The government of Singapore last week was considering legal action against two Singapore-based companies for operations in neighboring Indonesia. The government of Singapore believes that the two companies, Asia Pacific Resources International and Sinar Mas, which are both headquartered in Singapore but have Indonesian owners, are engaged in slash and burn techniques to clear land in Indonesia for use as palm oil plantations. The use of slash and burn techniques has generated considerable pollution, which has drifted into Singapore creating a thick haze and forcing the government to issue several health warnings for poor air quality. The government has indicated that the warnings could remain in place for weeks.
The recent developments provide a classic example of the problem of externalities. Because the costs resulting from the pollution associated with slash and burn techniques are displaced out of Indonesia, there is little incentive for the Indonesian government to address the situation. Further, because the cost of the pollution is not priced into the operations of the companies themselves, the companies have no incentive to curtail their activities. Rather, the costs are borne by the people of Singapore, who must endure poor air quality (and associated health problems).
In this case, the government of Singapore has some resource, because two of the companies engaged in the polluting activities are based in Singapore. But there are at least 30 other companies engaged in similar activities in Indonesia over which Singapore has little influence. And it’s not entirely clear on what grounds the two companies will be charged.
The land is being cleared for the production of palm oil, which historically has been used as edible oil in the region. But increasing demand for biodiesel in the European Union (which mirrors increased demand for ethanol in the United States) has led to sharp increases in palm oil production in southeast Asia. Ironically, the increased pollution in Singapore is thus driven, at least in part, by efforts to reduce air pollution in Europe.
What do you think? Should multinational corporations face liability in one country for their operations in another? What are the implications for such a position? Could you envision an American company being sued in foreign courts for operations in the United States? Are there any limits to this sort of liability? Take the poll or leave a comment below and let us know what you think.