Is California Seeking to Fashion Its Own Foreign Policy?

Jock O'Connell, an international business consultant, is a former analyst for the California Commission for Economic Development

Are democracies better candidates for long-term economic growth than authoritarian regimes? This is not an academic question. The fate of billions of state pension-fund dollars is at stake. So, too, may be the federal government's constitutional monopoly over U.S. foreign policy.

For much of the past year, state Treasurer Phil Angelides has been urging the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) to adopt new guidelines for investing in the world's high-risk emerging markets. Under the proposed rules, investments in nations found lacking in "political freedom and essential civil liberties, basic worker rights and a free press" would be prohibited.

Citing an array of studies he says indicate a strong, positive correlation between democratic societies and economic stability and growth, Angelides denies he is grinding an ideological or political ax: "These reports prove that our fiduciary responsibilities [to the pension funds] are not at all inconsistent with investment policies that reward societies that have embraced the democratic values America stands for."

Not everyone concurs. CalPERS' staff disputes the contention that a country's political structure has much to do with its economic prospects. Politically repressive Singapore, for example, has historically provided a much more appetizing environment for foreign investment than has democratic India. Others wonder whether factors such as a strong banking system and a flexible financial system are more accurate predictors of steady economic expansion. Still others say that investment decisions should be based on the commercial prospects of individual companies rather than on the political character of the host country.

What has generally escaped discussion, though, is the possibility that implementation of Angelides' guidelines could pose a novel challenge to the federal government's constitutional prerogatives in foreign relations.

In today's swiftly evolving global economy, capital is an exceedingly potent lever of influence. With their $280 billion in combined assets and $5 billion invested in developing nations, CalPERS and CalSTRS are major players in the world's financial markets. But it's not merely their size that counts. The two funds' investment decisions are closely monitored and widely emulated by other institutions. Consequently, should either rate a country as too risky for investment, scores of other major investors are apt to follow suit. That, of course, would severely hamper the ability of targeted nations to attract foreign investment capital needed for economic development. That, in turn, could serve to antagonize, if not undermine, governments the United States might consider friendly.

As it turns out, some of the nations that CalPERS and CalSTRS would be banned from investing in under Angelides' guidelines are key U.S. allies. One is Turkey, a NATO partner. Another is Brazil, the largest economy in Latin America, bigger even than Mexico's. A third is Egypt, commonly viewed as a moderating influence in Midle East politics. The proposed guidelines would also continue an existing prohibition on pension-fund investments in China, even though the White House and a majority in Congress favor a thicker commercial relationship with Beijing.

Angelides' "hit" list could spark discord in Sacramento, too. Last fall, Gov. Gray Davis visited Egypt to lobby President Hosni Mubarak on behalf of a vast irrigation project backed by one of the governor's biggest campaign supporters. Meanwhile, the Legislature passed a measure calling for establishment of a state trade office in Sao Paolo, Brazil.

This would not be the first time California officials have strayed onto federal turf. For many years, the state's "unitary tax" on multinational corporations had a neuralgic effect on State Department and Treasury officials who had to fend off objections from key trading partners. On one occasion in the mid-1980s, British Prime Minister Margaret Thatcher took the matter up with President Ronald Reagan, presumably under the impression that the federal government could easily compel a sovereign state to amend its tax code.

Similarly, many of California's environmental regulations, in several respects stricter than federal standards, have strained relations with countries that typically fail to see the humor in being forced to deal with a three-dimensional labyrinth of federal, state and local bureaucrats.

Angelides' proposal comes, ironically enough, at a time when international trade agreements like the North American Free Trade Agreement and the World Trade Organization are seen as circumscribing the legislative powers of state and local governments. If that wasn't enough, the U.S. Supreme Court has cast doubt on the right of state and local governments to adopt their own "least-favored nation" laws as a means to influence the behavior of foreign regimes. Such laws were used to oppose apartheid in South Africa, discrimination against Catholics in Northern Ireland and political oppression in China following the Tiananmen Square massacre in 1989. In June, the court threw out a Massachusetts statute barring state agencies from contracting, in most circumstances, with companies that do business in Myanmar. (The City of Los Angeles had a similar ordinance.)

Amid this carnage of states' rights comes a state treasurer invoking a lever of international influence that, in a global economy, is likely to be more effective in more circumstances than the use of armed force. The potential for California's two state public pension funds to complicate the lives of U.S. foreign policy mandarins cannot be taken lightly.

Angelides insists there is no inherent conflict. Still, much like a hitter obscuring the chalk lines around the batter's box, he may wind up further blurring the jurisdictional boundaries of the Constitution. *

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