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Minding the Gap: Global Finance and Human Rights


The workings of global finance are like that part of the iceberg beneath the waterline – vast, unseen and, for many, unknown. The interaction of global finance with human rights is especially opaque. The globalization of each phenomenon has occurred very largely independently of the other. Even the recent surge in interest in the global economy and human rights has been heavily focused on the real economy and on what (non-banking) corporations do and how they behave. The particular dimension of interactions between finance and human rights has, by and large, been a blank space. In this article we seek to bridge the gap in understanding, perspective, and practice between the two fields by investigating actual and potential linkages in respect of four specific features of global finance – two financial products: bonds and derivatives; and two financial processes: risk management and procyclicality. These have been chosen as an illustrative sample of the complex and diverse ways in which the global financial system interacts with human rights. Although these products and processes played an important role in the recent global financial crisis, and although the interface between global finance and human rights is extensive, they have not so far featured on the human rights agenda or been the subject of detailed human rights critique. As such they provide an overview of the types of human rights issues in the financial sector that have so far been hidden from view. The paper therefore constructs an argument as to why the bridging of the gap is important and provides pointers as to how it can be done.

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1 While there is a large body of work in the economic literature on issues of poverty, development, and social welfare, we are focusing here specifically on the interaction between international finance and internationally protected human rights, the relationship between which has so far been conceptualized within narrow parameters

2 Rita Roca and Francesca Manta, “Values Added: The Challenge of Integrating Human Rights into the Financial Sector,” Danish Institute for Human Rights, February 2010, p. 14.

3 Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Washington, D.C.: January 2011), p. xvi.

4 The apt term used in the Preamble to the Universal Declaration of Human Rights (1948), that encompasses public and private sectors, individuals, and all manner of organizations.

5 They are “basic rights,” in the sense of an individual's entitlement to have life's necessities provided, where otherwise absent, by the state; see Shue Henry, Basic Rights: Subsistence, Affluence, and U.S. Foreign Policy, 2nd ed. (Princeton, N.J.: Princeton University Press, 1996), chap. 1.

6 For a consideration of the history and significance of the phenomenon, see Epstein Gerald, ed., Financialization and the World Economy (London: Edward Elgar, 2005); and Thomas Palley, “Financialization: What It Is and Why It Matters,” Levy Economics Institute Working Paper No. 525, 2007.

7 World Bank, “Quick Reference Table: Gross Domestic Product 2009” (latest figures); available at (accessed October 26, 2010).

8 Bank for International Settlements, “Amounts Outstanding of Over-the-Counter Derivatives: By Risk Category and Instrument”; available at (accessed October 26, 2010); and Bank for International Settlements, BIS Quarterly Review (September 2010), p. 22; available at (accessed October 26, 2010).

9 Karsten von Kleist, Carlos Mallo, Serge Grouchko, and Philippe Mesny, “Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2010: Preliminary Results,” Bank for International Settlements, September 2010; available at This is 20 percent higher than in April 2007, which gives an idea of just how quickly financial markets can grow.

10 International Swaps and Derivatives Association, “ISDA Market Survey: Notional Amounts Outstanding, Semi-annual Data, All Surveyed Contracts, 1987–Present”; available at (accessed October 26, 2010).

11 These rights are protected under the International Covenant on Civil and Political Rights (arts. 14 and 26) and the International Covenant on Economic, Social and Cultural Rights (arts. 11, 12, and 13).

12 World Bank Group, “Recovery at the Crossroads: Role and Implications for Developing Countries” (background paper prepared for the G20 Summit, Toronto, June 26–27, 2010), p. 7; available at

13 International Institute for Labour Studies, World of Work Report 2009: The Global Jobs Crisis and Beyond (Geneva: International Labour Organization, 2009), pp. 34; available at

14 Olivier De Schutter, UN Special Rapporteur on the Right to Food, “Food Commodities Speculation and Food Price Crises: Regulation to Reduce the Risks of Price Volatility,” Briefing Note No. 2, September 2010; available at

15 Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith, “Income, Poverty, and Health Insurance Coverage in the United States: 2009,” United States Census Bureau, September 2010, pp. 14–15; available at

16 Ibid., p. 14.

17 As exemplified by the preeminent concern of human rights law and legal scholarship with individual (or group) dispute settlement and remedial action, rather than preventive policy development.

