Environment and Economy

11-1 Page 19 Image 1 Analysis of local development and global trade policies that deepen poverty and endanger environments

Subsidizing Sprawl

Economic Development policies that deprive the poor of transit and jobs.

Economic development subsidy programs—such as property tax abatements, corporate income tax credits and low-interest loans—were originally justified in the name of poverty reduction. Initiated as far back as the 1930s and accelerated in the 1950s, many of these programs were targeted to older areas and pockets of poverty that needed revitalization.

But over time, more and more of the 1,500 development subsidy programs nationwide have become part of the problem instead of the solution. Subsidies originally meant to rebuild older urban areas are being perverted into subsidies for suburban sprawl. Wal-Mart and other big box retailers are getting subsidies that allow them to simply pirate sales from existing merchants. Upscale residential and golf course projects are getting subsidies from programs originally designed to serve low-income neighborhoods.

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 The net effect has been to worsen sprawl and all of its disparate harms to communities of color: the out-migration of urban jobs, the growth of jobs in areas that are not accessible by public transportation, and the resulting concentration of unemployment and poverty.
Deconstructing Sprawl Development “Suburban sprawl” usually refers to development characterized by low density, a lack of transportation options, strict separation of residential from non-residential property, and job growth in newer suburbs with job decline in older areas. Sprawl causes increased dependence on automobiles and longer average commuting times, deteriorating air quality, and rapid consumption of open space in outlying areas. It also results in disinvestment of central city infrastructure and services, and strains city budgets at the core (due to a declining tax base) and in some suburbs.

The decentralization of jobs means work becomes scarce for low-skilled workers who are concentrated at the core. Many suburbs lack affordable housing and many suburban jobs are not accessible by public transit—either because a suburb has opposed the entry of transit lines or because jobs are thinly spread out far from transit routes. So sprawl effectively cuts central city residents off from regional labor markets. That means greater poverty for residents of core areas, who are disproportionately people of color.

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What causes sprawl? Urban experts cite many factors, including: some people’s preference for low-density housing; white flight; lack of effective regional planning; competition between cities for jobs and tax base; “redlining” or geographic and racial discrimination against older areas by banks and insurance companies; crime and perceptions of crime; declining quality of central city schools; contaminated land or “brownfields;” exclusionary suburban zoning that blocks apartment construction; federal capital gains rules that encourage people to buy ever-larger homes; the historically low price of gasoline; and federal highway spending that far exceeds public transportation spending.


But another important factor is economic development subsidies like tax increment financing (TIF) and enterprise zones that have gone awry and are being abused in ways their creators never intended.

Sprawl Subsidy #1: TIF
Originally conceived to help revitalize depressed inner-city areas, tax increment financing, or TIF, allows a city to designate a small TIF district and say that the area will get redeveloped so property values will go up and property taxes will rise. When that happens, the tax revenue gets split into two streams. The first stream, set at the “base value” before redevelopment, continues to go where it always has: to schools, police, fire departments and other public services.  The second stream is diverted back into the TIF district to subsidize the redevelopment. This diversion can last 15, 23, even 40 years—i.e., a lot of money for a long time.

Many states originally restricted TIF to truly needy areas with high rates of distress such as property abandonment, building code violations or poverty. Today TIF is allowed in 47 states and Washington, D.C. Over the years, about a third of the states have loosened their TIF rules so that even affluent areas qualify.  The wealthy Chicago suburb of Lake Forest, for example, has a TIF district—and a Ferrari dealership. Pennsylvania’s TIF statute allows a trout stream near Pittsburgh called Deer Creek to be TIFed because the land has “economically or socially undesirable land uses.” 

Worse still, a few states allow the sales tax increment to be “TIFed” on top of the property tax increment. That results in a perverse incentive to overbuild sprawling retail. A study by PriceWaterhouseCoopers about “greyfields”—the euphemism for dead malls—found that 7 percent of regional malls were already greyfields, and another 12 percent are “potentially moving towards greyfield status in the next five years.” That would mean 389 dead malls by 2009.

