8:22 PM Dec 15, 1995


Geneva 15 Dec (Chakravarthi Raghavan) -- The Transnational Corporations and the transnational mode of production, trade, distribution and consumption is the most efficient and competitive and is now a dominant force in the world and, whether countries and independent firms within them like it or not, they have to come to grips with this, form alliances and relationships with the TNCs and domestic non-TNC firms have to go into transnational production mode.

This is the central theme and message that the World Investment Report 1995 seeks to project the TNC mode, and uses this to advocate a Multilateral Investment Agreement as part of trade negotiations for liberalising market access in goods and services.

The WIR has been produced by the Investment division of the UN Conference on Trade and Development. The division was formerly the secretariat of the UN Centre on TNCs and, as a result of one of the UN secretariat restructuring exercises of Secretary-General Boutros Boutros-Ghali, was sought to be ended, and later reprieved and merged into the UNCTAD secretariat.

In releasing the WIR Thursday, UNCTAD Secretary-General Rubens Ricupero characterized the 490-page report (including a 50-page overview) as UNCTAD's annual review of issues relating to FDI and one highly regarded as a source of key data and policy analysis.

The WIR 1995 presents an array of data, tables, boxes and graphs -- sometimes pretty confusing -- to make out its case about the spreading TNC mode of the world economy, or as critics of the transnational mode argue, the TNC Empire and its tentacles into every country.

But the strength and authority of its data, sources and data-base for analysis is diluted by the WIR's increasing propensity to cite media articles as sources or support for its analysis.

Any serious media professional would be the first to admit the likely levels of errors in their reports and articles, given the time-pressures and strains of their work, as well as the many levels of filtration and editing before publication.

Out of over 80 footnotes to the text (not counting the boxes) of one chapter of WIR, over 40 were from media reports and clippings, including from advertising supplements in newspapers and magazines.

The WIR presents a picture of the TNCs, and their mode as the dominant in the world economy, and a dynamic one at that, which is "integrating" various countries into the world economy or rather the transnational mode of production, trade, distribution and consumption, including culture that appears to be a virtually irresistible force to which governments, countries, their peoples and enterprises, have to reconcile themselves to, and come to terms with, for their very survival.

It gives an impressive documentation about the growth of the TNC system -- in terms of capital investments, non-capital arrangements establishing control over and links with domestic firms relegated to a subcontracting and supplier-role to the affiliates, the generation of technology and control over its diffusion (heightened by the WTO's TRIPs accord), the virtually total dominance over most of the services sectors and the absorption of the middle-class consumers into a common (jeans, Mcdonald, coca-cola, film and tv programme) culture and tastes.

It makes though a less convincing case about this being the most efficient production system or enhancing general public welfare in host countries, particularly developing ones, or even increasingly in developed ones too, as a result of the operations of the TNCs.

This is apart from the confusion among neo-classical economists between economic growth and development (even if one ignores such concepts as 'Another Development' and its definitions as human-centred one and satisfying the needs, material and non-material, of people).

While development is not possible without growth, the two are not synonymous either -- as the spate of discussion papers and reports that the UN Research Institute for Social Development (UNRISD), for example, has published before and after the UN's Copenhagen Social Summit.

In extending the micro or firm level analysis and economics, into the macro-economic sphere, some of WIR's conclusions would be seriously challenged by orthodox analysis of macro-economics.

In trying to link FDI, firm competitiveness and country performance, for example, it appears to equate firm-level efficiency with profitability which it is not. Profitability is very much dependent on whether the firm is able to control the price of its inputs and the price it can command on the market for its output. The firm's search for and achievement of efficiency can mostly deal with the intermediate process between input and sale of output, but unless it is a prie-setter it can't control the price of the final product on the market.

In economic transactions among the industrialized countries, there is considerable trade and competition in intra-industry specialization. In case of developing countries, even involving the most advanced of them, the TNC operations, as the WIR notes, is of vertically integrated operations in a whole chain.

Thus the TNC operations in developing countries is based on the overall oligopolistic nature of the TNC operation.

Taking these into account, a highly profitable TNC operation, and they undoubtedly are visavis a local competitor, is not necessarily an efficient one in terms of the economy as a whole -- even if the WIR looks on the intra-firm transactions and sales as the most efficient firm-specific one.

The argument from profitability of a TNC as a whole to its affiliate, and from profitability to efficiency and competitiveness of the firm and thus competitivity of countries is a sequence that demands faith more than logic.