18 A theme explored by Dowell-Jones Mary, Contextualising the International Covenant on Economic, Social and Cultural Rights: Assessing the Economic Deficit (Leiden, Neth.: Martinus Nijhoff, 2004).

19 Branco Manuel Couret, Economics Versus Human Rights (Oxon, UK: Routledge, 2009), pp. 34.

20 This is also a central part of the argument for integrating environmental, social, and governance (ESG) factors into investment decision-making set out in the Global Compact's 2004 report, “Who Cares Wins: Connecting Financial Markets to a Changing World”; available at; see pp. 9–10.

21 Algorithmic trading is the buying and selling of stocks by computers programmed with mathematical models for selecting opportunities. Many such programs are high-frequency traders, whereby stocks are held for seconds or minutes, and where all holdings are sold at the end of each day. Securities and Exchange Commission (SEC), “Concept Release on Equity Market Structure: Proposed Rule,” Federal Register 75, no. 13 (January 21, 2010), pp. 3606–12; available at The SEC comments that “by any measure, HFT [high frequency trading] is a dominant component of the current market structure and is likely to affect nearly all aspects of its performance,” p. 3606.

22 Bear Stearns, for example, fostered a corporate culture in which senior managing directors were expected to donate 4 percent of their earnings to charity. Lehman Brothers donated $39 million to charity in 2007, and in the previous year had partnered with Spelman College to create the Center for Global Finance and Economic Development. See Peter Shergold, “Global Financial Crisis and Economic Downturn: Implications for Corporate Responsibility,” Issue Paper No. 1, Centre for Social Impact, May 2009, pp. 3–12; available at

23 In the context of collateralized debt obligations (CDOs), particularly subprime CDOs, it is worth noting that formal risk management substituted in the vast majority of cases for a basic commonsense look at what was being bought. UBS, in its shareholder report on its credit-related write-downs, conceded that “the CDO desk did not carry out sufficient fundamental analysis as market conditions deteriorated, or conduct ‘look-through’ analysis to reassess potential issues” in the CDO structures. UBS, “Shareholder Report on UBS's Write-Downs,” 2008, p. 30, sec. 6.2.3, and p. 14, sec. 4.2.3.

24 This is a specific example of a general point about the difficulties in the measurement and evaluation of human rights impacts in all sectors—social, political, and legal, as well as economic. Even as Todd Landman and Edzia Carvalho advance cogent arguments about how human rights can be measured, their work makes clear how difficult it is to provide workable means by which comprehensive and detailed measurements can be made. See Landman Todd and Carvalho Edzia, Measuring Human Rights (London: Routledge, 2010).

25 This is partly due to the precise wording of the obligational clause in the International Covenant on Economic, Social, and Cultural Rights, which talks of an obligation to devote “the maximum available resources” to realizing these rights (art. 2(1)). But it is also partly due to the legal rather than economic background of many commentators on this instrument. See Dowell-Jones, Contextualising the International Covenant on Economic, Social and Cultural Rights, pp. 44–51.

26 TheCityUK, “Bond Markets 2010,” June 2010; available at

27 Figures are for 2009; ibid.

28 Of course, the critical issue of the U.S. federal deficit and debt, and the use of quantitative easing by the Federal Reserve to purchase treasury bonds, effectively “monetizing the debt,” has very important ramifications for the dollar, the world economy, and, ultimately, human rights. The collapse of the U.S. bond market and/or collapse of the dollar would be catastrophic for global human rights enjoyment. Unfortunately, however, within the confines of this paper there is not scope to go into the complexity of how this dynamic would unfold.

29 IMF, World Economic Outlook: Sustaining the Recovery (Washington, D.C., October 2009), fig. 1.7; available at Despite the concerns in the 1990s that the state was being rolled back from the commanding heights of the economy, in reality there was only a marginal reduction in state spending as a proportion of GDP, and in many cases those reductions have been reversed by subsequent governments.