Missouri, which allows sales tax TIF, is learning this lesson the hard way. The state has had a raging four-year debate about how to reform its TIF program before it subsidizes any more unnecessary new stores.  State Senator Wayne Goode, D-St. Louis County, is the primary sponsor of a reform bill. “Putting public money into retail in a big metropolitan area doesn’t make any sense at all,” Goode says. “It just moves retail sales around.” About one-third of the 90-odd municipalities in St. Louis County collect “point of sale” sales tax, he explains. In other words, cities get to keep a portion of the sales tax if a purchase happens within their borders. The other two thirds of cities in the county pool their revenue. So the one- third fight each other for sales—and pirate sales from the two-thirds—often using TIF. Area developers go to great lengths to block reforms because the TIF is so lucrative.

As the St. Louis Post-Dispatch editorialized: “With towns handing out TIF like bubble gum, St. Louis may be getting over-stored, while developments are under-taxed. Projects that make no sense get built because of tax breaks.”

Subsidizing new retail is almost always bad economics, and terrible public policy. Retail packs a lousy bang for the buck compared to manufacturing or almost any other activity. The “upstream” inputs do little for the local economy (think of all those goods from China at Wal-Mart), and the “downstream” ripple effects are terrible because retail jobs are overwhelmingly part-time and poverty-wage, with no health care.

Suburban areas with the greatest numbers of high-income households will always have plenty of shopping opportunities. Supply chases demand. The only situation where retail can be legitimately called economic development—and therefore deserving of a subsidy—is in an older, disinvested neighborhood that is demonstrably underserved, and lacking basic retail amenities such a groceries, drugs and clothing.

Sprawl Subsidy #2: Enterprise Zones
Enterprise zones, another geographically targeted program intended to help poor inner-city areas, have also been weakened in many states so that affluent areas get multiple zone subsidies.

New York, for example, allows zones to be gerrymandered non-contiguously. So Buffalo’s two original enterprise zones have morphed into more than 130 non-contiguous areas, raising questions about political favoritism. A scathing Buffalo News investigative series found that “[t]he program, crafted to create business in distressed areas and jobs for the down-and-out, has transmuted here into a subsidy program for the up-and-in”—including even downtown law firms.

In an episode that gives new meaning to the term “Philadelphia lawyer,” law firms there are moving a few blocks into a “Keystone Opportunity Zone,” which will make the law firm partners exempt from state income tax! Meanwhile, the city’s African-American and Latino neighborhoods continue to suffer catastrophic rates of abandonment and unemployment.

Ohio has a large number of enterprise zones and they have a controversial history. A study from Policy Matters Ohio found that “[t]he very areas [that zones were] initially designed to help are now disadvantaged by the program. An aging infrastructure, a low tax base, weak education systems, and numerous costly social challenges place poor urban areas in a weak position relative to their wealthier suburban neighbors. Ohio's [zone program] has succeeded in making the playing field even more tilted against urban areas by extending to wealthier suburbs an additional fiscal tool with which to compete for firms.”

Discriminatory Development
TIF and enterprise zones are just the tip of the iceberg when it comes to explaining how pro-sprawl development subsidies undermine jobs for the truly needy. A recent study by Good Jobs First, Missing the Bus, finds that not one of the 1,500 total state development programs nationwide requires—or even encourages—a company getting a subsidy in a metro area to locate the jobs at a site served by public transportation.

In other words, despite all the anti-poverty rhetoric that most programs come draped in, states are typically indifferent to whether they create jobs that low-income people can get to. Research has shown that African-American households are about three and a half times more likely than white families to not own a car, and Latino households are about two and a half times more likely. Given those facts, the discriminatory bias of economic development in the United States today could not be clearer.

Greg LeRoy directs Good Jobs First, a national resource center for corporate and government accountability in economic development (http://www.goodjobsfirst.org).

