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A critique of neo-liberal globalisation?


Prof. Gerald Epstein argues that, notwithstanding its
weaknesses and shortcomings, the World Investment Report 1999
(WIR-99) provides a strong empirical critique of the
neo-liberal argument in favour of the non-regulation of TNCs.



THERE is something new in this year's World Investment Report
(WIR-99): there are many themes and arguments - much left
implicit but also a fair amount explicitly stated - and,
whether intended or not, they add up to a strong empirical and
theoretical critique of the neo-liberal approach to
transnational corporations (TNCs) and their role in economic
development.

It is easy to read the report as advocating a neo-liberal
approach to foreign direct investment (FDI). To be sure, there
are parts of WIR-99 which mirror some of the cheerleading for
TNCs which has been present in previous years; and there is a
great deal of shying away from some of the truly critical
implications of some of the authors' own data and arguments.
But by reading these parts and in between the lines, one finds
a strong theoretical and empirical case against much of the
basic neo-liberal view of the impact of TNCs on economic
development. Simply put, the standard neo-liberal argument in
favour of liberalisation of domestic and international
restrictions of TNC operations and FDI is that:

1) Investment markets, like goods markets, unhindered by
government regulation operate efficiently (or if they have
some inefficiencies, the costs of these 'market failures' will
be significantly less than the costs of 'government failures'
which would occur if governments tried to regulate
investment).

2) As a result of the efficient operations of these markets,
governments should welcome foreign direct investment and do as
little as possible to regulate it.

3) If governments do this, not only are they likely to attract
TNCs and FDI, but these will contribute significantly to the
development process by (a) bringing in financial resources;
(b) creating jobs; (c) transferring technology; (d) increasing
exports by raising efficiency and enhancing marketing
opportunities; (e) increasing the tax base; and (f) increasing
the availability and reducing the costs of public utilities,
consumption goods and investment goods, both in the short and
in the long run.

4) As a result, there is one, and only one, approach
developing countries should adopt toward TNCs: open up to
them, welcome them, try to attract them and do very little to
interfere with their operations. The market will take care of
the rest. In short, when it comes to policy toward TNCs, one
size fits all.

By contrast, the authors of WIR-99 implicitly or explicitly
argue that:

* Significant market failures characterise the TNC investment
process in its relationship to developing countries. 'The
first arises from information or coordination failures in the
investment process, which can lead a country to attract
insufficient FDI, or the wrong quality of FDI. The second
arises when private interests of investors diverge from the
economic interests of host countries.'(p. xxv, overview signed
by UNCTAD Secretary-General Rubens Ricupero)

* The key benefits which developing countries are likely to
get from FDI and TNCs involve dynamic effects of upgrading
which occur over time and which might not happen automatically
without significant government management. (pp. 313-326)

* In the short run, TNCs might 'crowd out' more dynamically
productive local businesses who cannot compete with TNCs for
labour, finance and/or markets. Therefore opening up to TNCs
without some support or protection for domestic firms may be
unwarranted. (pp. 171-195)

* Trying to attract TNCs with subsidies and tax breaks is
unlikely to be effective and might undermine the ability of
developing economies to finance other needed investments in
infrastructure and education which are valuable for the
development process and, ironically, ultimately attractive to
TNCs themselves. (pp. 154-155)

* To overcome these market failures and ensure that developing
countries benefit from TNC investment, developing country
governments must be able to guide and regulate TNCs in varying
ways and to various degrees depending on the particular
situation facing those countries and governments. In short,
while developing countries can reap some substantial benefits
from FDI and TNCs, they are most likely to do so if they
attract investment that complements their domestic needs.(p.
323)

* But while such regulation of TNCs is becoming more
necessary, the regulatory tools available to developing
country governments are being dramatically reduced in various
ways by the process of neo-liberal globalisation itself (pp.
323, 328). Among the most important of these are the
bilateral and multilateral trade and investment agreements
into which developing country governments are entering which
often prohibit precisely the types of regulations over TNCs,
such as performance requirements, which would increase the
benefits of TNC investment to 'host' country workers and
citizens. (p. 326)

* Also making it more difficult for developing country
governments to manage foreign investment to their advantage is
the asymmetry in bargaining power between TNCs on the one hand
and host governments - especially those from countries that
are poor, lack scarce natural resources and/or are small - on
the other.(p. 324)

