered to be indispensable to examine corporate involvement. In practice, principles falling under efficiency hypernorms include “respect for intellectual property; engaging in fair competition and avoiding monopolies; avoiding nepotism and ‘crony capitalism;’ not abusing government relationships; avoiding bribery and respecting environmental integrity.”

In sum, Donaldson proposes two levels of social contract: a macro–social contract that serves as the set of principles or hypernorms that contractors would agree upon to ensure procedural fairness, and micro–social myriad extant contracts that are concerned with how communities actually govern themselves within their moral free space. The main strength of this framework is its simultaneous prescriptive and descriptive nature. Donaldson’s method implies that the moral foundations of productive organizations can be understood through a thought experiment in which the terms of a hypothetical contract are delineated. The intellectual presumption of his social contract model is that all productive organizations, including corporations, are artifacts; that they are in part the products of our moral and legal imagination, and as such, they are to be molded in the image of our collective rights and societal ambitions. Donaldson makes a further distinction in the legal perspective, suggesting a tentative list of ten fundamental rights which every actor in the international arena, including nation states and multinational corporations, must respect. These ten rights include freedom of physical movement; ownership of property; freedom from torture; fair trial; non–discriminatory treatment; physical security; freedom of speech and association; minimal education; political participation and subsistence.

Although Donaldson is the first to admit that this minimal set is not conclusive or complete, one can immediately raise serious questions about how complex concepts, such as ownership, education, and participation have to be interpreted in different cultural settings. According to Donaldson, these rights have to be interpreted according to an algorithm that is based on the home country’s culture. Nation states are required to proactively aid the poorest, whereas multinational corporations possess this duty as a maximal not minimal moral requirement.

The theoretical foundation of the Donaldson integrative social contract model has been criticized by several business ethicists. There is the core question of whether the assumptions of a macrosocial contract are consistent with social beliefs and practices in other cultural settings or in a context of socio–economic underdevelopment. Hypernorms are idealistic and vague. A moral free space, or a microcontractor’s hypernorm, is supposedly discretionary and limited at the same time, but who will draw the line? By sanctioning moral free space for economic communities, Donaldson’s model can be accused of ethical relativism. When an individual or corporation leaves his hometurf, moral clarity often blurs. As philosopher Michael Walzer has noted, “there is no Esperanto of global ethics.”

According to Robert Phillips, the hypothetical character of Donaldson’s social contract model makes it “tenuous.” He argues that if most contracts are unwritten, then finding consent is rather a tricky endeavor. Along the same lines, Van Buren argues that “trying to measure a favorable attitude (tacit consent) in fact indicates no consent at all exists.” Hasnas also rejects the hypothetical character of the contract model as he sees no reason to accept the premise that justice should be based on hypothetical rather than real consent as expressed in actual business contracts and structures. Donaldson counterbalances these objections by claiming that the social contract is explicitly fictional or hypothetical: “If the contract were something other than a fiction, it would be inadequate for the purpose at hand: namely revealing the moral foundations of productive organization.” In other words, the moral strength of the social contract is not derived from the consent of the parties involved as if they had struck a deal. Velasquez questions Donaldson’s assumption that all cultures must accept the body of absolutist hypernorms as binding through a universal social contract, whereas the less fundamental local norms are those that derive from local and regional social contracts. According to Velasquez, this model does not enable us to know “what the aggregated preferences of everyone in the world would be” nor is it possible to know “if there is a unique solution to the problem of aggregating their preferences.” Velasquez questions the existence of metaphysical assumptions, inevitably culturally biased, about the nature of the contractors” in Donaldson’s model.

In addition, Velasquez argues that Donaldson’s contract model is too narrowly based on an ideal egalitarian Western society which does not take into account the intrinsic problems of a more hierarchic model of society, which is often the case in developing countries. Velasquez also criticizes the fact that Donaldson’s theories are too narrowly rights–based, which are typical for an individualistic Western culture instead of the pursuit of collectivist goals. According to Velasquez, these are “clearly parochial assumptions.” Velasquez questions the hierarchy or the prioritization of rules. He argues that “the mere fact that a set of norms is prevalent in a region does not constitute a justification of those norms, and so it is arbitrary to say (on that basis alone) that those norms should be followed by anyone.” Velasquez asserts that “none of the local norms prevalent in any region of the world has been arrived at through the kind of bargaining process proposed by social contract theories.” In practical terms, this means that the social contract theory leaves corporate managers too much to their own arbitrary devices. As an alternative, Velasquez suggests the definition of a standard account of moral reasoning. Under the standard account, moral reasoning proceeds by subsuming particular cases under general rules. In his model, moral reasoning is hierarchical with specific moral judgments at the bottom of the hierarchy and general abstract moral principles such as Kant’s categorical imperative, Mill’s principle of utility or Rawls’s difference principle at the top of hierarchy. The problem with such a model is that it remains unclear how many principles – and which principles in particular – are at the top of the hierarchy.

In sum, the most fundamental objection to Donaldson’s contract model resides in its voluntary nature. Psychologically, people might be interested in following the rules; opportunism however seems too closely related to human nature. Business managers operating in a context of underdevelopment, where legal frameworks and law enforcement are weak or nonexistent might not be ethically bound to keep a close eye on the social contract. It is also argued that disproportionate expectations from business and society can undermine a corporation’s competitiveness and efficiency.

2.3. Michael Porter’s Strategic Corporate Social Responsibility

The most popular contemporary business ethics model at the present moment is elaborated by Michael Porter. The Harvard Business School professor has been the most influential scholar in the field of strategic management over the last 25 years and is increasing influential in the business ethics debate. Porter has moved from elaborating on Milton Friedman’s ideas regarding philanthropy in the early 1980s, to proposing a so–called strategic philanthropy model at the turn of the millennium, to nowadays endorsing a context–focused strategic CSR model. This study will highlight the rationale behind these frameworks.

In the American context, philanthropy has been popular ever since its blueprint was written by steel tycoon Andrew Carnegie (18351919). In an essay published in 1889, he famously argued that “the man who dies rich dies disgraced.” He wanted to make the point that the wealthy have a duty to devote their fortunes to poor in order to avoid growing inequality. For Carnegie, growing inequality was the inescapable price of the wealth–creation that made social progress possible. Inspired by Carnegie’s words, thousands of hospitals, libraries, universities and welfare services in the United States are funded by private donations. This stands in sharp contrast with more government–funded policies in Western Europe. Is it also worth highlighting that religiosity is one of the strongest predictors of propensity to make philanthropic contributions. Religiosity is equally an important explanation of why Americans make more philanthropic contributions than Europeans.

The fact that multi–billionaire Warren Buffett pledged $31 billion to the Bill & Melina Gates Foundation in late 2006 is a reminder that the philanthropic sector remains popular and influential in the United States. However, it should also be noted that the growing trend of multi–billion contributions increasingly blurs the line that separates the private and the public sector. Critics also argue that Buffett’s donation generates unease about lack of accountability. Michael Porter argues that the way most corporate philanthropy is practiced today is diffuse and unfocused. Following Friedman’s rationale, Porter argues that most corporate philanthropy “consist of numerous small cash donations given to aid local civic causes or provide general operating support to universities and national charities in the hope of generating goodwill among employees, customers, and the local community. Rather than being tied to well thought–out social or business objectives, the contributions often reflect the personal beliefs and values of executives or employees.” In addition, Porter argues that “one of the most popular approaches – employee matching grants – explicitly leaves the choice of charity to the individual worker. Although aimed at enhancing morale, the same effect might be gained from an equal increase in wages that employees could then choose to donate to charity on a tax–deductible basis. It does indeed seem that many of the giving decisions companies make today would be better made by individuals donating their own money.” Porter, however, does not blindly follow Friedman’s arguments. Friedman’s two implicit assumption – that social and economic objectives are separate and distinct, so that a corporation’s social spending comes at the expense of its economic results, and that corporations, when they address social objectives, provide no greater benefit than is provided by individual donors – only hold true when corporate contributions are “unfocused and piecemeal, as is typically the case today.”

Around the turn of the millennium, Porter decisively moved beyond Friedman’s model by convincingly defending a more strategic interpretation of philanthropy: “Corporations can use their charitable efforts to improve their competitive context – the quality of the business environment in the location or locations where they operate. Using philanthropy to enhance context brings social and economic goals into alignment and improves a corporation’s long–term business prospects – thus contradicting Friedman’s first assumption. In addition, addressing context enables a corporation not only to give money but also to leverage its capabilities and relationships in support of charitable causes. That produces social benefits far exceeding those provided by individual donors, foundations, or even governments. Context–focused giving thus contradicts Friedman’s second assumption as well.”

According to Porter, “current programs will likely fall into three categories: (1) communal obligation: support of civic, welfare, and educational organizations, motivated by the company’s desire to be a good citizen; (2) goodwill building: contributions to support causes favored by employees, customers, or community leaders, often necessitated by the quid pro quo of business and the desire to improve the company’s relationships; and (3) strategic giving: philanthropy focused on enhancing competitive context, as outlined here.” Porter concludes that the more closely a corporation’s philanthropy is linked to its competitive context, the greater the corporation’s contribution to society will be. However, where a firm neither adds value nor derives benefits, then philanthropic commitment should be left – as Friedman already asserted – to individual taste.

Michael Porter argues that a corporation can considerably contribute to society’s welfare by focusing on context–focused strategic philanthropy. In order to be strategic, a corporation has to overcome conventional forms of philanthropy or charity, which are often diffuse and unfocused. Conventional forms of philanthropy continue to be widespread for several reasons. Most importantly, traditional forms of philanthropy are strongly favored through tax rules and regulations. This is especially true in the United States where corporate charitable expenditures on cause–related marketing jumped from $125 million in 1990 to an estimated $828 million in 2002. Arts sponsorships, for example, accounted for an extra $589 million in 2001. US–based foundations hold over $330 billion in assets and contribute over $20 billion annually to educational, humanitarian, and cultural organizations of all kinds.