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Beyond Trade: The WTO’s expansive agenda and impact (2004)

In the late 1980s, corporate leaders and their backers in the U.S. and British governments launched a campaign to transform the General Agreement on Tariffs and Trade (GATT), a narrowly-cast, 20-page trade pact, into a powerful new system of global governance. The GATT, which cut tariffs and quotas on trade in goods, and the overall notion of trade both enjoyed broad support, making these obscure negotiations an ideal Trojan horse within which to conceal an expansive non-trade policy agenda.

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What emerged from the GATT talks, completed in 1994, was a powerful new global commerce agency called the World Trade Organization (WTO), which now operates as the only binding system of global governance.

The WTO enforces 900 pages of one-size-fits-all rules pertaining to global policies on food, health, safety, the environment, social services and service sector regulation, investment, intellectual property, and government procurement. The agency’s expansive powers over the regulatory authority of WTO member nations are enforced by a binding dispute resolution system unlike any system existing in environmental, human rights or other treaties. A key WTO provision requires all signatory nations to “conform their laws, regulations and administrative procedures” to the WTO’s terms.

Any national or local policy of a WTO member nation that falls outside the WTO’s terms is challengeable as an “illegal trade barrier” before a WTO tribunal comprised of three trade officials who meet behind closed doors. Unlike domestic courts, the WTO tribunals have no basic due process protections: all documents and proceedings are secret and there is no appeal outside of the WTO system. The three officials deciding the cases are not judges, but rather private trade attorneys and government officials who have represented countries at GATT or WTO hearings. These tribunalists are not subject to conflict-of-interest disqualification. Nations whose policies are judged by the kangaroo court not to conform to WTO rules are ordered to eliminate the policy—or face permanent trade sanctions. Under WTO operations, it is irrelevant if the policy in question was passed by democratically elected parliaments, supported by domestic Supreme Courts, or established by public referendum. It is irrelevant if the law in question is unrelated to trade or if it treats domestic and foreign goods and companies the same. If the policy is ruled to be outside the constraints set by the WTO, it must go.

Because the WTO’s substantive rules are extremely biased against governments’ power to regulate markets, WTO enforcement tribunals have ruled in nearly every case to eliminate the policy in question. After nine years and nearly 90 cases decided, there is only one instance of a member refusing to comply with WTO rules: the European Union (E.U.), which banned meat containing artificial growth hormones, faces over $100 million in trade sanctions annually for the privilege of maintaining its ban. Most members cannot afford to take such a course of action. Indeed, now the mere threat of a WTO challenge often causes countries to change their laws to conform to WTO rules.

False Promises of Free Trade
WTO proponents and defenders continue to posit that governments and populations benefit because, according to them, reorganizing countries’ laws and economies to conform with the one-size-fits all model will ensure economic growth. However, the economic data—including data provided by the World Bank and other supporters of this model—prove the opposite: countries that have most strictly complied have suffered from dramatically slowed growth in per capita income, while countries remaining outside the rules have enjoyed the highest rates of poverty reduction. Nations such as Argentina and Thailand were touted as the poster children of the WTO model for other countries to emulate—until their economies crashed and burned. As the economies of country after compliant country in Asia, Latin America and Africa tanked and millions of their inhabitants suffered from the consequences of this failed social experiment, the high priests of the WTO suddenly claimed that the countries—not the model they had all followed—were themselves to blame for their economic problems.

Countries such as China and Vietnam—who were originally outside of the WTO system—implemented many of the investment, capital and import-control policies that the WTO forbids, yet have had stunning growth rates that lifted millions from poverty. If one excludes these countries and only considers those complying with WTO rules, the number—as well as the percentage—of people living in abject poverty (defined as $1 per day) has increased during the WTO era. Moreover, in the era of the WTO—and following the imposition of the same package of policies by the International Monetary Fund (IMF)*—income inequality between nations and within nations has increased dramatically. For instance, income inequality in the United States is at its highest since the age of the robber barons at the turn of the century.