30 Stephen Cecchetti, M. S. Mohanty, and Fabrizio Zampolli, “The Future of Public Debt: Prospects and Implications," BIS Working Papers No. 300, March 2010, p. 1; available at See the charts on p. 10, which plot the future trajectory of public debt for twelve advanced economies over the next thirty years. In all cases public debt levels at least double, with the UK's public debt jumping from 100 percent to 500 percent of GDP over the next thirty years.

31 Figures from and the Congressional Budget Office, “The Budget and Economic Outlook: An Update, August 2009”; available at

32 Figures from the Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020 (January 2010); available at

33 See for a breakdown of the UK debt situation.

34 Hans J. Blommestein, Eylem Vayvada Derya, and Perla Ibarlucea Flores, “OECD Sovereign Borrowing Outlook No. 3,” October 2010, p. 2; available at

35 This was effectively what happened to Greece in May 2010 when its eurozone partners, in concert with the IMF, had to step in to activate their offer of emergency financing because Greece needed to sell more than $10 billion in new bonds in order to repay bonds that were maturing, and to keep funding government spending. It was unclear whether there would be sufficient investor demand given the risks. BBC News, “Greek Minister Says IMF Debt Talks Are ‘Going Well,’” April 25, 2010; available at

36 In Ireland's case, the negotiation of its bailout by its eurozone partners was delayed by concerns over the interest rates it would be charged on the loans, which, it was feared, would just push it further into insolvency and cause even deeper social spending cuts. See EUbusiness, “EU Ministers Divided over Irish Bailout Interest Rate,” November 28, 2010; available at

37 The principle of nonretrogression was set out in the UN Committee on Economic, Social and Cultural Rights General Comment No. 3: “The Nature of States Parties Obligations,” December 14, 1990, 5th Session, UN Doc. E/1991/23, paras. 9 and 10.

38 See, e.g., Michalowski Sabine, “Sovereign Debt and Social Rights—Legal Reflections on a Difficult Relationship,” Human Rights Law Review 8, no. 1 (2008), p. 35; and Villaroman Noel, “The Need for Debt Relief: Debt-Servicing Leads to Violations of State Obligations under the ICESCR,Human Rights Brief 17, no. 3 (2010), pp. 35.

39 See, e.g., “ECB Steps Up Push to Calm Bond Markets,” Financial Times, December 3, 2010; and “ECB Bond Buying Triggers Biggest Drop in Corporate Debt Risk in Six Months,” December 3, 2010; available at

40 Of course, the credit rating agencies play a central role in this, and have been hugely criticized in light of the credit crisis. But the deeper issue of how risk is perceived, measured, and managed in finance, and the responsibility that financiers take for their own risk decisions, concerns the system as a whole.

41 Angela Merkel, the German chancellor, has commented: “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks” (“Irish Row with Angela Merkel over Debt Bailout,” Inside Ireland, November 12, 2010; available at At the G20 meeting in Seoul, the finance ministers of France, Germany, Italy, Spain, and the United Kingdom issued a joint statement assuring investors currently holding eurozone bonds that they would not be expected to take losses from any sovereign bailouts, and that the new rules expecting them to participate in any burden sharing would not take effect until 2013. See “EU Ministers Move to Calm Bond Markets,” Financial Times, November 12, 2010.

42 Warren Buffet, Letter to Berkshire Hathaway Shareholders, February 23, 2003; available at

43 Particularly when coupled with the deficiencies of risk management models and leverage, which we will outline below. All these factors combined in a powerful way to bring down the multibillion-dollar hedge fund Long-Term Capital Management in 1998, despite its Nobel Prize–winning founders. See President's Working Group on Financial Markets, Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management (Washington, D.C.: Department of the Treasury, April 1999).

44 See above text at note 9.

45 International Swaps and Derivatives Association, “ISDA Market Survey.”

46 The current crisis is just one in a list of crises that have been caused by derivatives. See Dowd Kevin and Hutchinson Martin, Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System (London: John Wiley, 2010), pp. 225–44.

47 See Gerald Epstein, Financialization and the World Economy, and Thomas Palley, “Financialization: What It Is and Why It Matters.”