Conventional philanthropy is characterized by institutions such as the Ford and Rockefeller Foundations. The green revolution, for example, had its roots in a joint–research of these foundations. Their programs developed new strains of wheat and rice that doubled and tripled crop output per acre. Within six years, India doubled its rice production, and Mexico, once an importer of wheat, became an exporter. The Carnegie Foundation has had a similar decisive impact on medical education in the United States. Traditional forms of philanthropy enjoy popularity in corporate boardrooms as relatively small amount of cash donations given to local civic causes can generate a tremendous amount of goodwill, strengthen a corporation’s reputation, and increase employee loyalty. Philanthropy enhances corporate morale.

Due to its popularity and widespread acceptance, Michael Porter argues that the corporations should use philanthropy “to improve their competitive context – the quality of the business environment in the location or locations where they operate” According to Porter, “using philanthropy to enhance context brings social and economic goals into alignment and improves a company’s long–term business prospects.” Moreover, “addressing context enables a company not only to give money but also to leverage its capabilities and relationships in support of charitable causes. That produces social benefits far exceeding those provided by individual donors, foundations, or even governments.” According to Porter, Cisco is a good example of a corporation, which has begun to use “context–focused philanthropy to achieve both social and economic gains.” Its ambitious educational program – the Cisco Networking Academy – trains computer network administrators, and thus indirectly alleviates potential constraints on its growth in the future. Apple Computer, for example, has a long tradition of donating computers to schools. Such strategic philanthropic activity is a means to introduce its products to young people while expanding its potential market. In rethinking where to focus their philanthropy and how to give, a corporation can combine its economic and social objectives in a competitive and strategic way. Eventually, the social and economic goals are no longer inherently conflicting but integrally connected. Porter concludes that the more closely a corporation’s philanthropy is linked to its competitive context, the greater the corporation’s contribution to society will be. However, where a firm neither adds value nor derives benefits, then philanthropic commitment should be left – as Milton Friedman already correctly asserted – to individual taste.

More recently, Porter has highlighted the strategic link between competitive advantage and corporate social responsibility. According to Porter, such approach is warranted as most CSR efforts are counterproductive: “First, they pit business against society, when in reality the two are interdependent. Second, they pressure companies to think of corporate social responsibility in generic ways instead of in the way most appropriate to each firm’s strategy. The fact is, the prevailing approaches to CSR are so disconnected from strategy as to obscure many great opportunities for companies to benefit society.” In order to overcome these weaknesses, Porter proposes a fundamentally new way to look at the relationship between business and society that does not treat corporate growth and social welfare as a zero–sum game. Corporations should instead identify the social consequences of their actions, discover opportunities to benefit society and themselves by strengthening the competitive context in which they operate, determine which CSR initiatives they should address and find the most effective ways of doing so.

The interdependence between business and society takes two forms in Porter’s model. On the one hand, there are the so–called inside–out linkages, in which corporate operations are directly having an impact on society. On the other hand, there are outside–in linkages, in which external societal forces are having an impact on corporations. The model furthermore categorizes three general ways in which corporations should intersect with society. First, Porter distinguishes generic social issues, which are related to corporate operations that are not significantly having an impact on society. In other words, issues which are not material to the corporation’s long–term competitiveness.

In the second place, value chain social impacts, which refer to normal corporate operations significantly impacting the wider society. In the third place, social dimensions of competitive context, where social issues affect the underlying drivers of corporate competitiveness. In addition, Porter divides these three categories into two primary modes: responsive CSR should address generic social impacts through good corporate citizenship and value chain social impacts by mitigating harm from negative corporate impacts on society. The second mode is strategic CSR, which enables value chain social impact to be transformed into activities that benefit society. Porter also argues that strategic CSR is capable of advances strategic philanthropy, which in return can potentially leverage areas of competitiveness.

Semiconductor giant Intel is an example where strategic CSR is boosting its competitive advantage, especially in the area of manufacturing processes, supplier chains, employee relations, and intellectual capital. The corporation has launched a system of assessments and audits that yields hard data regarding the social and environmental performance of its suppliers, enabling the suppliers to become part of its own so–called continuous improvement process. According to Julie Gorte, Calvert’s director of social research, “Intel beats its peers on environmental impact, achieving substantially better–than–average reductions in emissions, recycling–recovery ratios, compliance, and reduction of production waste.” Intel’s willingness to be transparent and proactive on business ethics issues has raised its visibility and reputation. Consequences for a firm’s reputation are obviously crucial as they might significantly impact the firm’s cost of capital, and its ability to sell products.

2.4. Roger Martin’s Virtue Matrix

A third model, equally popular in North American academic circles, is the so–called virtue matrix. The model was established by Roger Martin, the Dean of the Rotman School of Management at the University of Toronto, and invented to replace the outdated shareholder model. The matrix is a conceptual tool based on Aristotelian virtue ethics and distinguishes between two sets of corporate responsibilities. The first one is termed instrumental, explicitly geared towards shareholder value enhancement. Examples are norms and conventions, which have been incorporated by legal regulations. The other set is termed intrinsic, which activities are neither immediately visible, nor explicitly geared toward shareholder value.

Martin’s virtue matrix furthermore consists of four quadrants. The bottom two form the foundation or civil foundation, whereas the top two form the frontier. The left civil foundation quadrant is an accumulation of customs, norms, laws, and regulations, which promote socially responsible activities and enhance shareholder value. The bottom right quadrant represents compliance, containing conduct required by law or regulation. The line between the quadrants is not fixed. Some activities move back and forth between the bottom two quadrants as certain societal behavioral patterns change throughout time and space. Certain labor rights, for example, were part of the bottom left quadrant in the past, but have now moved up to opposite side. The bottom quadrants are deep and robust in developed countries, and shallow and fragile in developing countries.

The top two quadrants of the matrix are called the strategic and structural frontiers. Activities in these quadrants are mostly intrinsically motivated. The upper left strategic frontier eventually might result in additional shareholder value. According to Martin, “socially responsible corporate practices in the strategic frontier tend to migrate to the civil foundation as other companies imitate the innovator until the practice becomes the norm.” Pharmaceutical corporations providing cheap medicine pro bono for tropical diseases, but not justified from a viewpoint of financial returns, are an example. The upper right quadrant is the so–called structural frontier, consisting of activities that are intrinsically motivated but contrary to the interests of shareholders. Not shareholders but society is the main beneficiary of corporations pushing the structural frontier. Examples are corporations refusing to pay bribes to win overseas contracts. At first sight, shareholders seem to lose out, whereas society stands to gain. In the long term, however, both shareholder and stakeholders are reaping the benefits. Martin’s ultimate goal is to show where corporations stand in the matrix. For a corporation to earn public credit, it has to focus on activities that reside in the upper quadrants. This becomes especially clear in the case of pharmaceutical corporations, which so far have been unable to eradicate tropical diseases such as malaria, dengue fever and tuberculosis due to a lack of strategic funding.

The virtue matrix makes clear that the depths of the civil foundation or bottom two quadrants are crucial in the global business ethics equation. Martin argues that global corporations have an essential role to play especially in the low–income countries, as they can induce employment and raise environmental standards. Martin argues that “globalization can ‘average up’ the world’s civil foundations.” At the same time, Martin warns that corporations should not engage in ‘averaging down’ business practices. Notorious examples are corporations using underdeveloped regulatory environments in low–income countries to dump waste or to abuse cheap labor. Such corporate practices should be condemned as inconsistent with the home countries’ civil foundation. Martin’s virtue matrix is interesting tool to frame the business ethics debate. At the practical level, it can help corporations to visualize business dilemmas and break barriers to increase the supply of corporate virtue, which are indispensable to average up the civil foundation. According to Martin, the ingredients needed to innovate and consolidate the strategic frontier are courage to undertake bold initiatives on the part of executives and peer encouragement. At the structural frontier, legal and economic incentives are a sine qua non for the advancement of the civil foundation.

In order to assess the practical value of value matrix, Martin developed a set of explicit design parameters that would produce – if adhered to – an effective model for a chief executive officer to use to pursue exemplary corporate citizenship. Martin deliberately focuses on the role of the CEO because in any corporation, the CEO must ratify the major decision made in respect of corporate citizenship and “hence must have a decision–making model in his or her head that enables understanding and evaluation of those decisions.” Martin therefore argues that it is not unreasonable to use “the CEO as the ultimate focus of the evaluation of model effectiveness.”

Martin distinguishes seven design parameters against which the effectiveness of CSR models can be judged, three in the area of usability, one in desire and three with respect to ability to produce beneficial results. The first design parameter with respect to usability is to be connectable: “a model must be connectable to other accepted managerial tools and models.” In the second place, it has to be concrete: “a model must be sufficiently concrete for a CEO to be able to translate its inferences into action.” In the third place, it has to be measurable: “in order to be useful, a tool needs to have the results that it produces be measurable.” The single design parameter with respect to CEO desirability is to be organic: “a model must be linked to the true world of the CEO as a human being, not a profit–maximizing automaton.” Finally, there are three design parameters related to the capacity of the model directed at assisting the CEO producing beneficial action given that the CEO sees the model as usable and desirable. In the first place, it has to be particular: “a model must be able to provide decision–making assistance to CEOs across a wide array of particular situations.” In the second place, it has to be evolutionary: “standards for corporate citizenship have not been and are unlikely to remain static over time.” In the third place, it has to be communicable: “in order to be effective, the model must be understandable to the audiences involved.” According to Martin, these seven design parameters can be used to assess the effectiveness of CSR models from the point of view of the well–intentioned CEO.

More recently, Martin has focused on an intriguing new model of social entrepreneurship. According to Martin, social entrepreneurship is “an appealing construct precisely because it holds such high promise.” However, he warns that the concept is a mixed blessing: “On the positive side, it connotes a special, innate ability to sense and act on opportunity, combining out–of–the–box thinking with a unique brand of determination to create or bring about something new to the world. On the negative side, entrepreneurship is an ex post term, because entrepreneurial activities require a passage of time before their true impact is evident.” Martin here correctly warns that the notion is still too closely linked to Schumpeter’s analysis, in which entrepreneurial spirit is defined as creative destruction. In the conception of Schumpeter, the role of an entrepreneur role has a paradoxical impact on society, both disruptive and generative.

