Dear Colin and Ward:
I received the draft of your Alternative Investment Code via the FutureWork
list. I am afraid that while what you suggest would be considerably better
than MAI, it would still be damaging. Net capital flows between countries,
or even between one part of a country and another, need to be completely
prohibited if we are ever to construct a sustainable world. This might sound
such an extreme position as to be totally off the wall, so let me try to
explain why I have been forced into it:
It might be thought that allowing outside investors to put funds into
sustainable projects in unsustainable national economies would allow those
economies to reach sustainability faster. Is this the case? The answer in
all circumstances is no. For example, if the interest on this capital has to
be paid in an external currency which has to be earned by selling its goods
and services on external markets in competition with output from places
which subsidise their prices by using unsustainable systems, the need to
become internationally competitive to earn this external currency will
undermine the territory's path to sustainability: social and environmental
standards will be eroded away.
Even if the interest has to be paid in a currency which can only be earned
trading in sustainably-produced goods, there are two reasons why capital
transfers between territories, or even parts of the same territory, should
be discouraged.. One is that capital creates work in the place it is spent.
In Ireland after independence, the banking system collected savings from the
rural areas and lent them in urban ones, enabling factories, shopping
parades, cinemas and houses to be built. This work required young men from
the rural areas who needed housing, shops, pubs and recreational facilities
in the towns, especially if they married a girl from the country herself.
These needs created a further demand for loans and more work for the
building trade. Meanwhile, back at home, businesses went into decline
because the young people had left, and it became very difficult to find new
projects which would support the rate of interest being asked by the banks
in view of the declining population. So with fewer opportunities there, the
emigration from the countryside went on and whole villages were completely
abandoned. Capital transfers are therefore destabilising and undesirable
even within the same territory if more than, say, twenty miles is involved.
The second reason for rejecting external investment is even more powerful.
It is that people investing outside the areas in which they live can only be
interested in one thing - the rate of return they get on their money. All
the other income streams their investment starts - payments to workers and
suppliers, for example - are seen as reducing their profits and every effort
is therefore made to minimise them. If someone invests in a project in their
own community, however, there are many ways in which they can get a return
on their money quite apart from the interest they receive. Indeed, these
non-interest returns might be so important that those financing the project
might be prepared to charge no interest at all and even contribute to an
annual loss in order to be sure it goes ahead. This might be because the
project will provide employment for themselves or their children. Or because
it will increase incomes in the area and help their existing business do
better. Or because it will cut unemployment, thus reducing family breakdown
and crime.
Community investment projects are therefore very different animals from
those run for the benefit of outside investors. For one thing, they seek to
maximise the total incomes the project generates in the community, not just
the profit element. So, far from seeing the wage bill as a cost to be
minimised, they regard it as one of the project's major gains. Attitudes to
work are different too. Whereas outside investors seek to de-skill work
within the factory so that they can hire the cheapest possible labour, a
community company, particularly a workers' co-op, would want the work to be
organised so that those doing it find it interesting and fulfilling.
Outside investors also have very short time-horizons for their projects,
wanting to earn their capital back in three or four years . After that, if
necessary, they can close the plant and move on. Communities, on the other
hand, need long-term incomes for long-term projects like raising children,
and a community-owned factory would want to produce for a safe, stable
markets, most probably in its own area, rather than the market with the
highest immediate rate of return. Similarly, while outside investors merely
ensure that a plant's emission levels stay within the law because anything
better would cost them money, a community company is likely to work to much
higher standards to avoid fouling its own nest.
The different effects of external and community investment are therefore so
marked that any territory seeking to become sustainable has to try to stop
capital moving in either direction across its borders.
Best wishes,
Richard Douthwaite