But despite this track record, some interests—including the U.S. and E.U. trade agencies and the corporations they serve—have been pushing for negotiations to broaden the WTO’s scope and power even further. They seek to add to WTO rules certain outrageous terms now found in the IMF’s bilateral Structural Adjustment Programs (SAPs) with poor countries and in the North American Free Trade Agreement (NAFTA). Through NAFTA, for example, foreign corporations and investors are empowered to privately enforce new privileges and rights by suing governments for cash compensation based on allegations that government policy undermines expected profits. A string of these cases have already been decided. For instance, Mexico has paid a U.S. toxic waste company $18 million in damages after a NAFTA tribunal ruled that Mexico’s zoning laws barring toxic waste treatment in an environmental preserve violated the company’s investor rights. Not even international environmental and human rights treaties are free from these attacks: in another case, a corporation received compensation because Canada’s implementation of the Basel Convention (governing trade in hazardous waste) had limited its business opportunities in PCB trade.

Neoliberalism’s Next Phase
The world is living with the threat of WTO and NAFTA in part because the voices of those who would be most affected were locked out of the discussions. This dichotomy, combined with nearly ten years of dismal results, led to the collapse of talks at the WTO’s Cancun Ministerial in September 2003. Social movements, labor unions and a diverse array of other civil society forces from around the world have run effective campaigns in scores of countries to inform citizens and demand a more equitable trade system. The result was a setback to the corporate globalization agenda pushed by the Bush administration, some European countries, and WTO promoters in Geneva and in corporate boardrooms.

The Bush administration and its corporate funders suffered yet another blow two months later in Miami when a strong bloc of Caribbean and South American countries resisted plans to expand the NAFTA model to 31 more countries through a proposed Free Trade Area of the Americas (FTAA). The United States demanded an all-encompassing treaty with NAFTA’s extreme corporate investor protections; patent rules that limit access to seeds and essential medicines; and procurement rules that trump any local, state or federal government’s ability to use its tax dollars to employ local workers, or for “green” policies. In Miami, the United States was faced with a stark choice: no FTAA or a limited agreement that would not pass muster with its corporate backers. The United States settled for a basic framework that does not go beyond the WTO rules and to which all countries would be bound, and an “a la carte” system on other issues. However, the United States did succeed in keeping the more controversial issues on the table—i.e., FTAA rules that countries can opt into or out of are included in the framework.

Since the NAFTA model was implemented, and similar Wall Street-promoted IMF deals have caused social and economic chaos in developing countries, various governments in the hemisphere have changed from neoliberal cheerleaders to skeptics. This includes Brazil, Argentina, Venezuela, Paraguay and, most recently, Bolivia. Mass demonstrations in Peru and Bolivia have reversed plans to privatize basic public services. The same month as the Miami FTAA meeting, six people were killed in demonstrations in the Dominican Republic over new demands being made by the IMF. Public opinion polls throughout the region indicate a complete loss of faith in the “free trade” model.

This sentiment is also shared in the United States as public concern over trade policy and corporate globalization’s winners and losers has already made trade a central issue in the upcoming general election in November.

Lori Wallach is executive director of Public Citizen, a national non-profit consumer advocacy organization. Wallach is also the author, with Patrick Woodall, of Whose Trade Organization? A Comprehensive Guide to the WTO (The New Press). For more information, visit www.tradewatch.org.

* The International Monetary Fund (IMF) is the international organization originally established to help nations with short-term cash crunches relating to trade financing and to manage the gold-standard currency valuation system. In recent decades, the IMF has morphed into providing long-term loans to developing countries on the condition that these countries reorganize their laws and economies to prioritize servicing debt, for instance, by cutting government budgets, such as health and education spending, liberalizing trade and investment policies, and providing new intellectual property and investor protections.

Originally uploaded on: 2005-10-10 14:41:12 -0700

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From the Archives RP&E Vol.11 in 2004 — Under WTO operations, it is irrelevant if the policy in question was passed by democratically elected parliaments...