And while Paul Krugman (in Foreign Affairs, March/April 1994), cited in the report, in cautioning against taking the analogy of country and company competitivity too far and arguing that the gain in EU's competitivity need not mean loss in that of the US, this, and most of such analysis about economic exchanges, relates to exchanges among nations more or less at same levels of development and capabilities.

But there is quite a respectable number of economists and writings, even dating to Marshal, and down to our times through Keynes, Myrdal, Prebisch, Panic etc -- who have struck some cautionary notes on such 'free exchanges' between economies that are not in fundamental equilibrium.

The WIR says that, provided it is undertaken under competitive conditions, "like trade, FDI creates, therefore, a win-win situation".

But the same Krugman (in his essay, 'New Theories of International Trade and Multinational Enterprises, in the Kindleberger et al ed. book, 'Multinational Corporations in the 1980s') has brought out that the emergence of TNCs and their FDI is the result of 'imperfections or failures of the market mechanism' rather than expansion of perfect markets. In arguing that TNC operations, and transactions and arrangements between parents and affiliates, not only brings about 'technology transfers' (as between the two), but in fact actual diffusion of technology across the economy, the conclusions rest less solidly on an array of facts and testable data, but rather on some anecdotal experiences (based on media reports). If such anecdotal experiences are to be the basis for theory, then there are equal weighty anecdotal experiences that show that the TNC research and development efforts in their affiliates and subsidiaries are mostly peripheral; and don't relate to the core innovations that remain a close preserve of the parent -- wrapped as it is in layers of patents, designs and trade secrets.

That TNCs can contribute to enhancing the performance of countries as a whole, by the operations of the TNC system and its linkages with suppliers and subcontractors, if true, would surely reduce strength of Krugman's arguments about firm competitivity and country competitivity.

Some other conclusions of the WIR also are conjectural.

Would Mexico be better off or worse off, as a result of the peso crisis, because of the 'integration' of its economy in NAFTA? The WIR suggests that as a result of the integration, Mexico is better off than say during and after its 1981 debt crisis.

No doubt Mexico now would have been worse off, but for the massive rescue plan and foreign funds that were placed at its disposal (repayable loans) that the US and IMF put together.

But it could as easily, and perhaps more rightly, argued that the US would have been forced to put together such a package, irrespective of Mexico being in or out of NAFTA -- simply because of Mexico's "seamless" border with US, despite high-tech fence and barriers, to Mexicans migrating for jobs and its consequences.

None of the Latin American economies, whether those still facing the aftermath of the Mexican collapse or those being pushed further into neo-liberal external integration, can't expect in a crisis of a similar nature to get that kind of US or IMF help. Several of them, including Brazil, have taken a more cautious approach to the integration processes, because of this realization.

In any event, even the WIR concedes that the inflow of short-term funds in the early 1990s into Mexico, and its sudden withdrawal in December 1994 triggered the crisis. But since 1993, any number of Mexican economists and academics have been writing about the fragility of the integration and economic progress under the FDI process (because of lack of clear backward linkages into the Mexican economy), and unsustainability.

It is possible that Mexico could recover sooner than after the 1981 crisis. But thrice this year, the IMF and the US made reassuring statements about the recovery in Mexico, only to find that country's stock-markets falling as also the peso.

All this could be blamed on the still continuing political crisis and the Salinas saga that grips Mexican media every day. But a sustainable and strong economy is expected to be able to weather political fragilities like this. In the industrialized countries it may create a day or a week of turmoils on stock and exchange markets, but seldom affect the real economy.

As the WIR concedes the TNC system and its operation, by its nature, may lead to integration of the countries into the world economy and the TNC system could lead to better allocation of resources.

But to speak of its enhancing global welfare -- when there is no Global Government or State to intervene to assure social equity -- requires faith. Even within major industrialized countries, it is resulting in an increasing social divide -- whether it be marginalization and apathy in US inner cities or the more militant reaction of the deprived or workers feeling aggrieved by inequity taking to the streets as now in France, where despite their hardships in having to trudge to work, the non-striking public sympathies appear to lie with the workers.

And when political columnists of establishment papers begin to write about backlash of market driven politics, or prestigious journals like Foreign Affairs (Paul Krugman, 1995) write about the Mexico crisis showing a deflation of the Washington Consensus for neoliberalism, there is something taking place in the real world that international institutions advocating neoliberalism have to look at more carefully.