* A substantial share of recent FDI has taken the form of
mergers and acquisitions (M&A) rather than 'greenfield' or new
investments. But M&As are much less likely to contribute
toward economic development than are 'greenfield' investments.
(p. 321)

* Most FDI is still carried out in the developed economies and
of that invested in developing economies, FDI is highly
concentrated in only a handful of countries. (See the
discussion below)

* The upshot of these points is that TNCs do not have as
positive an effect on helping developing countries catch up
with developed economies as is often asserted by neo-liberal
advocates. Indeed, TNCs may be contributing to increased world
inequality. (p. 328)

* And the process of global liberalisation itself is
eliminating the rights and tools that governments have to
counter this process.

Does this critique mean that the authors of WIR-99 have
abandoned their arguments in favour of FDI and TNCs and have
been entirely won over to the side of their critics?

No, far from it. They still argue that developing countries
should try to attract FDI and TNCs. But rather than doing so
by giving away the candy store in the form of subsidies and
tax breaks, developing country governments should mobilise
'infrastructure and labour resources' which TNCs need in a
targeted fashion for particular types of investment that will
complement the economic structures and needs of the
particular developing country. They should make efforts to
inform TNCs of these resources and opportunities to attract
them. And they should bargain with TNCs to ensure that these
investments contribute to the long-term and dynamic benefit of
the developing country.

All of this sounds reasonable enough and is a significant
advance on earlier approaches toward TNCs and FDI. But
equally important is the recognition by the authors of this
year's WIR that there are serious obstacles to following this
'guided investment' approach which they themselves argue is
needed to capture the benefits of FDI and TNCs.

Most important (of these) are the bilateral and multilateral
investment agreements which are eliminating the ability of
governments to impose performance requirements and other
mechanisms to regulate TNCs; and the second is the increased
bargaining power of TNCs vis-vis developing country
governments.

Solution?

Where WIR-99 comes up terribly short is in its willingness to
seriously confront this dilemma which it identifies so well.
What solution does WIR-99 propose to this contradiction
between the need for more regulation and the systematic
dismantling of the arsenal which would allow them to carry it
out?

It proposes none, or almost none. The WIR's apparent solution
to this problem is contained in its final chapter entitled:
'The Social Responsibility of Transnational Corporations'.
According to this chapter, the solution is to be found in TNCs
adopting more social responsibility toward stakeholders in
developing countries.

The report highlights UN Secretary-General Kofi Annan's recent
challenge to TNCs to form a new 'global compact' with society,
whereby they would become Global Corporate Citizens and
subscribe to a set of principles which would protect the
environment, human rights, and labour rights. (p. 353)
This call for corporate social responsibility or global
corporate citizenship is clearly inadequate to the task of
solving the very dilemmas of development in neo-liberal
globalis-ation that the Report identifies. The reason is
simple: there seems to be no compelling reason given in the
Report to believe that TNCs would be interested in voluntarily
subscribing to such a compact to the extent required to
actually solve the problem. There is no mention of restoring
the ability of national governments to regulate TNCs in the
national interest.

There is no mention of confronting the World Trade
Organisation (WTO) or the International Monetary Fund (IMF) or
national governments in the developed economies to end their
insistence that developing countries subscribe to the very
liberalisation process that will reduce or eliminate the
ability of developing countries to undertake the policies
which the WIR itself proposes.

But even here - in this realm where the WIR clearly fails to
confront the central issue it raises - there is more than at
first meets the eye. For in its promotion of a 'global
compact' between TNCs and national citizens, there is an
implicit threat: that non-governmental organisations (NGOs),
domestic governments and other groups will accelerate their
efforts at blocking the liberalisation process which TNCs so
desperately want.