Trading Human Rights for Corporate Profits

Global trade policy weakens protections for health, the environment

In 1995, a small town in central Mexico refused to allow the California-based Metalclad Corporation to build a hazardous waste landfill that studies showed could have contaminated local groundwater and jeopardized a fragile ecosystem. The following year, the company sued Mexico, claiming that special rules under the North American Free Trade Agreement (NAFTA) entitled it to millions of dollars in compensation for its lost business opportunity. Although the Mexican government had approved the project, it also acknowledged in the NAFTA proceedings that local communities have the right under Mexican law to oppose hazardous waste facilities. A NAFTA tribunal disagreed, holding that Mexico had violated Metalclad’s rights and owed the company almost $17 million.

This ruling made clear that international trade rules have become a weapon to undermine the health and environmental sovereignty of nations and local governments. How did such an injustice come to be?

Enshrined in international human rights law is the notion that people everywhere have intrinsic rights to life and health, and to a healthy environment. It is the responsibility of governments at all levels to protect these fundamental human rights. Recently, however, the United States and other nations have relinquished much of their power to protect such rights when doing so would interfere with corporate profits.

This abdication of responsibility is occurring in international trade agreements that give foreign corporations the right to compensation for profits lost as a result of government regulations. Companies have already used rules to challenge protections for drinking water, health and the sacred sites of Native Americans. Multimillion dollar awards in several cases create a strong disincentive to new government regulations, substantially reducing human rights protections around the world.

Trade Rules Trump Rights
Most of the late–twentieth-century wave of trade liberalization focused on facilitating the movement of goods—from plastic toys to commercial aircraft—around the world. With the success of this effort, multinational corporations sought to expand their geographic and economic reach by moving operations overseas to exploit cheap labor and materials. To strengthen their position, corporations began to demand special rules guaranteeing the profitability of their investments in foreign countries. Their first major success was NAFTA, which devotes an entire chapter to guaranteeing foreign profits irrespective of government regulations. Subsequent trade agreements have applied the same rules to more nations, and efforts are underway to make them apply throughout the Americas and around the world.

Under the provisions of NAFTA’s Chapter 11 and its progeny in other international agreements, foreign investors can sue governments in special international tribunals when they believe a government action has treated their investment unfairly or otherwise interfered with their investment. The judges are private lawyers, and the proceedings are frequently closed to the public. The tribunals’ decisions are automatically binding on the governments and generally cannot be appealed. Because each tribunal’s interpretation of the investment rules influences subsequent tribunals, each decision sets a precedent that may apply worldwide.

Corporations’ interpretation of these investment rules establishes a system akin to legalized extortion: governments can only protect against an environmental or health threat posed by the activities of a foreign investor if they are willing to pay the investor to remove the threat. Even defending the most frivolous claim—which usually requires hiring private U.S. or European lawyers—can be beyond the means of many developing countries, dooming many regulations before they are even implemented.

Threats to Water, Sacred Sites
The growing influence of international investment rules presents a particular threat to the human right to water. United Nations agencies have recognized that access to clean water is fundamental to the fulfillment of all human rights, including the right to life. Yet as worldwide demand for fresh water rises, more and more governments are succumbing to pressure to grant water privatization contracts to multinational corporations. The international investment rules are already working to undermine the ability of governments to protect freshwater resources.

For example, in the late 1990s, the World Bank pressured the government of Bolivia to privatize the water system in the nation’s second-largest city, Cochabamba. A subsidiary of U.S.-based Bechtel Corporation signed a contract to provide the water, and immediately raised rates until some residents were paying 20 percent of their average monthly income just for water. Widespread protest ensued, resulting in one death, numerous injuries, and the eventual termination of the water services contract. The company is now using international investment rules to demand that Bolivia pay the $25 million (more than one percent of Bolivia’s gross domestic product) that the company claims to have invested in its failed enterprise.


