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Tuesday, November 01, 2005
The Political Economy of Divestment

Andrew Samwick, professor of economics at Dartmouth and director of Rocky, posted a response to persons advocating for Dartmouth's divestment from Sudan. I take issue with his framing of the argument.

Samwick wrote:
Suppose that, based on the projected cash flows from selling its products, the company in question is worth $100 per share. Now imagine that a large group of current shareholders decide that they are going to divest the stock. What happens to the stock price? Let's say they are very successful, and it goes down to $80. Since the business operations of the company have not changed, the future cash flows of the company still have a present value of $100 per share. All that the divestment has done is to open up a $20 per share profit opportunity for a new investor in the company. The most natural candidates to see the opportunity and take advantage of it are the existing management or the remaining (less ethical?) shareholders.

Continuing to focus on the capital markets, the way to damage the company is to deny it access to new capital, not to spend a lot of time debating who should own the shares on the existing capital. The $80 share price would matter, for example, if the company intended to issue new equity and had to take a 20% capital loss on all new shares. But very few companies issue new shares in a given year, and for well capitalized multinationals, there are other financing options that don't even require the equity market. So I am very doubtful that the capital market can be used productively in this endeavor, contrary to the conjectures of the editorial. (Similar conjectures are made in a well intentioned op-ed yesterday.)

Samwick makes an avoidable mistake in his poignant criticism of divestment petitions through a narrow focus on the economics of divestment without a subsequent discussion of the political economy of divestment. While viewing the divestment movement's actions in a purely economic framework makes them look silly and ill-informed, situating the discussion of divestment within a political economic paradigm sheds light on the actual goal of the movement.

A political economic analysis of the divestment campaign focuses on the lobby as a strategic political actor. Let us consider the five strategic factors behind divestment.

(1) The first goal should be obvious; petitioners want to make a statement about ethical investing. In declaring that some institutions like Dartmouth ought not invest in companies that do business in places like Sudan, the divestment movement seeks to transform the discourse surrounding investment and holdings from an economic one of profits to a moral one of responsibility. For the divestment movement, to invest in something is more than placing an institution's money at the disposal of the corporation, the choice of investment reflects back on the institution itself.

(2) The second goal follows in the footsteps of the first. Once the terms of the debate reflect moral intuitions and justifications rather than economic ones, the intended audience--in this case institutional investors--can begin to see stock as good or bad, rather than as merely safe, high profit, or stable. The question then becomes: what should one do with the stock of the bad companies? Divest from it to deny them old capital. Bad people shouldn't have had the money in the first place.

Samwick notes that if the movement is very successful, the price of a stock valued at $100 might drop to $80. He then offers: "All that the divestment has done is to open up a $20 per share profit opportunity for a new investor in the company. The most natural candidates to see the opportunity and take advantage of it are the existing management or the remaining (less ethical?) shareholders." (emphasis mine) The futility of the divestment movement in his mind comes at this moment; the price has dropped but a window of opportunity for the less ethical opens. Thus, nothing, beyond a feel good politics, has been accomplished. But, is that all the divestment movement hopes for?

The divestment movement, if it succeeds in making investment a moral issue, has achieved a greater victory than simply creating the opportunity for new investors. It has changed the atmosphere in which investment occurs from one governed by market relations to one operating under the logic of ethics. This paradigm shift grants the movement three additional strategic resources.

(3) This leads me to my third point. A successful divestment campaign raises the profile of both the centers of capital and the beneficiary of investment. The goodness of the institutions who divest are directly produced against the badness of the place from where they have divested. This move incentivizing large sources of capital to both deny and demonize an otherwise perfectly good source of investment, raising the moral stakes and embedding the issue in a moral framework.

(4) Fourth, in this new political economy of investment--one where ethical logics prevail over market logics--the divestment movement can take advantage of issue convergence and issue linkage. There most undoubtedly will be other groups who wish to raise ethical banners and moral awareness around certain issues. The success of a moral group in the one case provides a philosophical and political arena--ethics--where these isolated demands can benefit from each other and where they can link the demands of one with the demands of all who are doing the same thing. For example, the divestment petition can easily link to other anti-mass killing/ humanitarian intervention campaigns. Alternatively, they could use the Sudan issue to bring out issues of racism and toleration. Just as the South African divestment campaign linked capitalist support of South African to the western lack of civil rights for blacks, so could a divestment campaign aimed at the Sudan provide issue linkage and convergence. This leverage, from linkage and convergence, could then be easily translated into a much more crippling boycott.

(5) The fifth and final move goes one step beyond divestment of the bad place. It targets the enemy of the coalition of the good: those companies and institutions who would invest in spite of the morality of the issue. A successful campaign, with broad based support, gives the divestment-boycott lobby the political leverage to defame and denounce those companies who defy their moral reasoning. In the best case scenario, it will give them the ability to boycott those investors also.

Thus, as I have argued, the divestment movement is not a trade-off situation between boycotting and divesting on the one hand, nor, old capital and new capital on the other. Instead, it's about political coalitions and ethical standards prevailing over the more entrenched market logics.

In the "well-intentioned op.ed" that Samwick smugly dismisses, these political economic are highly salient. Consistent with my analysis, the author's main reason for supporting divestment is to build a political coalition.
Divestment would let the world know that Dartmouth is not complicit in genocide. Furthermore, it will provide support for the efforts in Vermont to divest the state pension fund and perhaps even for similar efforts in Illinois. If we gather enough support behind divestment, the companies currently involved in Sudan will be forced to leave or suspend operations there, sharply curtailing the amount of weapons, genocidal infrastructure and militia support that the Sudanese government can afford. In addition, our actions will help persuade the government of the United States that there is a broad consensus for stronger action against the genocide.

Why not support the political goals of the divestment movement knowing that it might lead to some good--and a broad political coalition against something that we can all agree is bad: the mass killing and displacement of civilians?

Ignoring the political considerations of divestment not only let Samwick dismiss the goal as misinformed economically, but encouraged him to invoke his superior training as an economist to identify the tragic irony of a divestment strategy that everyone seemed to miss. Too bad the joke is on him.