Topic 4 Globalisation. 2 Course Overview 4 main topics: Topic 1: International Trade Theory and Policy Topic 2: FDI and the Multinational Corporation.

Topic 4

Globalisation

2

Course Overview

• 4 main topics:Topic 1: International Trade Theory and Policy

Topic 2: FDI and the Multinational Corporation

Topic 3: Exchange rate theory, capital flows and International Institutions

Topic 4: Globalisation

3

Overview

Topic 4: Globalisation

a. Introduction: definition of globalisation

b. The Case for globalisation

c. Giant private organisations as the driving force behind globalisation

Source: Intriligator M.D. (2001), "Globalisation of the world economy: Potential benefits and costs and a net assessment", Centre for Globalisation and Policy Research, UCLA

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Introduction• What is meant by ‘globalisation’?

– Globalisation is a very powerful and very real aspect of the modern world

– It represents a very influential force– It has many dimensions: economic, political, social,

cultural, environmental, security– Focus here is on globalisation applied to the world

economy– It refers to a growing interdependence amongst

sovereign states in areas such as trade, investment and communication

– Integration of economic processes across political borders – resulting in business behaviour being oriented to world markets rather than particular national markets


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Introduction

• Trends: – Accelerating growth in international trade –countries

are becoming much more dependent on foreign trade– Production is increasingly organised on a global,

rather than national basis – the growth of multinational corporations, the rates of foreign direct investment have risen dramatically.

• Globalisation has involved greater openness in the international economy, an integration of markets on a worldwide basis, a movement towards a borderless world


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Introduction

• Sources of/reasons for globalisation:– The adoption of trade liberalisation strategies in an

increasing number of countries– Technological advances that have significantly

lowered the costs of transportation and communication, and information storage and retrieval. E.g. Electronic mail, world wide web

– Changing companies – corporations that had been mainly focused on a local market have extended their range to a global reach

– New global roles of international organisations :World Bank, IMF, WTO


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Introduction • Sources of/reasons for globalisation:

– Cultural developments: move to a globalised and homogenised media, arts and the widespread use the English language for global communication

• Economic benefits of globalisation:– The benefits stem mainly from competition:

specialisation, increased production and efficiency (increased productivity), economies of scale – all facilitating economic growth. Reductions in costs and prices, increase in variety. Gains from trade.

– The result is the potential for increased output and higher real wages and living standards


8

Introduction

• Economic costs of globalisation:– There can be substantial equity problems in

the distribution of the gains from globalisation among individuals, regions, nations. Many of the gains are going to rich countries causing a growing disparity/inequality between nations

– Instabilities stemming from the interdependencies of economies

– The control of national economies is seen by some as possibly shifting from sovereign governments to other entities – powerful multinational corporations

Source/Quoted directly from: Ellwood (2002), Amnesty International, Full reference at the end. 9

Giant private organisations as the driving force behind globalisation

Source: Ellwood, W. (2002), “The No-Nonsense Guide to Globalisation”, Amnesty International, Chapter 4: The Corporate Century (Distributed during lectures, also available on desk reserve in the library)

• This article discusses a viewpoint on the potential costs of globalisation: the power of multinational corporations

• Introduction:– Globalisation has introduced a level of commercial culture that is

homogenous e.g. Fast food restaurants sell the same foods with only minor changes to local tastes.

– The multinational corporation is a cultural and economic tidal wave roaring across the global replacing the diversity of human society: erosion of local cultures, the existence of a global monoculture able to disrupt traditional cultures

Source/Quoted directly from: Ellwood 2002, Amnesty International. Full reference at the end. 10


• Introduction:– Over the past couple of decades - global rules

regulating the movement of goods and investment have been relaxed. Private corporations have expanded their global reach so that their decisions affect the lives of people in the most distant parts of the world. The holdings of these corporations are so numerous sometimes it is difficult to trace the chain of ownership.

– Proponents of globalisation argue that MNCs are the ambassadors of democracy. Free markets and political freedoms are inextricably linked and the introduction of the first will lead to the second.