48 See, e.g., Christopher Gilbert, “Speculative Influences on Commodity Futures Prices 2006–08,” United Nations Conference on Trade and Development, Discussion Paper No. 197, March 2010; Miguel Robles, Maximo Torero, and Joachim von Braun, “When Speculation Matters,” International Food Policy Research Institute, Issue Brief No. 57, February 2009; and Bryan Cooke and Miguel Robles, “Recent Food Prices Movements: A Time Series Analysis,” International Food and Policy Research Institute, Discussion Paper No. 00942, December 2009.

49 Ke Tang and Wei Xiong, “Index Investment and Financialization of Commodities,” NBER Working Paper Series No. W16385, 2010, p. 2; available at See also John Baffes and Tassos Haniotis, “Placing the 2006/8 Commodity Price Boom into Perspective,” World Bank Policy Research Working Paper No. 5371, 2010; available at; Basu Parantap and Gavin William, “What Explains the Growth in Commodity Derivatives?Federal Reserve Bank of St. Louis Review 93, no. 1 (2011), p. 37; and Commodity Futures Trading Commission, “Staff Report on Commodity Swaps Dealers & Index Traders with Commission Recommendations,” 2008; available at

50 Georgiev Georgi, “Benefits of Commodity Investment,Journal of Alternative Investments 4, no. 1 (2001), p. 40.

51 Testimony of Michael W. Masters, Masters Capital Management LLC, before the Committee on Homeland Security and Governmental Affairs, United States Senate, May 20, 2008, pp. 6–7 and 2; available at

52 Data available from

53 Testimony of Michael W. Masters, p. 1.

54 FAO, “More People Than Ever Are Victims of Hunger,” Press Release, June 2009, p. 1; available at

55 De Schutter, “Food Commodities Speculation and Food Price Crises.”

56 Namely, “the right of everyone to an adequate standard of living . . . including adequate food,” under Article 11 of the International Covenant on Economic, Social and Cultural Rights.

57 See Institute for Agriculture and Trade Policy, “Commodities Market Speculation: The Risk to Food Security and Agriculture,” 2008, for a discussion of the regulatory debate in the United States; available at

58 See above section on derivatives.

59 The credit crisis “was not an across-the-board deterioration of all credit markets, but—at least in its early stages—an acute crisis that affected certain markets while leaving others virtually unscathed.” Risk management and procyclical processes helped transmit problems from one market to another, and across financial institutions. David Greenlaw et al., “Leveraged Losses: Lessons from the Mortgage Market Meltdown” (paper presented at the U.S. Monetary Policy Forum, New York, February 29, 2008), p. 11; available at

60 Usually the arguments made for inclusion are—of necessity because of their starting point—limited to reputational risk, the influence of environmental, social, and governance (ESG) factors on the long-term “value” of an equity, or increasingly, arguments around the corporate responsibility to respect human rights. None of these approaches mainstreams concern for human rights into financial processes proper.

61 Not only has it limited the way in which the integration of human rights into bank processes has been approached, it has also limited the type of people who are engaged in this process: the vast majority are either pure human rights lawyers or CSR managers who do not themselves have a background in frontline financial operations. The technical know-how of frontline financial operations is therefore not present in the discussion from the outset, immediately excluding the more complex areas of bank operations—which account for the majority of financial activity—from the dialogue. Situating the CSR unit technically within the risk management function does not address this gap.

62 The risk weighting of assets for regulatory capital purposes was at the heart of the second Basel Accord on international capital adequacy. Bank for International Settlements, International Convergence of Capital Measurement and Capital Standards: A Revised Framework (generally known as Basel II), June 2004; available at

63 As one observer has commented, the objective was “to use the alchemy of financial modeling to create the appearance of mathematical safety out of dangerous toxic ingredients.” Statement by Christopher Whalen, cofounder of Institutional Risk Analytics, to the U.S. House Committee on Science & Technology Subcommittee on Investigations and Oversight hearing on “The Risks of Financial Modeling: VaR and the Economic Meltdown,” September 10, 2009, p. 5; available at