Martin equally wants to dispel the notion that the difference between an entrepreneur and a social entrepreneur can be ascribed simply to motivation, as if the former is driven by money and the latter by altruism. Such standoff is indeed misleading. Martin defines a social entrepreneur as somebody who knows how to identify an inherently unjust equilibrium that causes exclusion or suffering of a segment of society and that is lacking the means to achieve any transformative benefit on its own. In return, a social entrepreneur is convinced that there an opportunity exists in such unjust equilibrium. In order to break down the status quo or hegemony, a social entrepreneur has to forge a new, stable equilibrium that releases trapped potential or alleviates suffering. Martin makes clear that social entrepreneurship is intrinsically linked to and can be reformulated through social activism. According to Martin, who was named one of Business Week’s seven Innovation Gurus in 2005, good examples of successful social entrepreneurship include fair–trade product certification and microcredit schemes. Martin’s virtue matrix and social entrepreneurship model are valuable tools for management to transform corporate morale and mission, culture and leadership. In being instrumental, normative, descriptive and managerial, the virtue matrix has the promise the evaluate competing stakeholders claims, stimulate a much–needed debate and encourage corporate business leaders to be bold and innovative.

3. Preliminary Conclusion: Towards a Paradigmatic Shift

The dominant academic view, inspired on the writings of Smith, Hayek and Friedman, convincingly points at the specific advantages of competitive free markets. First, free markets encourage creativity and entrepreneurship. Second, free markets foster efficiency and provide incentives for production at the lowest cost. A third characteristic is that they require no central direction or organization. Free markets require no governmental interventions in order to function. Free markets are associated with freedom of choice and let individuals act in their own best interest. These specific advantages have become overwhelmingly evident since the demise of the totalitarian Soviet empire.

Despite these obvious, rigorous strengths of the competitive free markets model, there are several limitations and caveats. First, it has become clear that the assumption that business operates in a morally neutral arena is fallacious. Louvain’s leading moral theologian and business ethicist Professor Johan Verstraeten argues that the instrumental characteristics of a corporate manager are often “grounded inextricably in a mechanistic perception of reality typified by an anthropological reduction.” He refers to expressions such as “reengineering the Corporation’ (the enterprise as machine!), human resources (the human person as material reserve), workforce (reduction of the human person to a source of energy) and the ubiquitous obsession with control and evaluation.” These expressions indeed confirm a mechanistic perception of the human being, which is dangerous. Along the same lines, Alford and Naughton convincingly argue that “by elevating shareholder wealth to the status of the ultimate good, the shareholder model in effect erects a ‘tyranny of foundational goods,’ inhibiting managers from considering more excellent goods except as instruments to increase profits.”

In the same spirit, MacIntyre argues that “there are strong grounds for rejecting the claim that effectiveness is a morally neutral value.” For MacIntyre, the concept of effectiveness in the context of corporate business is “inseparable from a mode of human existence in which the contrivance of means is a central part of the manipulation of human beings into compliant patterns of behavior.” He correctly concludes that only “by appeal to his own effectiveness in this respect that the manager claims authority within the manipulative mode.” All these critiques point at the fragile foundations of the dominant academic view.

It has become clear that corporations are not merely value–free private institutions making money, but social entities embedded in a larger society. Their dealings are legitimized as it intends to contribute to the welfare and well–being of surrounding communities which already existed prior to its arrival on the scene. Moreover, corporations are not static entities, but rather dynamic bodies, which interacts permanently and dialectically with the ecological and cultural environment. It is only in the light of this dynamic relationship between the corporation and its physical and cultural environment, that our ethical problems can be understood adequately.

The theoretical inconsistencies or practical weaknesses of the dominant academic view are not an excuse for corporations to surrender to unreasonable expectations set by society. Arbitrary expectations are mostly demands of anti–business activist groups, which are hostile to the free–market economy. According to Henderson, “the effects of enforced stringency and uniformity are especially damaging in labor markets. Regulations made in the name of ‘social justice’ or ‘positive’ human rights, whether by governments or businesses, can undermine freedom of contract and thus deprive people of opportunities. Those who suffer most from such actions are often the worst off.”

INSEAD Professor Ethan Kapstein convincingly warns against the use of “an ethics of intimidation,” especially in the context of the developing world. He argues that the rules of engagement (laws) in the area of corporate ethics are often too weak to protect the environment. According Kapstein, such weakness “opens the door to legitimate disputes over interpretation and enforcement.” Moreover, “when profound differences arise over corporate social responsibility in such areas, the parties involved should set out the advantages and disadvantages associated with adopting higher standards before declaring any proposed policy solution to be the obvious best choice.” Kapstein argues that such practice is paramount to an ethics of intimidation.

Along the same lines, University of East Anglia Professor Timothy O’Riordan argues that sustainable development is “deliberately vague and inherently self–contradictory so that endless streams of academics and diplomats could spend many comfortable hours trying to define it without success.” According to O’Riordan, sustainability is merely used as a mediating term to bridge the widening gulf between developers and environmentalists. Mahathir, Lutzenberger, and Jhamtani warn that the fashionable sustainable development bandwagon is a Western, if not white middle–class social movement, with a main objective to prevent developing countries from doing what those in the West have already done.

There is moreover no consensus on how to achieve just business or how to frame better the business ethics debate. On the one hand, free–market ideologues warn that a major undesirable consequence of attempts to moralize the corporation is the disincentive to entrepreneurship. Whistle blowing can be prompted by a desire for revenge due to personal disappointment. In the line of Friedman and Hayek, it is often argued that risk–taking and innovation are essential to a firm – and hence society – if it is to make efficiency gains. University of Buckingham Professor Norman Barry therefore concludes: “Developments in Anglo–American capitalism may render the arguments about corporate social responsibility a little passé.” For Barry, moral behavior is primarily a matter of learning the rules of just conduct. What really matters is a “generic moral code – which includes respect for justly acquired property; the sanctity of contract; the objective verdict of the market; (mainly) negative individual rights; and predictable, non–retrospective laws.” According to Barry, “the generic moral code, from which Humean conventions derive their ethical validation, is the only one capable of uniting the varieties of capitalism under a common set of moral principles. And that is the only business ethics that globalization requires.”

These and other serious questionings have slowly been integrated in business ethics manuals, which have grained credence at MBA (Masters in Business Administration) courses. Throughout the 1980s and 1990s, MBA students with a “social heart,” where sent off to non–governmental organizations, where their business insights were applied. Nowadays, the same students are getting top–jobs at multinational firms, as business ethics has grained importance on the corporate agenda. Fifty surveyed business schools reported a five–fold increase in the number of stand–alone ethics courses between 1999 and 2007, with 25 percent of the schools requiring students to take a course in business ethics. Old assumptions that business ethics is a soft subject – only for tree–huggers, veggie–lovers and scaremongers – is no longer shared. Business ethics in the MBA context is now about social entrepreneurism, about making the world a better place. Continuous corporate education programs and executive training should focus more on learning how to diagnose ethical issues in uncertain environments and how to take action to improve them. More research is warranted on business ethics pedagogy, not only to prevent future scandals, but also for teaching it in a transformational way. Besides inculcating particular moral values at home or in the workplace, a systematic training in thinking and reasoning about ethics is equally crucial to get a better feeling for the art of conducting business.

In sum, what has become obvious so far is that the state of global opinion on business ethics matters is seriously fractured. It remains to be been whether a sort of global justice paradigm, which could inspire and benefit us all, is desirable and feasible. Would a radically different approach be capable of breaking the deadlock? In the next part, I will analyze whether a moral–theological perspective can break the impasse.

(to be continued at "Older Posts" below)

A Moral–Theological Critique of Business Ethics – Between Pharisaic Moralism and Prophetic Morality

2008-03-23T20:57:00.005-03:00

PART II –

CORPORATE MORALITY IN THEOLOGICAL PERSPECTIVE

1. At the Crossroads of Economics and Theology

So far, this study has analyzed philosophical underpinnings, political assumptions, some managerial decision–making procedures, and socioeconomic implications of business ethics. The works of philosophers, politicians, economists, sociologists and corporate managers in business ethics have all contributed to present qualitatively different perspectives to the debate on ethical obligations, moral duties of corporations and its share– and stakeholders. So far, this occasional paper has made clear however that these approaches are not fully capable to grasp to magnitude of what is at stake in the business universe. It seems that the relationship between business and ethics remains profoundly paradoxical. The central question in this part is whether the discipline of moral theology can break an impasse.

The main objective of this second part is to examine whether an interdisciplinary dialogue between business ethicists and moral theologians can help to advance the debate. At first sight this seems a rather odd proposition. A dialogue between business ethics and moral theology seems problematic with many questions coming to mind. Is economics not about modeling and theology about dogmas? Is economics not about this world and theology about the other world? How does a theologian’s demand for solidarity square with an economist’s quest for profit maximization? Many economists doubt whether theologians indeed have a task of constructing a religiously informed public philosophy. Economics is most commonly regarded as essentially foreign to theology, as something rather opposite. It seems that economists ignore moral–theological questions at best. Or they treat the church’s teachings with contempt at worst. Theologians are often regarded as moralists engaged in pulpit bullying.

The argument that moral theologians are not adding value to the business ethics debate is shared by many. Sociologists, for example, argue that the declining influence of mainstream Protestantism and Catholicism in Western Europe is attributable to over–aggressive social activism, which has alienated the faithful. Economists often argue that churches, synagogues and mosques are supposed to preach about personal behavior and spiritual yearnings, about matters related to family. If the discussion is about business matters concerning profit and losses, the pulpits are supposed to remain silent. In the United States, it is often argued that the role of religious authorities is not to be anti–market or pro–market, but merely to be life affirming. Didn’t Jesus expel the money–chargers from the Temple? Didn’t Jesus refer to the Temple as his Father’s house which was being made into “house of trade” (John 2:16) or “den of robbers” (Matthew 21:13 and Mark 11:17)?