• Introduction:– Today, 50 of the largest 100 economies in the world

are run by MNCs, not by countries – Mitsubishi is bigger than Saudi Arabi; General Motors is larger than Greece, Norway or South Africa.

– The combined annual revenues of the biggest 200 corporations are greater than those of 182 nation-states that contain 80% of the world’s population.

– Of course large companies have not just appeared overnight. They have been with us since the early days of European expansion overseas

– But nothing in history matches the economic and political power of today’s corporations



• Merging businesses:– Tendency towards monopoly is growing across a

range of industries – Business executives push for the approval of mergers

on the grounds that getting bigger is the only way to compete a lean and mean global marketplace.

– But a smaller number of large corporations eliminates competition – the easiest way of getting rid of a competitor is to buy them out.

– There has been a spate of mergers and acquisitions over the past number of years and this reflects the changing nature of the global economy, especially the relaxation of regulations around foreign investment and the liberalisation of international capital flows



• Merging businesses:– Example: Early 2005 Procter & Gamble agreed to buy

Gillette in a $57 billion deal – combining some of the world’s top brands. Procter & Gamble is already the US’s largest consumer products company and the merger creates the greatest consumer product’s company in the world

– Companies are now free to compete globally, to grow and expand into overseas markets – and the new international climate of free trade in goods, services and investment capital is furthering this consolidation



• Merging businesses:– The assumption of this neo-liberal economic

model is that competition is good– This belief has led to a worldwide campaign in

favour of privatisation of publicly-owned enterprises

– According to this view, the government must be downsized and its role in the provision of public services curtailed



• Merging businesses:– Neo-liberals argue that governments are inefficient,

bloated bureaucracies that waste taxpayers’ money – so they must be restrained

– But rather than strengthen the role of the State by streamlining bureaucratic inefficiencies, they argued that private business should do the job instead

– Maniac enthusiasm for privatisation exploded when Margaret Thatcher came into power in Britain in 1979:

• State-owned enterprises were quickly sold off: national airline, government-run water, gas, telephone and electric utilities



• Merging Businesses:– In Ireland: Telecom Eireann was sold and much was

made of the opportunity for ordinary Irish people to purchase shares in the newly privatised Eircom, but many of these people lost a great deal of money on these shares

– Aer Lingus is currently under preparation for being sold

– As governments adopt the private enterprise model and cut back on public expenditure they open up areas to market forces that were previously considered the responsibility of the State



• Merging Businesses:– After World War Two politicians in the West were

forced by civic-minded electorate to expand social welfare policies including education, healthcare, unemployment insurance, state pensions etc. At the same time the State expanded its role in the provision of public infrastructure, building roads, bridges, airports, prisons and hospitals

– Now with the notion of the ‘inefficient’ public sector, governments are selling off public utilities

– But is the ever increasing power of private firms the answer? Why not reform public sector inefficiencies? Are private firms fair, encouraging equality?



• Merging Businesses:– Privatisation has been strongly endorsed by the World

Bank and IMF- based on the notion that governments have no business in the marketplace and the least government is the best government

– Countries are privatising public assets and encouraging foreign investment in their own private sector

– But is foreign investment the best? Does investment by foreign corporations guarantee economic progress?



• Controlling foreign investment:– It is not the quantity of foreign investment that

matters, but the quality – National governments need to choose the kinds of

foreign investment that will produce net benefits for their citizens and reject those investments whose overall impact will be negative

– However, the power to influence the quality of investment is dwindling as free-trade agreements and the free movement of capital effectively tie the hands of states which agree to them, inevitably compromising government sovereignty



• Draining the public purse:– Even in countries of the OECD (Organisation

for Economic Cooperation and Development) corporations have the upper hand, trading off one nation against another to see who can offer the most lucrative investment incentives

– Governments drain the public purse in their attempts to buy jobs from private investors

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Ireland: Cost per job in IDA supported companies

0

5000

10000

15000

20000

25000

88/'94 89/'95 90/'96 91/'97 92/'98 93 to'99

94 to'00

95 to'01

96/'02 97/'03

Years

Euros

Source: Forfas Annual Employment Survey, 2003



• Draining the public purse:– The largest multinationals call themselves

‘global firms’ – which might lead one to believe that they are stateless, disembodied entities

– There are a few giant companies that are truly stateless; most are firmly tied to one national home base. For example, Microsoft is an identifiably US corporation. Nortel Networks is a Canadian corporation.