This threat, of course, is veiled almost to the point of
non-existence by 'officialese', but it comes through
nonetheless, for example, in this passage: 'The growing
economic interdependence of the world community, to which the
liberalisation of international investment and trade regimes
has contributed significantly, has great potential for
enhancing the living standards of people throughout the world.
Greater efforts must be made, however, to manage the
adjustment costs and social as well as economic disruption
that accompany globalisation. By assuming greater social
responsibility, firms can assist in these efforts. THIS IS IN
THEIR INTERNATIONAL SELF-INTEREST. It is precisely the purpose
of the global compact to contribute to the emergence of
'shared values and principles, which will give a human face to
the global market', the foundation of a stable global society
and economy. FAILURE TO BUILD SUCH A FOUNDATION COULD
CONTRIBUTE TO A BACKLASH AGAINST THE LIBERALISATION POLICIES
THAT, IN THE FIRST PLACE, PROVIDE THE FRAMEWORK OF LEGAL
RIGHTS WITHIN WHICH FIRMS PURSUE GLOBAL BUSINESS
STRATEGIES'(emphasis added). (p. 370)

In short, the strategy proposed by WIR-99 is the classic 'good
cop'/'bad cop' strategy: if TNCs don't voluntarily curb their
'abuses' in the areas of the environment, human rights and
labour rights and provide a 'human face to the global market',
then the liberalisation process which gives them increased
access and free rein to the world's human and natural
resources may be curbed or even cut back by 'civil society'.

Elsewhere in the Report, the authors make this point in an
even more opaque, but also much more concrete, fashion. There,
the authors describe the demise of the Organisation for
Economic Cooperation and Development's (OECD) Multilateral
Agreement on Investment (MAI) which would have greatly
extended the protections afforded TNCs in the OECD countries,
and would have served as a model for TNC protection in other
countries.

Underestimated

In its autopsy of the MAI, WIR-99 concludes that one important
reason for the MAI's demise was that ''negotiators
underestimated the intensity of public debate the MAI would
provoke in some countries.... Indeed, NGO influence - often
through direct links to parliamentarians - brought about
unexpected developments at a relatively late stage of
negotiations, which appeared to have caught negotiators by
surprise. This was so, in particular, with respect to the
issues of indirect expropriation and investor-to-State dispute
settlement, issues that initially had been perceived to be
relatively easy to deal with...' (p. 136)

The Report goes on to explain that with the process becoming
so politicised, business groups which had been the main force
behind the MAI became concerned that, in the end, the MAI
would actually lead to a reduction in the prerogatives they
had won via bilateral agreements. According to WIR-99, the
business community 'appeared to have lost interest....after it
became clear that taxation provisions would be carved out of
the MAI, provisions on the environment and labour would be
added and no significant new liberalisation would be gained.'
(p. 136)

In short, the dangers to the TNCs' 'liberalisation project
from the mobilisation of 'civil society' appear to be real
indeed.

Implicitly, then, the authors of the WIR, seem to be
supporting the mobilisation of NGOs and 'civil society', but
only to the extent that they push TNCs to become good
corporate citizens; there is no indication that they support
the broader aims of many working to eliminate the destructive
aspects of liberalisation that are promoting inequality and
instability in the world.

Do the authors of the WIR really believe that TNCs will become
sufficiently good corporate citizens that the dilemmas of
development they identify will be significantly ameliorated?
It's hard to know from this Report. What does seem clear,
though, is that the authors are still committed to significant
aspects of the liberalisation process, primarily because they
have faith that FDI and TNCs can have significant benefits for
developing economies. But here too their own analysis raises
serious questions.

To their credit, the authors argue that the best way of
attracting TNCs and FDI, from the point of view of mobilising
foreign investment that will benefit developing economies, is
to mobilise domestic resources - infrastructure, labour with
the appropriate skills, and effective complementary
institutions - that will benefit TNCs and allow the domestic
economy to benefit from them. A second key factor is to ensure
a competitive climate in the domestic economy which will
prevent the emergence of great market power by large firms.
(p. 320) The Report also stresses that one size does not fit
all: which types of mobilisation and which types of TNCs will
be most beneficial will depend on the context of each
particular country.(eg. p. 319)

But a major question remains unanswered: if countries can
successfully mobilise infrastructure, skilled labour and
regulatory institutions that work - in itself a highly
difficult task, particularly for poor countries - why should
they devote this effort to attracting TNCs? How can one be
sure that the effort wouldn't be better spent devoting this
effort to mobilising complementary resources to benefit
domestic firms - private, public or quasi-public? Have the
authors demonstrated that TNCs and FDI are more beneficial
than domestic firms? Or are Dani Rodrik and others correct
that domestic investment, in general, is just as valuable as
foreign investment (Rodrik, Dani (1999), The New Global
Economy and Developing Countries: Making Openness Work.
Washington, D.C. Overseas Development Council.)?