Yale University philosopher Richard De George argues that “theologians have not adequately addressed the question of whether there are particular theological tasks in the field as they define it, and whether, if they define it, the theological definition is different from the philosophical.” He furthermore argues that philosophers and theologians might have “similar research interests in business ethics” and that “a dialogue between them may be mutually beneficial.” However, arguing that theologians have a specific task carved out for themselves in the business ethics debate would go too far in his opinion. According to De George, theologians can argue strictly from reason, “but unless a theological argument has a theological premise, it is not clear what distinguishes it as a theological argument or conclusions.” He moreover downplays the role of theologians and preachers as they “often give the impression that they think the problems of international poverty will dissolve before love and charity.” He also argues that “the approach of many theologians to problems of world poverty focuses on individuals or the Churches themselves.” For De George, theologians have a legitimate task ahead of them in attempting “to change the allegiance of the Church in Latin America from its ties with the rich elites to solidarity with the poor masses.” At the same time, however, he warns that such involvement leans towards Marxism, which in itself is a dangerous choice: “If liberation theologians seek to overthrow and replace the free enterprise system with some sort of socialism, why should they be interested in the moral issues within the system that they wish to overthrow?” De George therefore questions whether liberation theology is really theology. De George concludes that there is only one ethics or morality: “There is not a Christian ethics, a Jewish ethics, a Muslim ethics, a secular ethics, and so on. Ethics is universal. What is right is right for all; what is wrong is wrong for all similarly placed.” If moral theologians have a role to play in the business ethics debate, then they should focus on developing character and provide motivation for acting morally.

A specific role for theology is not only downplayed by economists or philosophers, but also from within the church. In the first place, not many theologians seem to be interested in addressing business matters. Secondly, not many theologians have knowledge about economic models and systems. Lack of knowledge or sheer ignorance makes theological debates on matters related to economics often poor. However, the poor dialogue between economics and theology is not an excuse. A general lack of investigation is not to say that economics is irrelevant to theology. Thirdly, influential voices within the church see little advantage, attraction, need, or prospect to engage in a critical dialogue with the discipline of economics. Some theologians argue that a corporation does not need the imprimatur of a moral theologian to defend its pursuit of profit and justify tough managerial decisions.

In addition, churches throughout the world have a direct impact on economic life. Through pension funds, donations and institutional endowments, wealthy archdioceses in North America and Western Europe channel billions of dollars, which have important economic ramifications. The poorer archdioceses in the South often make explicit political statements, which have direct impact on economics and business life. Religion and theology are often used as a tool for confrontational social–economic change. Simply by making choices, which necessarily have an impact on society and culture, churches and theologians subject themselves to societal evaluations.

In the following section, this study will therefore defend the thesis that theological reflection on business practices is neither unrealistic nor unnecessary. It is neither uncalled for, nor counterproductive. This study will argue that business ethicists and moral theologians should meet each other at the crossroads of corporate morality. First, I will present a historical overview of the dialogue that already has taken place between business ethics and moral theology. As will become clear, the relationship has often been problematic and has taken distinct dimensions throughout the centuries.

2. Business Ethics and Moral Theology in Historical Perspective

Ever since Christianity arose in the Middle East, theologians and economists have persistently debated on the morality of economic systems, models and its decision–makers. Theologians and church authorities alike have especially played a major role and consequently had a huge impact on the world of finance in past centuries.

The most common way in which church officials and theologians have addressed issues related to business throughout the ages can be called the moralistic approach. General moral prohibitions against stealing and lying, and general moral demands for helping the poor and visiting the prisoners have been common throughout ages during the traditional Sunday sermon. As a result, Christian moral theology has a rich tradition of reflections on theological virtues of charity and prudence, just wage and justice. It moreover provided pastoral guidelines to avoid usury and avarice, mendacity and covetousness. Benedictine monasteries already started to teach that profit seeking is related to the love of God as early as in the sixth century. The moralistic approach has been merging religious and moral obligations.

Thomas Aquinas (1225–1274), the most famous Dominican priest, has been crucial in the Catholic tradition of moral theology. By turning Aristotelian categories into Catholic dogmas, he articulated the natural law tradition in the thirteenth century. His theology later on was incorporated in the great medieval manuals of moral theology. His most mature writings are to be found in the influential Summa Theologiae, which he ended in 1273. He defined the primary principle of natural law on the self–evident belief that “good ought to be pursued by action and evil avoided.” The five fundamental goods or natural laws consist of human life, the union of male and female, care of one’s children, a well–ordered society, and knowledge, particularly of God. These are the self–evident goods of the natural law, which humans are required to pursue and whose destruction is entirely forbidden.

Aquinas also revised Plato’s cardinal virtues, which include prudence, justice, courage, and moderation. These virtues enable a person to pursue fundamental goods. Aquinas’ teleological structure of moral theory leads from primary injunctions, which consist of the above mentioned five fundamental goods, down to secondary precepts, including normative claims regarding marriage, property, labor conditions and other issues. According to Aquinas, the fundamental principles of natural law are ultimately decrees implanted in human nature by God. Individuals can discover such decrees by carefully studying human nature. These are the theological claims intrinsically linked to the natural law theory.

For this study’s area of concern, it is important to realize that Aquinas did not regard the issue of private property as a natural right, but merely as a conventional means of securing an orderly society. According to Aquinas, the use of private property must serve the needs of all humanity. In referring to the state of poverty, Aquinas asserts that “all things are common property, so that there is no sin in taking another’s property.” Nonetheless, he adds that “temporal goods are ours as to their ownership, but as to their use, they belong not to us alone but also to those whose needs can be served from what we have over and above what we need.”

Regarding business transactions, Aquinas warns against (1) taking advantage of the buyer’s dire need or ignorance to extort a price for a product in excess of its just price (which is the price estimated by the market, as a function of the product’s utility to man and its relative scarcity); (2) failing to inform a buyer of a known product defect that may impose unknown risks on the buyer or lower its true value and by subsequently failing to adequately compensate the buyer; (3) pursuing profit as an end which has no limit instead of as a means for duly supporting oneself, one’s family, or one’s society; and finally (4) charging interest for money lent, a practice constituting usury since it appropriates a return for something which is deemed without value. Aquinas related profit to leading a virtuous life. He has no problem with business as long as it related to the craft itself: ergo negotiari secundum se non est illicitim. According to Aquinas, business becomes problematic if is leads to vice. Aquinas therefore distinguishes four virtuous ends to justify business enterprise: sustaining one’s household, helping the poor, the good of the public utility and gain as a due payment for labor.

In sum, Aquinas’ natural law theology is characterized by a teleological focus, an integrated approach of ethical principles and practical virtues; a concern for concrete moral dilemmas combined with a pragmatic rules of resolving an impasse; an immense confidence in the human capacity in resolving conflicts in a rational way, and a flexible, pragmatic way to resolve moral impasses in a contextual approach, adaptable to changing historical situations and cultural circumstances. According to Velasquez and Brady, Aquinas’ emphasis on reason, “imbued catholic moral theology with an extraordinary confidence in the ability of natural reasoning to grasp the fundamentals of morality, a confidence, in fact, that morality itself has an objective and rational basis and constitutes an intelligible orderly system.”

The scholastics of the Middle Ages also greatly deliberated on business matters. The Franciscan Pierre de Jean Olivi (1248–1298) was the first scholar to develop subjective utility theory. He pioneered the concept of capital as a fund of money invested in a business venture. Olivi’s theories were later picked up by the also Franciscan Bernardino of Siena (1380–1444) and Dominican Antonio Pierozzi of Florence (1389–1459), who classified money as something fungible and sterile. By arguing that pecunia pecuniam non parit (money does not breed money) the scholastics rejected the notion that money can bear fruit by being reinvested. By not allowing a distinction between capital and money, Catholics were forbidden to charge interest.

In the next century, the Spanish Scholastics of the School of Salamanca substantially advanced the debate. Martin de Azpilcueta (1493–1586), better known as Doctor Navarrus, and Tomas de Mercado (1530–1576) developed the notion of purchasing power parity of exchange rates and the supply and demand equation of the value of money. The School of Salamanca also raised serious objections to price regulation as it might distort markets and encourage corruption of public authorities. The Jesuit Luis de Molina (1535–1601) spread the Salamanca tradition to Coimbra and Evora in Portugal. Economic theory on commerce and development further flourished in the wake of the discovery of the Americas, the New World.

At a stage when the influence of the School of Salamanca was waning, another crucial contribution was made by a Flemish Jesuit. In his most well–know work entitled De justitia et jure, published in Louvain in 1605, the moral theologian Leonardus Lessius (1554–1623) reflected on issues related to international trade, money value and charging interest rates on loans. Lessius used the conclusions of his Spanish predecessors as point of departure but quickly established new theories. His work on justice and law has been praised by historians and economists for its nuanced treatment of business matters involving interest. Lessius’ insights were based on his close contact with the business community and financial establishment of Antwerp. The master of scholastic economic analysis was moreover the first scholar who consistently argued that creditors should be rewarded for lending money, because they temporarily forgo liquidity. The so–called carentia pecuniae clause holds that money in hand is worth more than portfolio paper held by a custodian. The value of liquidity emerges and will remain at the center–stage of finance. According to Lessius, by temporarily converting liquid assets into illiquid contracts, bankers and speculators should be rewarded. At the same time, however, Lessius argued that potential creditors should not keep too much liquid resources from circulation. The risk of a credit shortage or liquidity squeeze might cause higher interest rates, which for him is morally reprehensible.

Lessius is one of the first scholars who perfectly understood the functioning of the free–market system by pointing at the disastrous side–effects of price fixing and state intervention in periods of shortage. Lessius, however, should not be regarded as a market absolutist. He argues that a just price cannot simply be established by the market as a dynamic outcome of the law of supply and demand, but rather on the market by individual market players, who act as responsible moral subjects. Lessius clearly rejects a vita nummularia (life ruled by money) solely aimed at making money and acquiring riches (pecuniam ac divitias). For Lessius, there is a clear link between business and morality. The so–called iudicium prudens (prudent judgment) stands out throughout all his work.

One of the most prolific times of moral–theological writing on business ethics was the Reformation. The writing of Martin Luther (1483–1546) and Jean Calvin (1509–1564) heralded a new era for the relationship of theology and economics. The pursuit of profit by means of systematic and rational behavior, characterized by rational bookkeeping, was crucial in the advancement of capitalism. By living frugally, being austere and persistent, people could overcome their anxieties. The faithful were encouraged to make instrumental calculations of cost and benefit, as well as to employ a purely formal mode of thinking and reason. The notion that hard work, a sense of duty, moral character, self–control, the idea of work as a calling or God–given vocation, and perseverance would bring the good life associated with material wealth. Even more importantly, such a good life was attainable to all who would try it. Otherworldly austerity would eventually lead to the acquisition of wealth, investment, and systematic saving. Calvinists in Europe and later Puritans in America interpreted profit as a sign of salvation.

