7:57 AM Dec 21, 1995


Geneva 20 Dec (Chakravarthi Raghavan) -- "A research organization like ours," Gunnar Myrdal wrote in 1961, "is not the property of the scientists employed in it but has a clearly practical purpose -- in this case, as it is an international organization, to serve the general aim of increasing rationality in the national and international policies of members -- and it will not for any length of time be supported if it is not reasonably effective in furthering this specific purpose."

Well-renowned Swedish economist and Executive Secretary of the UN's Economic Commission for Europe (UN-ECE), Myrdal was writing about the research work of the ECE Secretariat in a contribution in 'Twentfive economic essays in honour of Eric Lindahl".

The essay (and an earlier Hobhouse Memorial Lecture in London, 1954), sharply delineating work and writings of the ECE research department, and its operational and technical assistance divisions, should perhaps be compulsory reading these days for researchers and heads of the UN and Bretton Woods Institutions, the WTO, as well as government delegations.

No bureaucrat, diplomatist or careerist, but an economist of high credentials (he won the Nobel prize in economics in those days), Myrdal nevertheless acknowledged in his essay that the special rules for research organized under authority of political bodies (like the UN and ECE), undoubtedly put limits on absolute academic freedom, forcing researchers to do work which was always "practical" and "useful" and directed towards need for "catharsis of free and independent analysis in seeking objective knowledge".

Rejecting any single-minded approach, Myrdal stressed the need for an "ideological common denominator" (inside such secretariats) based on a "shared delight in manifoldedness of possible intellectual approaches to a scientific problem and an abhorrence for 'Gleichschaltung' and conformism", but an "eclectic and catholic" philosophy, a search for truth, and a teamwork approach that would develop a "consensus sapientium".

The UN of Myrdal days and the present are not merely three decades apart; now the UN and its economic structures are pulled and pushed by powerful business groups and other private interests trying to influence UN executives and the secretariat thinking, and rich governments trying to use illegal withholding of contributions to make them fall in line - and work to advance the neo-mercantalist greed of the rich. It is not easy to stand up for the approach, in the interests of member-countries themselves, that Myrdal put forward. It is a wonder that so many within the UN system still stand up, but if they don't they quickly lose respect outside.

The UNCTAD's Division on Transnational Corporations and Investment (DTCI), which produces annually the World Investment Report (WIR) has had a difficult history. It came into being in 1970s, in the aftermath of the Pinochet-led military coup in Chile, one financed, inspired and instigated by some giant US-TNCs and the CIA acting on their behalf. It was established by the UN General Assembly to undertake a critical monitoring role of the TNCs, and particularly their effect on development of developing countries.

But the heady rhetoric of the new orders of the 70s and early 80s, was soon overtaken by the reality of the South's debt crisis and the Fund/Bank conditionalities and enforced change of direction to neoliberalism, more so after the collapse of the Soviet Union.

In adjusting to these changes, the UNCTC attempted in the Uruguay Round, to persuade developing countries to make investment the services issue, perhaps hoping the UNCTC would administer any services agreement -- at that time the post-Uruguay Round institutional arrangements were quite open. But developing countries did not agree, and many of the developed were reluctant.

Meanwhile, UN Secretary-General Boutros Boutros-Ghali first decided to close that secretariat, but faced opposition from the UN General Assembly and the public interest NGOs. Ultimately the secretariat was transferred and merged 'as a unit' into UNCTAD, where it has moved from a critical monitoring role to an advocacy role of TNCs and neoliberalism in investment -- joining hands with the World Bank to advocate unilateral liberalisation of service sectors by developing countries and binding them in GATS.

The World Investment Report 1995 (WIR-95) continues this trend of promoting Transnational Corporations (TNCs) and their role in restructuring economy of developing countries and integrating them into a "global" economy. By even the somewhat attenuated Myrdal approach now prevalent in the UN system, the WIR-95 raises questions about the objectivity of the analysis and even the facts cited to support the conclusion.

But the report's messianic approach -- and the computer wizadry to produce an eye-catching 400-page volume with text, figures, charts and boxes -- in promoting TNCs, has resulted in drowning out some essential messages, facts and options that the intergovernmental processes have to face up to and tackle. That is a pity.

