About Egypt .. and Socially Responsible Investment

Dear Colleagues

I just wrote this comment in response to an essay about Egypt and Socially Responsible
Investment (SRI) on the JustMeans website at:
http://www.justmeans.com/editorialauthor/389.html.

SRI is very important ... but there is almost none of it emerging from either capital markets or the official development assistance community.

The majority of all fund flows move because there is an inner circle of elite that get benefits with everyone else on the sidelines. Very little of the funding for "good works" gets to serve the beneficiaries identified in the PR, but the fund flow certainly benefits someone.

The Egyptian situation has all sorts of examples of this ... the Egyptian military has great equipment ... funded in large part by the US taxpayer ... with military equipment manufacturers the biggest beneficiary. All sorts of FDI and investment deals have been in play with the inner circle of the Mubarak regime big beneficiaries. Over the years the human capital in Egypt has increased through education, but the economy has never been reorganized so that most of these people could have a meaningful future.

The sad fact is that the metrics of capital market capitalism ignore everything to do with people and their quality of life and the huge importance of jobs and remuneration in the business ... that is socio-economic model for quality of life improvement. In the end this results in total socio-economic instability.

Modern economic misinformation may fool some of the people some of the time, but not all of the people all of the time. Markets are working well to generate corporate profit ... but markets are not working well to improve quality of life for everyone ... not by a mile.

Peter Burgess
TrueValueMetrics.org

This is the text of the essay. Better format and images on the original!

What Egypt Means For Socially Responsible Investment
Posted On: February 07

The past several weeks have been momentous times for Egypt, Tunisia and many other countries in the Middle East and North Africa: regimes are toppling, the people are taking to the streets and protesting en masse, despots are quaking in their boots while world powers are scrambling to navigate the rapidly shifting political landscape.

Perhaps what has been most surprising is the speed at which these events have unfolded - nobody seemed to see any of this coming, particularly the US government, which appeared to have been caught flat-footed as evidenced by initial statements from President Obama and Secretary of State Clinton. While it certainly has been encouraging to see the citizenry rise up and assert their human rights, it is important to note that the aftermath of any regime change may be protracted - it may take weeks, months, or perhaps even years before true stability returns to some of these countries. And sadly, there is no guarantee the regimes that replace the current crop will be any less autocratic (though we hope this is not the case).

So when we consider this region from a socially responsible investment perspective - whether it be as a micro-financier, a venture capitalist, a non-profit aid organization or an individual investor - the inevitable question arises: will the capital we invest help to deliver the social good we intend, particularly if the government in place is actively undermining these efforts?

There's no question that foreign direct investment can benefit developing nations by spurring economic growth, relieving poverty, providing job and educational opportunities, improving basic healthcare and helping to build and support the conditions and institutions vital to a functioning free society. FDI can also be instrumental in improving a country's infrastructure, particularly in the area of technology, which is essential for any economy hoping to compete in the information age (a question that has often been posed over the past few weeks is whether the events in Egypt could have even been possible if the people did not have access to social networking sites like Facebook or Twitter).

But while the potential benefits of FDI are clear, the degree to which these benefits are achieved can often times be murkier, particularly when dealing with corrupt governments that have been in power for - in some cases - decades. Investment dollars and state aid may be welcome by these leaders, but the Western cultural ideals and influence that may come with this capital often times is not.

So when those in the socially responsible investment community tackle this issue, there are two schools of thought that often emerge. These views resemble the "sanctions-versus-engagement" dilemma many developed nations face when confronting diplomacy issues with rogue states.

On one side, there's the purist approach: investing in an autocratic nation not only explicitly endorses the regime's authority and practices, but also helps to preserve the regime's power and foster their growth. This investor tends to be more dogmatic in defining what constitutes a socially responsible investment and is less likely to compromise that view.

On the other side, there's the pragmatic approach: investing in developing nations is by definition a messy endeavor and one cannot wait for the ideal environment to deploy capital because that environment may never arrive. A government will always have some level of corruption embedded in it, and even if a particular government is deemed "acceptable", the nature of politics is fluid: the policies and practices in place today may not necessarily be the same ones in place tomorrow. So rather than wait for the country to meet certain baseline criteria, this investor seeks to take an active role in helping shape the country's future by investing in companies or projects that they feel will have the greatest social impact.

So which approach is best?

Since socially responsible investing is often a subjective and deeply personal undertaking, there is no one right answer on how best to approach it. What one socially responsible investor may find untenable another finds acceptable. So it falls to the individual or institution to decide what their mandate will be and how they will apply social and ethical principles to their investment decisions.

But regardless which approach is taken, what's most important is that the end goal of all socially responsible investors is usually identical: use the resources at your disposal to, in the words of Gandhi, "be the change you want to see in the world."

My reading of the events in Egypt over the past few weeks is that youth have better education and more unemployment than in the past ... while the elite leadership of the country of the country has become incredibly wealthy, what one might describe as a monopoly of power. This unfortunately has become a big part of the modern corporate and capital market business model ... really not much different than the business model used in the old days with Rockefeller and the oil trusts, and more recently (the 1950s) with the market sharing arrangements of the electric generating machinery manufacturers in the USA. Rigging the playing field is good for profits ... and corrupt elites are still helping to play this game.

Transparency is important ... essential. But transparency will not be good for the economic and political elite nor, indeed for corporate profits!

Stay tuned

Peter Burgess