The theological teachings of Luther and Calvin transformed the moral attitude and ethical assumptions of Christianity that fostered the development of business, which previously were characterized by the virtue of poverty, asceticism and honoring intellectual life over commerce. Luther and Calvin fundamentally transformed these virtues, by emphasizing the glorious value of austerity, industry, and thrift. Calvinism introduced the notion of predestination, in which God not only foreknows, but also actively wills the salvation of some, and damnation of others. The emphasis given by Reformed pastors to the uncertainty of salvation had major psychological consequences for the masses. In their pastoral deliberations, preachers argued that there are signs of election. The clearest sign is obtaining material wealth, directly related to business activities. Preachers emphasized that people might not attain salvation by achieving business excellence, but they can have some assurance that they are at least on the way. Calvin argued that one is to serve not only in vocation, but also through one’s vocation (per vocationem).

The German sociologist Max Weber (1864–1920) first observed that the proportion of leading industrialists, traders, financiers, and technical experts was far greater among Protestants than Catholics in Europe of the sixteenth and seventeenth century. He grasped that something crucially important about the inspirational sources of capitalism. While contemplating on the origins of capitalism, Weber noticed that dedicated, industrious and persistent people were driven by a different work ethic, motivated to earn as much as they could and go constantly beyond their earlier gains. He concluded that Protestant, especially Calvinist, religious values leads people to have a moral duty to constantly better their condition. According to Weber, it was this Protestant Ethic that helped justify the capitalist system exactly by providing a moral justification for the pursuit of wealth, which was necessary for the rise of capitalism. Weber moreover demonstrated that the Protestant ethic, whose original intention was to remove all concern with works–righteousness, ended up pushing the faithful towards an unprecedented obsession with works. This unintentional and unforeseen consequence eventually propelled wealth creation and technological innovation.

Weber correctly teaches us that social success largely depends on the spiritual and moral qualities embodied in the practices of its economic agents. It is important to stress that Weber’s assessment of capitalism was far from uniformly positive. He argued that once capitalism becomes divorced from its original religious impulses it turns into an iron cage from which we are unable to extricate ourselves. He describes the fate of the modern man in terms as bleak as his motivational foundations are mechanized. Nevertheless, as accurately synthesized by outspoken Dutch theologian Van Hoogstraten: Weber’s analyses makes undeniably clear that “the enormous impact of ideology and religious thought on society and economy is incontestable: the study of economy should start with a ‘deep economic’ analysis, for it acknowledges the interconnectedness of economy, morals, and religion.”

The impact of Luther and Calvin’s teachings can hardly be overstated. Due to the supposed links between Protestantism and capitalism, Catholicism has been regarded as notoriously reactionary during a long period of time. Catholic doctrines against usury, fair price, restricted hours and the proliferation of holy days have long been considered as enemies of progress. There is sociological evidence that Catholic countries in Europe were relatively late in the Industrial Revolution. The Papal States have also been notoriously retarded in economic development, remaining locked in medieval customs and methods until the end of the 19th century. The argument that Catholicism and modernity are at odds continues until modern days. Catholic countries – from the Brazil, the Philippines to Poland – have been relatively late in achieving democracy. In many parts of the world, Catholicism continues to be reluctant to come to terms with capitalism. Especially in developing countries, the Catholic Church and its theologians continue to struggle with free–market models.

The debate of the impact of religion on economic behavior is poised to continue. It is worth mentioning that the most recent academic dispute on the issue concerns the policies of former Fed–president Alan Greenspan. For most academic observers, there is little doubt that he was an extraordinarily successful chairman of the most important central bank in the world. However, only a couple of years after his retirement, several observers started to question his legacy, especially regarding his failure to supervise and regulate financial institutions against liquidity risk. According to Paul De Grauwe, Louvain’s most articulate economics professor: “The root cause is the religious belief of Greenspan in the benevolence of markets and perniciousness of government interventions.” De Grauwe moreover argues that “the corollary of this religious optimism in the wondrous workings of the financial markets is the belief that governments and the Fed can do nothing to regulate these new financial instruments.” The fact that religion indeed time and again stands in the way of rational analysis only make a theological examination more valuable.

3. The Social Magisterium of the Roman Catholic Church

After having briefly explored the historic contributions of moral theology in the business ethics debate, it is now imperative to turn to the official social teaching of the Roman Catholic Church. Throughout the centuries, Catholic social teaching (CST) in general, and the encyclical tradition in particular, have been chief custodians of Christian ethics. Its considerable impact has led to growing recognition and obedience to papal pronouncements on matters of faith and morals. An in–depth examination is equally warranted from an extra–ecclesial perspective because the Holy See has substantially contributed to structure debates on warfare, social development and human rights issues.

Before scrutinizing CST, it is important to realize that encyclicals are neither fixed, timeless, universally applicable and immutable statements, nor infallible papal pronouncement. Throughout history, CST has often been presented as a fundamentally unchanged and unchangeable theoretical framework based on natural law revelation. According to Verstraeten, “this has led to a confusion between the ‘unchangeable’ formal principles belonging to the duplex ordo of natural law and divine revelation, and a historically contingent political and social ‘third way’ theory, which was legitimated as its contemporary expression.” The Second Vatican Council of the 1960s overcame the ideological tension by adopting the concept of signa temporum (signs of the times) as methodological base. While analyzing the contributions of the social magisterium of the Roman Catholic Church, this study will therefore mostly refer to Catholic social teaching and try to avoid the controversial concept of doctrine.

In the encyclical Redemptoris Missio, promulgated in 1990, Pope John Paul II stressed the following: “The church addresses people with full respect for their freedom. Her mission does not restrict freedom but rather promotes it. The church proposes; she imposes nothing. She respects individuals and cultures, and she honors the sanctuary of conscience” (§39). The Vatican clearly recognizes that authentic faith cannot be coerced upon people.

The Congregation for the Doctrine of Faith has extensively written about the relationship between “the Gospel life and social life.” It argues that CST “is born of the encounter of the Gospel message and of its demands summarized in the supreme commandment of love of God and neighbor in justice with the problems emanating from the life of society.” It moreover reiterates the following: “Being essentially orientated toward action, this teaching develops in accordance with the changing circumstances of history. This is why, together with principles that are always valid, it also involves contingent judgments. Far from constituting a closed system, it remains constantly open to the new questions which continually arise; it requires the contribution of all charisma, experiences and skills.” The magisterium argues that the church is a “expert in humanity,” which “offers by her social doctrine a set of principles for reflection and criteria for judgment and also directives for action so that the profound changes demanded by situations of poverty and injustice may be brought about, and this in a way which serves the true good of humanity.”

In his encyclical Mater et Magistra (1961) Pope John XXIII already stressed that it is the church’s urgent desire that the social doctrine be studied more and more. First of all, it should be taught as part of the daily curriculum in Catholic schools, particularly seminaries. At the same time, the pope argues that the social doctrine should be spread “by every modern means at our disposal: daily newspapers, periodicals, popular and scientific publications, radio and television” (§223). In Octogesima Adveniens (1971), Pope Paul VI acknowledged the impossibility of a unified social doctrine applicable to all contexts: “In the face of such widely varying situations, it is difficult for us to utter a unified message and to put forward a solution, which has universal validity.” In addition, “It is up to these Christian communities, with the help of the Holy Spirit, in communion with the bishops who hold responsibility and in dialogue with other Christian brethren and all men of goodwill, to discern the options and commitments which are called for in order to bring about the social, political and economic changes seen in many cases to be urgently needed.” The Congregation for the Doctrine of the Faith argues that the orientation received from the social doctrine of the church should stimulate an acquisition of the essential technical and scientific skills and the seeking of moral formation of character and a deepening of the spiritual life.

In his encyclical Veritatis Splendor (1993), Pope John Paul II argues that the church’s social teaching belongs to the field of moral theology, from which “general attitudes, but also to precise and specific kinds of behavior and concrete acts” are presented of commandments governing social, economic and political life. According to the Compendium of the Social Doctrine of the Church, promulgated in 2004, the social doctrine intends to “help to develop authentic, believing characters and inspire them to bear credible witness capable, by thought and by action, of modifying the mechanisms of modern society.” The Compendium does not list social priorities or emerging problems. Rather, it presents itself as an instrument, which is suitable for assisting the discernment. The magisterium is well aware that a one–size–fits–all approach is neither feasible, nor desirable.

In Pope Benedict XVI’s first encyclical Deus Caritas Est (2006), the church’s social doctrine is presented as “a set of fundamental guidelines offering approaches that are valid even beyond the confines of the church: in the face of ongoing development these guidelines need to be addressed in the context of dialogue with all those seriously concerned for humanity and for the world in which we live.” The words of the magisterium make clear that CST should always be placed in socio–historical perspective. Since Pacem in Terris (1963), papal encyclicals are explicitly addressed to two different audiences: members of the Catholic Church but also to “all people of good will” and therefore aim at contributing to the debate, both at the theological and philosophical level. Even though there are limits to what any new pope can do when it comes to developing social policy, a new pope has the power to place his own accents and emphasize his intellectual interests.

In sum, encyclicals should be read not as the work of a doctrinal policeman, but rather as the work of a learned and compassionate pastor who is addressing a global audience. CST allows for disagreement, change over time and development. Only such approach is appropriate and legitimate since the church operates in a wide variety of political and economic systems, cultural mindsets and stages of socio–economic development. Encyclicals are as lively and varied as the Roman Catholic Church itself. They are never the last word on a subject as they often give the debate new impetus.

The next section will examine in detail the most pertinent encyclicals and relevant parts of the Compendium of the Social Doctrine for the business ethics debate. A chronological examination is an essential starting point in understanding how and why official CST has become highly influential, not only in ecclesial but also in economic and political circles. They deserve to be highlighted not only for intra–ecclesial reasons, but also because they coincide with the development of modern economics. Pope John Paul II’s encyclicals deserve most attention, not only because he was the second longest serving pope in history and the longest serving pope of the twentieth century. His powerful presence and influence among Catholics and non–Catholics will continue throughout the world for a long time to come.