• Draining the public purse:– Such companies have no problem stating their

allegiance to a nation when they want tax breaks, grants etc. But this allegiance is fickle and quickly diverted if opportunities for profit appear greater elsewhere

– The fact that multinational corporations are relatively footloose means they can move operations to where costs are cheapest and play off one government against the other in the process

– The sheer size, wealth and power means that multinationals and the business sector in general have been able to structure the public debate on social issues and the role of the government in a way which benefits their own interests



• The Upper Hand:– As corporations gain the upper hand, the fear of job

losses and the resulting devastation has created a downward pressure on environmental standards and social programs

– The Multilateral Agreement on Investment (MAI): most infamous recent example of the attempt by big business to remake the world its image

– After the WTO came into being in 1994, the globe’s major corporations began to put together a plan for codifying the rules of world trade in a way that would give them complete freedom



• The Upper Hand:– The MAI was an agreement drafted by the

International Chamber of Commerce and presented to the rich-nation OECD members for discussion, and assumed approval

– Once passed, they would next go to the WTO– Third World governments were rightly suspicious of

the MAI but with the weight of the OECD behind it, supporters reckoned it would be speedily adopted as an official document of the WTO

– OECD delegates began discussion the MAI in 1995 behind closed doors. By 1997 most of the treaty was down on paper. Many politicians in the OECD member countries weren’t even aware of the negotiations



• The Upper Hand:– Activists in Canada saw a copy of the MAI and began

sending it around the world via the internet– The MAI had set out to give private companies the

same legal status as nation-states in all countries that were party to the Agreement

– It set out a clear set of rules so that corporations would be able to defend their new rights against the objections of sovereign governments

– The MAI was overwhelmingly biased towards the interest of multinationals

– For example, under the MAI provisions corporations could sue governments for passing laws that might reduce their potential profits



• The Upper Hand:– The MAI also allowed foreign investors to challenge

public funding of social programs as a distortion of free markets

– The MAI would provide foreign investors with new and substantive rights with which they could challenge the government programs, policies and laws all over the world

– Once the text became public, groups around the world began education campaigns on the potentially-damaging impact of the MAI

– In a few months public anxiety about the deal came to a head.

– Politicians were drawn into the debate and governments were forced to enter ‘reservations’ to protect themselves from certain MAI provisions



• MAI Protest:– By May 1998 it was clear that the talks were

at a standstill and the public opposition had prevented further progress on the Agreement – leading to the end of the MAI

– But the end of the MAI didn’t spell the end of the corporate agenda – the focus shifted to the WTO and other global venues where multinationals could lobby for MAI-like investment provisions



• Globalisation:– A huge investment by giant corporations in

computerised, high-tech machinery has reduced many jobs while boosting productivity and constraining wage growth

– In an era of globalised free markets all countries try and fight their way to prosperity by boosting exports. Nations look outwards, depending more and more on international trade for their economic survival

– The success of one country vis-à-vis another depends on how competitively it can price its goods in the world market. This kind of competition inevitably means cutting costs and the easiest costs to cut are wages

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• Reference: Ellwood, W. (2002), “The No-Nonsense Guide to Globalisation”, Amnesty International, Chapter 4: The Corporate Century

Topic 4 Globalisation. 2 Course Overview 4 main topics: Topic 1: International Trade Theory and Policy Topic 2: FDI and the Multinational Corporation.

Documents

potential benefits

international economy

world markets

world bank

world economyit

policy research

international trade

net assessment