The WIR's 22-page bibliography has few, if any, references to the extensive academic literature, on the negative side of TNC-led development and "integration", nor any reference to the only historical experience of a totally liberalised, inward and outward, trade, production and foreign investment regime -- the laissez faire economy that prevailed voluntarily under British leadership on the European continent, from about 1850 to 1870, and the compulsory laisse faire, from 1860 to the 1920s, under British Imperial rule over Asia and Africa.

One does not expect to find in the WIR (and other UN publications) references to or serious discussion of the anti-orthodox, anti-TNC advocacy books. But absent are even references to UNCTAD's own extensive research work and publications (that are contrary to WIR ideology), the WIDER publications and UN system publications (about managing the global economy) and the counter-analysis to the World Bank neo-liberal models, leave aside articles and books by such renowned economists with high academic credentials like Ajit Singh, Sanjay Lall, David Gordon, Jan Kregel, Paul Bairoch etc.

The WIR has relied extensively, and somewhat uncritically, on reports and articles in the Transnational western media (Financial Times, Far Eastern Economic Review etc), ignoring even other western media with a more critical approach - columnists like Will Hutton of the London Guardian, for example.

This reliance on pro-TNC media clips is perhaps responsible for WIR-95's partial truths and conclusions.

The WIR thesis is that TNCs and the TNC system are always more efficient, and hence profitable, (or is it the other way round) than domestic non-TNC firms that rely on arms-length transactions.

But according to a survey by the Centre for Monitoring the Indian Economy (CMIE), published (28 Nov) in the pro-business Indian daily 'Economic Times', Indian companies have been earning much higher profit margins than TNCs affiliates in India.

According to the report, a CMIE survey of published corporate reports of 302 large business houses in India, showed these had gross profits, as a proportion to gross sales, of 16.3% in 1993-94.

But a sample of 127 companies operating in India, but owned by foreigners, partly or fully, had only a gross profit to gross sales ratio of 12.9%, while the average for all private sector companies (both large and small) had a ratio of 15.3% - which implies that non-TNC private sector companies in India have a higher ratio.

The large Indian corporate sector firms operate in the core sector of the Indian economy, while most of the TNCs operate in the more profitable consumer sector where there is high demand for 'foreign' goods.

If the WIR logic is to be accepted, the Indian corporate sector and private firms are more efficient than the TNC sector. Right?

TNCs have a propensity for higher import-content in their final output, with imports sourced from their parents or affiliates, as a part of their tax-avoidance in the host country by transfer-pricing practices and other charges to siphon away funds and reduce gross profits. This may or may not add to the resources that the TNCs mobilise (globally) and could use (which WIR acclaims as a major plus for TNC system), but it certainly does not add to the domestic savings or to welfare and economic development of the host country -- as many studies have brought out -- both country, regional and macro-economic.

Take another case of the pitfalls of over-reliance on media reports.

In trying to stress the superior role of TNCs for generation and transfer of capital, the WIR (pp 143-144) cites, as an example, the case of Maruti Udyog Ltd, an Indian automobile manufacturer in which Japan's Suzuki has a 50% ownership (the government of India has the other 50%) and says "a public share issue is expected to be offered in India's equity markets to raise capital for an expansion in production".

"The plan to raise capital in the local equity (emphasis added) market had to receive the stamp of approval of Suzuki the foreign partner, before launching the issue because that approval was viewed by Maruti Udyog as guarantee for the issue's success," the WIR says.

The WIR relies for its "facts" on a Financial Times story (23 March 1995) to draw its conclusion "Such support by parent firms can be of crucial importance if, in spite of the good credit rating of a foreign affiliate, its access to international capital markets is limited by the credit rating of the host country."

If the FT has been correctly cited, the reporter shows some ignorance of Indian Company Law, under which issuance of fresh equity by a limited liability company needs approval of the majority of shareholders. There are some disputes in India whether this needs a shareholders meeting or a 50% plus 1 share represented on the Board of directors is enough. Either case, approval to the new issue is needed from Suzuki with its 50% share, just as, Suzuki (alleged in India to be having more influence, than the government, on Maruti Managing Director) would need approval of the government for a new equity issue for new capital.

In any event, if the share issue is to be on the 'local equity' market, where does the WIR or FT conclusion about need for "Suzuki's" support to get a better credit rating on "international capital markets" arise?