3.1. The Foundations of Catholic Social Teaching

3.1.1. Rerum Novarum (1891)

The era of modern Catholicism starts in earnest with the promulgation of the encyclical Rerum Novarum by Leo XIII, in 1891. The encyclical was written in a time of revolutionary change: “The momentous gravity of the state of things now obtaining fills every mind with painful apprehension; wise men are discussing it; practical men are proposing schemes; popular meetings, legislatures, and rulers of nations are all busied with it – actually there is no question which has taken deeper hold on the public mind” (§1). One year after the loss of the Papal States, the Vatican starts focusing on the ethos of families and individuals in general, and the social situation of the workers, their working hours, job protection, and the ability to establish savings in particular. The encyclical defends that “some opportune remedy must be found quickly for the misery and wretchedness pressing so unjustly on the majority of the working class” (§3).

Leo XIII, who reigned between 1878 and 1903, turned out to be more critical of socialism than capitalism. In an era in which the writings of Karl Marx where popular, Pope Leo XIII stressed that “private ownership is in accordance with the law of nature” (§9). In Quod Apostolici Muneris, promulgated in December 1878, he already defended private property and attacked “socialists, Communists and Nihilists.” Thirteen years later in Rerum Novarum, the pope tried to stay clear of laissez–faire capitalism and totalitarian socialism, which were the two extreme positions in those days. On the one hand, he condemned the harsh working conditions of employees: “For the ancient workingmen’s guilds were abolished in the last century, and no other protective organization took their place.” In addition, “Public institutions and the laws set aside the ancient religion, hence, by degrees it has come to pass that working men have been surrendered, isolated and helpless, to the hard–heartedness of employers and the greed of unchecked competition.” According to the pope, this has led to “rapacious usury, which, although more than once condemned by the church, is nevertheless, under a different guise, but with like injustice, still practiced by covetous and grasping men” (§3). The encyclical is a cry of protest against the social injustices experienced by the working class. The pope clearly voiced his concern about the widening gap between the rich minority and poor majority.

Throughout the encyclical, the word ‘capitalism’ or ‘capitalists’ is never used. In return, it directly addresses and sharply attacks “socialists,” who are accused of depriving “wage–earners” of “the liberty of disposing of his wages, and thereby of all hope and possibility of increasing his resources and of bettering his condition in life” (§5). The pope’s words are unequivocal: “What is of far greater moment, however, is the fact that the remedy they propose is manifestly against justice. For every man has by nature the right to possess property as his own” (§6). The pope furthermore criticizes the fact that Socialists are “striving against nature.” Such striving is in vain: “It must be first of all recognized that the condition of things inherent in human affairs must be borne with, for it is impossible to reduce civil society to one dead level.” For the magisterium, “Social and public life can only be maintained by means of various kinds of capacity for business and the playing of many parts; and each man, as a rule, chooses the part which suits his own peculiar domestic condition” (§17).

Pope Leo XIII, who before becoming a pope had served as a papal diplomat in Belgium, recognized that socialism as an idea and ideal was fatally flawed: “It is clear that the main tenet of socialism, community of goods, must be utterly rejected, since it only injures those, whom it would seem meant to benefit, is directly contrary to the natural rights of mankind, and would introduce confusion and disorder into the commonweal. The first and most fundamental principle, therefore, if one would undertake to alleviate the condition of the masses, must be the inviolability of private property” (§33). Throughout the encyclical, the term ‘socialism’ is used once and ‘socialists’ four times. In all instances, ‘socialists’ are condemned because they are against private property, natural justice, liberty. From a twenty–first century perspective, Pope Leo XIII’s critique on totalitarian socialism looks remarkably prescient. Another important contribution of Rerum Novarum is the introduction of the concept of common good. The concept originates in Plato’s philosophy, where is equaled to social virtue. Aristotle incorporates the notion in his political analysis. Thomas of Aquinas introduced the concept in the theological dictionary, which Pope Leo XIII revived in his social encyclical. Rejecting the individualistic worldviews of Descartes and Locke, the pope emphasizes the common teleological end or destiny of humanity.

The encyclical also emphasized that laborers have a right to a just salary that will allow them to support themselves and their families. The concept of fair wage was introduced. The encyclical also supported the rights of labor to form unions: “Let the working man and the employer make free agreements, and in particular let them agree freely as to the wages; nevertheless, there underlies a dictate of natural justice more imperious and ancient than any bargain between man and man, namely, that wages ought not to be insufficient to support a frugal and well–behaved wage–earner” (§45). The pope moreover sanctioned trade unions as long as they draw the two orders of capital and labor “more closely together” (§47) and emphasizes that it “were greatly to be desired that they should become more numerous and more efficient” (§49).

Initially church leaders had been hesitant to support labor rights, but Pope Leo XIII changed course and sanctioned unions as a way to promote just wages and social democracy. Soon after the encyclical was issued, Christian trade unions started to spread throughout Europe. In Germany, for example, trade union membership increased from 300,000 to 7 million between 1880 and 1914. In the same period, trade unions in the United Kingdom increased five times. In the United States, wary of socialism and suspicious of labor movements, appointed an investigative commission on the issue of labor. It should therefore be argued that Rerum Novarum turned out to be the main impetus for the organization of trade unions. Instead of politicizing or promoting and ideological model, as espoused by the openly socialist trade unions, the new Christian trade unions, inspired by the encyclical, promoted a more pragmatic form of collective bargaining for just wages.

In sum, the encyclical is remarkable as a summary of the many issued raised at the end of the 19th century by the Industrial Revolution and new democracies. The Catholic Church regained influence in labor circles. The solutions proposed by the pope, which point at combined, coordinated actions between the State, the church, employers and employees, still hold important lessons for today’s societies. Several objectives stated by this first social encyclical remain valid and in the case of developing countries still constitute a goal yet to be reached.

3.1.2. Quadragesimo Anno (1931)

Pope Pius XI celebrated the fortieth anniversary of Rerum Novarum by issuing Quadragesimo anno (1931). In this encyclical, promulgated in the time of the Great Depression, which questioned the viability of capitalism as an economic system, the pope enlarges and refines the perspective of Rerum Novarum, reemphasizing that both unbridled liberalism and socialism has to be opposed.

The pope argues that the “capitalist economic regime has spread everywhere to such a degree, particularly since the publication of Leo XIII’s encyclical, that it has invaded and pervaded the economic and social life of even those outside its orbit and is unquestionably impressing on it its advantages, disadvantages and vices, and, in a sense, is giving it its own shape and form” (§103). The pope argues that not only wealth but also “immense power and despotic economic dictatorship” has consolidated in the hands of a few, “who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure” (§105). The pope condemns the fact that a few control the money flow and credit lines: “This concentration of power and might, the characteristic mark, as it were, of contemporary economic life, is the fruit that the unlimited freedom of struggle among competitors has of its own nature produced, and which lets only the strongest survive; and this is often the same as saying, those who fight the most violently, those who give least heed to their conscience” (§107).

The pope argues that the “accumulation of might and of power” generates three kinds of conflict: “First, there is the struggle for economic supremacy itself; then there is the bitter fight to gain supremacy over the State in order to use in economic struggles its resources and authority; finally there is conflict between States themselves, not only because countries employ their power and shape their policies to promote every economic advantage of their citizens, but also because they seek to decide political controversies that arise among nations through the use of their economic supremacy and strength” (§108). The pope condemns might and power accumulation: “Free competition has destroyed itself; economic dictatorship has supplanted the free market; unbridled ambition for power has likewise succeeded greed for gain; all economic life has become tragically hard, inexorable, and cruel.” In sum, “economic imperialism” and “internationalism of finance or international imperialism whose country is where profit is” are sharply condemned (§109).

In the next sessions, the pope provides an in–depth analysis of the shortcoming of socialism. According to the pope, socialism back in the times of Rerum Novarum could be termed almost as a “single system and which maintained definite teachings reduced into one body of doctrine.” In the 1930s, however, socialism has “split chiefly into two sections, often opposing each other and even bitterly hostile, without either one however abandoning a position fundamentally contrary to Christian truth” (§111). One section of Socialism has “sunk into Communism,” with dramatic consequences: “Unrelenting class warfare and absolute extermination of private ownership.”

The magisterium moreover argues that “when it has come to power, it is incredible and portent like in its cruelty and inhumanity. The horrible slaughter and destruction through which it has laid waste vast regions of eastern Europe and Asia are the evidence; how much an enemy and how openly hostile it is to Holy Church and to God Himself is, alas, too well proved by facts and fully known to all.” The church therefore gravely condemns “the folly of those who neglect to remove or change the conditions that inflame the minds of peoples, and pave the way for the overthrow and destruction of society” (§112). The magisterium argues that “the other section, which has kept the name Socialism, is surely more moderate.” It is less critical of this version: “In a certain measure approaches the truths which Christian tradition has always held sacred; for it cannot be denied that its demands at times come very near those that Christian reformers of society justly insist upon” (§113). At the same time, the magisterium warns that “those who want to be apostles among socialists ought to profess Christian truth whole and entire, openly and sincerely, and not connive at error in any way. If they truly wish to be heralds of the Gospel, let them above all strive to show to socialists that socialist claims, so far as they are just, are far more strongly supported by the principles of Christian faith and much more effectively promoted through the power of Christian charity” (§116).

The conclusions that the magisterium draws concerning socialism leaves no doubts: “If Socialism, like all errors, contains some truth (which, moreover, the Supreme Pontiffs have never denied), it is based nevertheless on a theory of human society peculiar to itself and irreconcilable with true Christianity. Religious socialism and Christian socialism are contradictory terms; no one can be at the same time a good Catholic and a true socialist” (§120). Pope Pius XI made clear that socialism is intrinsically evil because it disregards basic Christian tenets regarding private property and class relations. Although liberalism is not as sharply condemned as socialism, it is also criticized in Quadragesimo Anno. The pope emphasizes that “It belongs to Our Pastoral Office to warn these persons of the grave and imminent evil: let all remember that Liberalism is the father of this Socialism that is pervading morality and culture and that Bolshevism will be its heir” (§122).