64 Just a few months before problems in the financial markets began, the UK Financial Services Authority (FSA) had noted that firms were significantly underestimating the likelihood of severe events and were using only very mild stress scenarios to test their portfolios' resilience to problems. UK FSA, “Stress Testing Thematic Review,” October 9, 2006; available at

65 David Viniar, Chief Financial Officer at Goldman Sachs, is quoted as having said in a conference call to investors in August 2007, before the worst of the crisis: “We are seeing things that were 25-standard deviation (i.e. once in every 100,000 years) events, several days in a row.” Gangahar Anuj and Tett Gillian, “System Error: Why Computer Models Proved Unequal to Market Turmoil,Financial Times, August 15, 2007, p. 9. See also Danielsson J., “Blame the Models,Journal of Financial Stability 4, no. 4 (2008), pp. 321–28; Rebonato Ricardo, Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently (Princeton, N.J.: Princeton University Press, 2007); and Taleb Nassim Nicholas, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (London: Penguin, 2007).

66 Kevin Dowd, John Cotter, Chris Humphrey, and Margaret Woods, “How Unlucky is 25-Sigma?” Centre for Risk & Insurance Studies Discussion Paper Series, 2008.III, p. 4; available at

67 Lord Turner identified procyclicality as one of the five key issues that underpinned the crisis (UK Financial Services Authority, “The Turner Review: A regulatory response to the global banking crisis,” p. 16). In a similar vein, the Bank for International Settlements has commented: “One of the most destabilizing elements of the crisis has been the procyclical amplification of financial shocks throughout the banking system, financial markets and the broader economy” (Basel Committee on Banking Supervision, “Strengthening the Resilience of the Banking Sector,” Consultative Document, Bank for International Settlements, December 2009, para. 28; available at

68 International Institute for Labour Studies, World of Work Report 2009.

69 There has been considerable concern in light of the crisis over the rights of migrant workers, who are often the first to lose jobs but who receive little help in returning to their home country. See Ibrahim Awad, “The Global Economic Crisis and Migrant Workers: Impact and Response,” International Labour Organization, 2009. Although there is an international convention on migrant workers—the Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families—this convention has only forty-three States Parties (as of September 2010). Critically, it has not been ratified by any of those states that are major recipients of migrant workers.

70 Aldo Caliari et al., “Bringing Human Rights to Bear in Times of Crisis: A Human Rights Analysis of Government Responses to the Economic Crisis” (Submission to the High-Level Segment of the United Nations Human Rights Council on the Global Economic and Financial Crisis, Geneva, March 2010), pp. 11–12.

71 “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”: Keynes John Maynard, General Theory of Employment, Interest and Money (London: Macmillan & Co, 1936), p. 142.

72 Kinley David, Civilising Globalisation: Human Rights and the Global Economy (Cambridge: Cambridge University Press, 2009), pp. 618.

73 This is the line of reasoning that links Smith's great work on social justice (The Theory of Moral Sentiments [1759]) with his treatise on political economy (An Inquiry into the Nature and Causes of the Wealth of Nations [1776]).

74 Caliari et al., “Bringing Human Rights to Bear in Times of Crisis,” p. 18.

* Discussions with the following people helped us enormously in the development of our thinking on this topic: Philip Alston, Bill Alford, Lara Blecher, Ross Buckley, Tony Fisher, Ros Grady, David Harris, Jeni Klugman, Sheldon Leader, Mark Lyster, Chip Pitts, August Reinisch, Jim Salzman, Helen Stacey, Andrew Tuch, and Peter Woicke, as well as the three anonymous referees and the editors of Ethics & International Affairs. Various iterations of the paper were delivered at talks and seminars at Duke, Essex, Harvard, Stanford, and Sydney universities, the Max Planck Institute in Heidelberg, Herbert Smith Lawyers in London, the Human Rights Law Centre in Melbourne, and the International Council for Human Rights Policy in Geneva. The audiences at these events also robustly tested our views. Finally, we owe a particular debt to Christine Ernst, whose assistance in the research and editing of the paper was exemplary. The research for this paper was funded in part by a Discovery Grant from the Australian Research Council.

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