A second case directly challenges governments’ ability to protect the quality of drinking water. In 1999, California ordered a phase-out of MTBE, a toxic gasoline additive that has contaminated groundwater in hundreds of locations throughout the state. Methanex Corporation, a Canadian manufacturer of one of the chemicals in MTBE, has brought a claim against the United States for nearly $1 billion in compensation for the impacts of California’s measure on the company’s future profits. The outcome of this case will set a powerful precedent by determining whether state (or local or national) governments have the right to protect drinking water, and other public interests, without the fear of investor challenges.

These international investment rules do not only interfere with government action to protect health and the environment, but also with efforts to protect the right of Indigenous communities to their cultural heritage. Another NAFTA case demonstrates this threat. A Canadian gold-mining company, Glamis Gold Ltd., holds a mining claim in a pristine desert ecosystem in Southern California’s Imperial County. The company planned to exploit its claim with an open-pit gold mine less than a mile from several sites sacred to the Quechan Indians. During the Clinton administration, the U.S. Department of Interior denied a permit for the mine based on a federal historic preservation agency’s finding that the project would irreparably damage the tribe’s sacred sites. In 2001, President Bush’s Interior Secretary, Gale Norton, rescinded the decision based on her agency’s determination that U.S. law does not allow the government to deny a mining permit on the basis of cultural concerns.

In the meantime, however, California passed two measures requiring mine operators to refill open pit mines when they complete operations, particularly if the mines are near Native American cultural sites. Such backfilling is one of the best-known methods of preventing the massive toxic contamination that can accompany open-pit mines. Glamis argues that the actions of the United States (in delaying the permit) and California (in requiring backfilling) violate its rights under NAFTA and is using the investment rules to demand $50 million in compensation. If Glamis’s claim is successful, it would set a dangerous precedent that corporate profits take precedence over the rights of Indigenous communities.

Undemocratic Decisions
The threat posed by international investment rules is not limited to the special protections they give multinational corporations. The processes by which the cases are resolved also undermine many traditional safeguards against abuse.

Before the new investment rules came into effect, investors could not sue governments directly for violations of international agreements; an investor would have to convince its government to bring a challenge on its behalf. This practice allowed governments to filter out challenges that could undermine rights considered important to protecting the public interest. Thus Glamis’s claim might have been prevented because Canada, Glamis’s home nation, might have been unwilling to support a challenge establishing a precedent that would undermine its ability to protect the rights of its large Indigenous population.

International law also generally requires claimants to take their claims to national courts before using international ones. As in the Glamis and Metalclad cases, disputes about domestic law often underlie investment challenges. National courts are much better qualified to resolve such questions than international tribunals made up of foreign lawyers.

Domestic courts also provide an important element of democratic legitimacy to disputes. Domestic judges have a much better understanding than international tribunals of the public policy concerns underlying government actions. Because their processes are generally open to public scrutiny and participation, concerned individuals and organizations can ensure that the courts do not ignore important points. However, the protections provided by public participation are unavailable in international investment disputes, which are often resolved in secrecy and have only permitted minimal public participation.

Future of Free Trade
Decisions ordering governments to pay millions of dollars to foreign corporations have not stemmed the tide of nations adopting these investment rules. To the contrary, the United States and other governments are pressing for the inclusion of the rules in numerous new free trade agreements, including the Free Trade Area of the Americas agreement, which would apply to every nation of the Western Hemisphere but Cuba.

Foreign investment can play a valuable role in the sustainable development of nations around the globe. According to World Bank economists, developing nations can attract foreign investment without accepting the rules presently being advocated by multinational corporations. Nations must adopt investment rules that explicitly guarantee their ability to protect the environment and other fundamental public values. Human rights should always take precedence over corporate profit.

Martin Wagner is managing attorney for the International Program at Earthjustice (www.earthjustice.org), a public-interest environmental law firm. Alyssa Johl is the Program’s research associate. The International Program has been instrumental in opening international investment disputes to participation by environmentalists and other advocates of the public interest.

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