One of the most noteworthy contributions of this encyclical to the debate is the introduction of the principle of subsidiarity. The principle was originally articulated in the context of Pope Pius XI’s quest to distinguish Catholic social teaching from Italian fascism. The original of the concept of subsidiarity is Aristotle, who structured society in organic models, each with different tasks and responsibilities. Each group’s task and responsibility has been understood autonomously and can only interfere with other groups in cases of absolute need. Thomas of Aquinas further elaborated on the concept by placing it in the context of human dignity, understood as the recognition for individual freedom in relation to larger groups and the State. In the Thomist perspective, personal ends and interests are relegated to the second place when they conflict with the principle of common good.

In the encyclical, the pope introduces the concept of subsidiarity in the following terms: “As history abundantly proves, it is true that on account of changed conditions many things which were done by small associations in former times cannot be done now save by large associations. Still, that most weighty principle, which cannot be set aside or changed, remains fixed and unshaken in social philosophy: Just as it is gravely wrong to take from individuals what they can accomplish by their own initiative and industry and give it to the community, so also it is an injustice and at the same time a grave evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organizations can do, for every social activity ought of its very nature to furnish help to the members of the body social, and never destroy and absorb them” (§79). For the magisterium, it is clear that the principle of subsidiarity must direct economic life. The principle should help to define the limits of state intervention in private and public economic life. Ever since the pope launched the concept, subsidiarity has remained at the core of the church’s teachings and pastoral guidelines. Pope Pius XII, for example, emphasized in 1946 that the principle is “valid for social life and all its grades” and valid “also for the life of the church without prejudice to its hierarchical structure.” The principle has also gained credence in political circles and even entered legal documents.

3.1.3. Mater et Magistra (1961)

The next encyclical, which is relevant for our study, is Pope John XXIII’s encyclical on Christianity and social progress in May 1961. Pope John XXIII reiterates Pope Pius XI emphasis that there exists a fundamental opposition between Communism and Christianity and underlines that “no Catholic could subscribe even to moderate Socialism.” According to Pope John XXIII, “the reason is that Socialism is founded on a doctrine of human society which is bounded by time and takes no account of any objective other than that of material well–being.” The pope therefore concludes that “it proposes a form of social organization which aims solely at production, it places too severe a restraint on human liberty, at the same time flouting the true notion of social authority” (§34).

In the next sessions, Pope John XXIII addresses the question of free–market economies. The magisterium criticizes the fact that “unbridled ambition for domination has succeeded the desire for gain; the whole economic regime has become hard, cruel and relentless in frightful measure” (§36). The pope calls for the “reestablishment of the economic world within the framework of the moral order and the subordination of individual and group interests to the interest of the common good as the principal remedies for these evils.” In addition, “Public authority should resume its duty of promoting the common good of all” and “there should be co–operation on a world scale for the economic welfare of all nations” (§37). The magisterium is clear that “all forms of economic enterprise must be governed by the principles of social justice and charity” (§39) and “man’s aim must be to achieve in social justice a national and international juridical order, with its network of public and private institutions, in which all economic activity can be conducted not merely for private gain but also in the interests of the common good” (§40). For the first time, the pope observes “a marked disparity in the economic wealth possessed by different countries” (§48). The magisterium observes many changes, including “the break–away from colonialism and the attainment of political independence by the peoples of Asia and Africa” (§49). The situation is not further examined in detail but the magisterium is clearly “aware of our responsibility to take up this torch” (§50).

The pope also directly refers to the role of corporations: “A sane view of the common good must be present and operative in men invested with public authority. They must take account of all those social conditions which favor the full development of human personality. Moreover, we consider it altogether vital that the numerous intermediary bodies and corporate enterprises—which are, so to say, the main vehicle of this social growth—be really autonomous, and loyally collaborate in pursuit of their own specific interests and those of the common good. For these groups must themselves necessarily present the form and substance of a true community, and this will only be the case if they treat their individual members as human persons and encourage them to take an active part in the ordering of their lives” (§65). Corporate enterprises have a special role in the quest for full development of the human personality.

The magisterium seems especially keen on increasing participation of workers in specific enterprises. It reiterates that it is “convinced that employees are justified in wishing to participate in the activity of the industrial concern for which they work.” At the same time, the magisterium admits that it is not possible “to lay down hard and fast rules regarding the manner of such participation, for this must depend upon prevailing conditions, which vary from firm to firm and are frequently subject to rapid and substantial alteration.” It nevertheless underlines the need for giving workers “an active part in the business of the corporation for which they work – be it a private or a public one. Every effort must be made to ensure that the enterprise is indeed a true human community, concerned about the needs, the activities and the standing of each of its members” (§91). The pope moreover stresses the importance of loyalty in the common enterprise from the side of workers and understanding and appreciation from the side of the employers (§92). Further on in the encyclical, the magisterium adds that private enterprise too must contribute to an economic and social balance in the different areas of the same political community. Here the pope applies the subsidiarity principle to the relationship between public authority and private enterprise (§152). The same principle is also observed in the context of state and public ownership: “The State and other agencies of public law must not extend their ownership beyond what is clearly required by considerations of the common good properly understood, and even then there must be safeguards. Otherwise private ownership could be reduced beyond measure, or, even worse, completely destroyed” (§117).

Finally, the magisterium argues that probably the most difficult problem today concerns the relationship between economically advanced countries and ones “subject to extreme poverty.” It calls for solidarity between nations, not only out of charity but also out of mere self–interest: “The nations of the world are becoming more and more dependent on one another and it will not be possible to preserve a lasting peace so long as glaring economic and social imbalances persist” (§157). Economically developed nations are called to give technical and financial aid, without gaining control over the political situation in the poorer countries (§171). Disguised aid is regarded as “a new form of colonialism” (§172). According to the magisterium, the only possible solutions reside in respect for the laws of life (§193), education towards sense of responsibility (§195), and worldwide cooperation (§200). These solutions are a clear example of how Catholic social teaching has shifted from natural law to a more personalist approach. This epistemological shift was further deepened during the Second Vatican Council.

3.1.4. Pacem in Terris (1963)

It took only two years before Pope John XXIII again addresses several issues related to this study. The main topic of the encyclical is peace on earth, which according to the pope, “can never be established, never guaranteed, except by the diligent observance of the divinely established order.” The encyclical pays considerable attention to the issue of economic rights. The magisterium argues that in the economic sphere, a man has the inherent right not only to be given the opportunity to work, but also “to be allowed the exercise of personal initiative in the work he does” (§18). The economic conditions in which a man works “must not be such as to weaken his physical or moral fiber” (§19). It moreover a consequence of man’s personal dignity that his right to engage in economic activities is “suited to his degree of responsibility” (§20). The pope also reiterates the right to private ownership of property, including that of productive goods (§21). He adds, however, that such “the right to own private property entails a social obligation as well” (§22).

In the section on the evolution of economically less–developed countries, the magisterium repeats its appeal “to the more wealthy nations to render every kind of assistance to those States, which are still in the process of economic development” (§121). The result the magisterium is looking for is rather optimistic: “The poorer States shall in as short a time as possible attain to a degree of economic development that enables their citizens to live in conditions more in keeping with their human dignity” (§122). However, it is well aware that the process of economic development is not only depending on the goodwill of developed nations. Developing countries have important challenge ahead: “They must be conscious that they are themselves playing the major role in their economic and social development; that they are themselves to shoulder the main burden of it” (§123). The wealthier states are called to “also repudiate any policy of domination” (§125).

3.1.5. Gaudium et Spes (1965)

The Second Vatican Council profoundly transformed the Catholic Church. Its theology prior to the Second Vatican Council sometimes over–emphasized God’s transcendence and thus indirectly endorsed a more mechanic, fixed view of the world. Before the 1960s, Catholic social teaching was mostly based on the assumption that nature is an external resource, a given habitat to be exploited. At best, nature was regarded as a poetic inspiration, at worst as virgin business territory. This dramatically changes with the Second Vatican Council, which reclaimed the incarnational model by emphasizing God’s imminence in nature. The Second Vatican Council introduces a person–oriented approach. By stressing a revelation from below, theology itself is no longer detached from human suffering, economic exploitation or ecological degradation. The conciliar document Gaudium et Spes, which is the Pastoral Constitution on the Church in the Modern World, examines “the situation of men in the modern world.” The concept of signa temporum becomes the methodological base for interpreting the social teachings. The magisterium argues that the social teachings must interpreted in a “language intelligible to each generation,” so it “can respond to the perennial questions which men ask about this present life and the life to come, and about the relationship of the one to the other” (§4).

One of the first “signs of the times” that the Conciliar Fathers analyze is the growing conviction that “humanity can and should increasingly consolidate its control over creation.” At the same time, the Fathers argue that “it devolves on humanity to establish a political, social and economic order, which will increasingly serve man and help individuals as well as groups to affirm and develop the dignity proper to them.” Injustice and unequal distribution between nations is criticized: “Nations on the road to progress, like those recently made independent, desire to participate in the goods of modern civilization, not only in the political field but also economically, and to play their part freely on the world scene, still they continually fall behind while very often their economic and other dependence on wealthier nations advances more rapidly” (§5). The third chapter of the pastoral constitution addresses the economic challenges of the mid–1960s. The Conciliar Fathers first argue that “man is the source, the center, and the purpose of all economic and social life.” This however does not mean that man has unbridled domination over nature. The Conciliar Fathers argue that “many people, especially in economically advanced areas, seem, as it were, to be ruled by economics, so that almost their entire personal and social life is permeated with a certain economic way of thinking.” They moreover deplore the fact that “at the very time when the development of economic life could mitigate social inequalities (provided that it be guided and coordinated in a reasonable and human way), it is often made to embitter them; or, in some places, it even results in a decline of the social status of the underprivileged and in contempt for the poor.” In addition, “While an immense number of people still lack the absolute necessities of life, some, even in less advanced areas, live in luxury or squander wealth, extravagance and wretchedness exist side by side” (§63).