The Report's own analysis calls into question its presumption
that these major efforts should be devoted to attracting TNCs
rather than to domestic firms and institutions. The authors
include an appendix filled with econometric analyses which
suggest that there is no clear evidence of a positive
connection between FDI and economic growth. They present
another very interesting econometric appendix which suggests
that there can be crowding out of domestic firms by TNCs and
therefore, there may be a real need to choose between TNCs and
domestic firms in some circumstances (pp. 329-344).

So are these targeted promotion efforts for TNCs - even if
they can be accomplished despite the tightening noose of
bilateral and multilateral investment agreements - the right
strategy for development? While no general answer can be
given that is relevant to all countries, it does seem that
such a strategy may have very low pay-offs for most developing
economies. The reason is simple: most FDI goes to the
developed economies. And among the developing countries, only
a handful of countries get the lion's share.

In 1998, for example, the top five countries received 55% of
all developing country inflows and the 48 least developed
countries (LDCs) received less than 1% of the inflows. (p. xx)
The inflows of FDI are extremely concentrated: the 10 largest
countries in terms of inward stock received 71% of the world
inflows of FDI in 1998 (United States, United Kingdom, China,
Germany, France, Netherlands, Belgium and Luxembourg, Brazil,
Canada and Spain).

Highly exaggerated

In 1998, the concentration of flows among developing countries
increased, with the five largest developing host countries in
terms of the stock receiving 55% of inflows in 1998 compared
with 41% in 1990 (pp. 18-19). It has been fashionable to argue
that FDI is a more stable source of international financing
than portfolio flows and therefore is a much more beneficial
form if international investment, particularly for developing
economies. While there is some truth to this argument, it has
also been highly exaggerated in recent years. Widely cited is
the rapid growth of FDI to developing countries, even during
the period of the recent Asian economic crisis.

But, in fact, virtually all the increase in FDI in 1998 was in
the developed economies where growth has remained stable. In
developing economies, FDI declined only slightly, but these
declines would have been greater if it hadn't been for the
currency depreciations, FDI policy liberalisation and more
hospitable attitudes toward mergers and acquisitions as a
result of pressures that developed during the crisis. (p. 11)
For example, in South Korea, bankruptcies generated by the
crisis, plus pressure from the IMF and the South Korean
government, promoted enormous M&A activity. In the end, WIR-99
continues to be taken in by its own rhetoric on the importance
of TNCs: if TNCs are such an important agent of
globalisation, then developing countries need them to develop.

While it is true that TNCs are an important agent of
globalisation, they are only important in this sense for a
small number of countries and even then, they are not always
an agent of real development. As a result, for most countries,
the best approach to development would seem to be to mobilise
resources and institutions for domestic development and
sustainable growth.

If they succeed, the TNCs will want to come. Then, in
principle, each country should be able to decide whether they
want the TNCs or not - and on what terms. This ought to be the
relationship between TNCs and the development process.
But there are several important obstacles to this scenario,
all of them either identified by or embodied in WIR-99. To the
extent that exports are important for development in order to
finance needed imports, the increasing grip the TNCs have over
export marketing and branding inhibit the ability of countries
to both export and opt out of the TNC game (p. 322).

Similarly, to the extent that investment agreements
increasingly become integrated with trade agreements,
particularly through the WTO, the costs to countries of opting
out of the system that ties their hands with respect to
regulating TNCs may significantly increase. And finally - as
embodied in the analysis of WIR-99 - as long as policy-makers
continue to believe that they need TNCs to promote
development, they will continue to try to mobilise resources
to attract them rather than to develop their own economies in
a sustainable fashion.

Still, WIR-99 provides us an insight into the dangers of
neo-liberal globalisation in the realm of FDI and TNCs, and a
great deal of ammunition to help its critics publicise this
system's flaws in an informed and balanced way. To the extent
anyone can read a 500-page report of dry prose, tables and
charts, I recommend WIR-99. - (Oct/Nov 99)

The above article first appeared in the South-North
Development Monitor (SUNS- issue no. 4521) of which
Chakravarthi Raghavan is the Chief Editor.

Gerald Epstein is Professor of Economics and Co-Director of
the Political Economy Research Institute (PERI), Univ. of
Massachusetts, Amherst, USA. He contributed this article to
the SUNS.

 


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