In a reference to corporations, the document argues as follows: “Economic development must remain under man’s determination and must not be left to the judgment of a few men or groups possessing too much economic power or of the political community alone or of certain more powerful nations. It is necessary, on the contrary, that at every level the largest possible number of people and, when it is a question of international relations, all nations have an active share in directing that development.” The notion of growth is not restricted to economics: “Citizens should remember that it is their right and duty, which is also to be recognized by the civil authority, to contribute to the true progress of their own community according to their ability. Especially in underdeveloped areas, where all resources must urgently be employed, those who hold back their unproductive resources or who deprive their community of the material or spiritual aid that it needs–saving the personal right of migration–gravely endanger the common good” (§65).

The Council moreover argues that “in economic enterprises, it is persons who are joined together, that is, free and independent human beings created to the image of God. Therefore, with attention to the functions of each–owners or employers, management or labor–and without doing harm to the necessary unity of management, the active sharing of all in the administration and profits of these enterprises in ways to be properly determined is to be promoted” (§68). The Council is convinced that Christians can considerably contribute to the fight for justice, the “prosperity of mankind and to the peace of the world” (§72). In acquiring the “absolutely necessary skill and experience,” the Conciliar Father argue that Christians “should observe the right order in their earthly activities in faithfulness to Christ and His Gospel, thus their whole life, both individual and social, will be permeated with the spirit of the beatitudes, notably with a spirit of poverty” (§72).

The Second Vatican Council had a tremendous impact on the local churches. The call of Conciliar Fathers to thoroughly examine the local socio–economic and political issues in the light of the Gospel was overwhelmingly followed. The most widely publicized local expression was the Latin American Bishop’s Conference, which took place in Medellín, Colombia. Another important regional expression, which changed internal church dynamics, was the one organized by the Dutch Episcopate in Noordwijkerhout. The Dutch pastoral congress resulted in fifteen thousand discussion groups and 4,500 workshops. The principal debates at the six plenary sessions, which were held between 1968 and 1970, got widespread media coverage.

3.1.6. Populorum Progressio (1967)

Not long after the Second Vatican Council, as soon as March 1967, Pope Paul VI promulgated the encyclical letter Populorum Progressio, which expands on the theme of development. The pope argues that the progressive development of peoples, especially those “trying to escape the ravages of hunger, poverty, endemic disease and ignorance,” is “an object of deep interest and concern to the church” (§1). The pope argues that the church has a special role to play but “has no desire to be involved in the political activities of any nation.” Nevertheless, the magisterium affirms that “since the church does dwell among men, she has the duty of scrutinizing the signs of the times and of interpreting them in the light of the Gospel, sharing the noblest aspirations of men and suffering when she sees these aspirations not satisfied, she wishes to help them attain their full realization.” This is why the magisterium “offers man her distinctive contribution: a global perspective on man and human realities” (§13). The pope directs his appeal to both people who are suffering from “material poverty” and “moral poverty” (§21).

In a section often cited by liberation theologians, the magisterium attacks “unbridled liberalism.” It argues that certain liberal concepts have “insinuated themselves into the fabric of human society.” According to the magisterium, “these concepts present profit as the chief spur to economic progress, free competition as the guiding norm of economics, and private ownership of the means of production as an absolute right, having no limits or concomitant social obligations.” Such liberalism paves the way from “tyranny,” which results in the “international imperialism of money” (§26). Although critical of liberalism, the magisterium is carefully not to call for “revolutionary uprisings.” It argues that they could instill “great damage to fundamental personal rights and dangerous harm to the common good of the country, engender new injustices, introduce new inequities and bring new disasters” (§31).

Wealthier nations are called to a three–fold obligation: “Mutual solidarity – the aid that the richer nations must give to developing nations; social justice – the rectification of trade relations between strong and weak nations; and universal charity – the effort to build a more humane world community, where all can give and receive, and where the progress of some is not bought at the expense of others” (§44). The magisterium moreover argues that the duty of promoting human solidarity directly falls upon the shoulders of the citizens of nations. It directly calls for public and private allocations of gifts, loans and investments for underdeveloped countries. Greater generosity, willing sacrifice and diligent effort from developed countries are urgently requested. The magisterium asks whether rich nations are prepared “to pay higher taxes so that public authorities may expand their efforts in the work of development.” Also, whether rich countries are “prepared to pay more for imported goods, so that the foreign producer may make a fairer profit.” And finally also, whether citizens of rich countries are “prepared to emigrate from his homeland if necessary and if he is young, in order to help the emerging nations” (§47). Next, the magisterium proposes a transfer of wealth from the rich to the poor nations: “We must repeat that the superfluous goods of wealthier nations ought to be placed at the disposal of poorer nations.” It argues that continuing avarice “will arouse the judgment of God and the wrath of the poor, with consequences no one can foresee.” The magisterium refers to the parable of the rich man: “The fields yielded an abundant harvest and he did not know where to store it: but God said to him, ‘fool, this very night your soul will be demanded from you” (§49).

In yet another indictment of the liberal world order, the magisterium reiterates that “it is evident that the principle of free trade, by itself, is no longer adequate for regulating international agreements.” It deplores the fact that “market prices that are freely agreed upon can turn out to be most unfair, it must be avowed openly that, in this case, the fundamental tenet of liberalism (as it is called), as the norm for market dealings, is open to serious question” (§58). The pope also calls for social responsibility of corporations, especially from “industrialists, merchants, managers and representatives of large business concerns.” The encyclical argues that “their more favored position should rather spur them on to be initiators of social progress and human betterment in these lands.” In addition, “their organizational experience should help them to figure out ways to make intelligent use of the labor of the indigenous population, to develop skilled workers, to train engineers and other management men, to foster these people’s initiative and prepare them for offices of ever greater responsibility” (§70). Corporations clearly are seen as entities, which have a vocation to contribute to the advancement of humanity. It is clear that Pope Paul VI’s so–called development encyclical endeavors to incorporate the liberation theology agenda into the social teaching of the Catholic Church.

3.1.7. Octogesima Adveniens (1971)

In the apostolic letter Octogesima Adveniens, promulgated on the eightieth anniversary of Rerum Novarum, Pope Paul VI elaborates on the notions first employed in 1967. The letter is a renewed call for action for social justice, “in response to the new needs of a changing world” (§1).

The paragraph that has received most attention throughout the years concerns about the very role of the magisterium. With respect to the changing socio–economic and political situation worldwide, the encyclical argues as follows: “In the face of such widely varying situations it is difficult for us to utter a unified message and to put forward a solution which has universal validity.” The magisterium reiterates that “such is not our ambition, nor is it our mission.” The pope argues that it is up to the Christian communities “to analyze with objectivity the situation which is proper to their own country, to shed on it the light of the Gospel’s unalterable words and for action from the social teaching of the church.” It moreover argues as follows: “It is up to these Christian communities, with the help of the Holy Spirit, in communion with the bishops who hold responsibility and in dialogue with other Christian brethren and all men of goodwill, to discern the options and commitments which are called for in order to bring about the social, political and economic changes seen in many cases to be urgently needed.” According to the magisterium, the Gospel is never outdated: “Its inspiration, enriched by the living experience of Christian tradition over the centuries, remains ever new for converting men: end for advancing the life of society” (§4).

In this apostolic letter, an ecological consciousness is raised. This is rather prophetic as it came before the Club of Rome published its groundbreaking document Limits of Growth. The magisterium warns that human activity can have devastating consequences for the natural environment. It laments ill–considered exploitation and degradation of nature in which mankind risks becoming the victim: “Not only is the material environment becoming a permanent menace – pollution and refuse, new illness and absolute destructive capacity – but the human framework is no longer under man’s control, thus creating an environment for tomorrow which may well be intolerable” (§21). In the section Ideologies and human liberty, the magisterium argues that Christians, “who wishes to live his faith in a political activity which he thinks of as service cannot without contradicting himself adhere to ideological systems which radically or substantially go against his faith and his concept of man.” Therefore, Christians cannot adhere to the Marxist or liberal ideology. The magisterium warns against the dangers of atheistic materialism, which is characterized by its “dialectic of violence.” The magisterium argues moreover that it dangerously “absorbs individual freedom in the collectivity” and denies “all transcendence to man and his personal and collective history” (§26).

The magisterium is especially keen on warning against the dangerous attractions of socialists currents, especially those ideologies which are incompatible with faith: “Too often Christians attracted by socialism tend to idealize it in terms which, apart from anything else, are very general: a will for justice, solidarity and equality.” According to the magisterium, however, “They refuse to recognize the limitations of the historical socialist movements, which remain conditioned by the ideologies from which they originated.”

According to the magisterium, a generous aspiration and seeking for a more just society should always be compatible with the safeguarding of important values, especially those of liberty, responsibility and openness to the spiritual. These three dimensions “guarantee the integral development of man” (§31). The magisterium also warns against adhering to liberal ideology, because “it exalts individual freedom by with drawing it from every limitation.” The liberal ideology is moreover rejected because it considers “social solidarities as more or less automatic consequences of individual initiatives, not as an aim and a major criterion of the value of the social organization” (§26). The magisterium criticizes the liberal ideology, which often disguises itself in the name of economic efficiency. According to the magisterium, “the very root of philosophical liberalism is an erroneous affirmation of the autonomy of the individual in his activity, his motivation and the exercise of his liberty” (§35).

In sum, the magisterium regards economics as a discipline with “a radical limitation” because it is often “a field of confrontation and domination” (§46). Pope Paul VI argues that Christian faith and social morality should oppose both the Marxist and liberal ideology, as they better safeguard and advance the notions of responsibility and freedom (§27 and §40). The reception of the encyclical has also been positive. Nevertheless, Gudorf argues that although the essentially innovative nature of the pope’s approach to justice seems clear and relatively consistent, “we know from hindsight that the innovative approach of Octogesima Adveniens never took root.” Gudorf argues that the encyclical “had a very limited impact on the way that the official Church acts either internally or externally in the world, and has effectively become a dead letter in the domain of the hierarchy.” In general, however, it is widely regarded that Octogesima Adveniens had an incremental, positive impact on the church. Throughout the 1970s, many justice and peace groups have proliferated within dioceses and parishes worldwide, directly dealing with issues raised in the encyclical such as poverty and violence. The Catholic social lobby became increasingly influential.

(to be continued at "Older Posts" below)