It is a well-known fact (easily ascertainable from reports of the Reserve Bank of India and the Security and Exchanges Board of India) that equity issues in India are most often oversubscribed.

Maruti Udyog's case though is more complicated, but discernible from government's answers in Parliament. A preliminary project report for expansion of Maruti plant at a cost of Rupees 2000 crores (20 billion) was put up for approval by the company's Board of Directors, which asked the Managing Director to produce detailed estimates for a Board decision on expansion and, related to this, decisions on how the money is to be raised -- by equity, by loans or a mixture of both. As of early this week, there has been no decision.

Behind it, is the Suzuki effort to ensure that the new equity for public subscription would not dilute its own 50% share, but a dilution of the Government's 50% share - a case of denationalization by the backdoor. This has not been accepted by the Government of India which is equally determined that the new issue should not dilute its (public sector) share visavis Suzuki (and loss of control on important questions).

This is a far cry from the claims of the superior position of TNCs visavis the host country on credit rating in international markets, sought to be made out by WIR-95. And never having defaulted, even pledging its gold reserves to get temporary accommodation to service its debt, official India's credit rating isn't all that bad either - as the DTCI would have found out if it had checked with UNCTAD's own macro-economics division that tracks these things (from credit rating firms).

These may be just two instances of half-facts and mis-conclusions. But, as an Indian proverb says, "to test whether a pot of rice is cooked, one need to taste only a pod in the pot".

Much of the report's examples of the beneficial effects of the TNC-led FDI, are on the experiences of industrialized countries at more or less similar levels of development, and scientific and technological capacities of firms, and having a high-degree of intra-industry trade in products and ancillaries.

Even then, as the example of the Japanese contribution to restructuring of the British automobile industry shows, it is not a phenomenon of a neo-liberal freedom for capital (to invest and produce what it likes and where, without any controls or permission needed from host country) at work.

Rather, as in the case of Japanese auto-industry production in UK, or others in the electronics consumer field in Europe, the incentive to invest and produce from within the European Union, is related to tax and tariff systems on intra-EU trade, the local content requirements and rules of origin of the EU and the 'grey area' voluntary export restraints and agreements the EU Commission has across a wide variety of sectors to protect domestic production.

The similar industrialization efforts (via TNCs) in some Far East economies, and the second tier NICs of Asia are also related to the ability of host country governments to prescribe local content requirements (which under the WTO TRIM's agreement have to be phased out by year 2000 by developing countries).

In fact the post-war history in Europe shows that the TNC (US) investments in Western Europe were helped by the Marshal Plan, trade barriers of Europe, industrial policies of governments, the liberalisation and reduction of barriers within Europe but behind high barriers against the rest of the world, including discrimination visavis the US (a violation of GATT, but one that the US then accepted), and the extensive technological abilities within Europe that enabled the influx of foreign capital (to substitute for lack of savings and capital in war-damaged Europe) put to work to replicate foreign technology and set up new production.

They have no application in a situation of unequal relationships, and vertical integration being attempted by the TNC system in the developing world. It can only result in enclave high-life economies and mass poverty.

The only experience in the real world -- of full capital mobility, as a factor of production, laisse faire economics and fully liberalized trade (the neoliberalism of the Washington consensus), but relatively more labour migration -- was after 1840, 64 years after Adam Smith published his Wealth of Nations to persuade his countrymen to adopt laissez faire (though even he expressed many qualifications to his free-market philosophy).

Between 1860 to 1870, France and Germany joined England in practising it, but quickly discovered that the benefits went to England and its manufacturing industry and their own lost, and withdrew from free trade with UK (thus managing to escape the worst rigours of the Long Depression in Europe).

Between 1857 to 1929-30, full laissez faire prevailed under British rule over the Indian subcontinent (current India, Pakistan and Bangladesh), Sri Lanka and Burma. Capital flows, inward or outward, were unrestricted and so was trade. The British Patents act was fully applied in India - in fact the very next year after Crown rule was established. There is a wealth of economic literature showing that this de-industrialized India and blocked the industrial revolution. There was a "modernization" --creation of enclave economies (in the plantation agriculture sector) with no linkages to the rest of the subsistence agriculture. All that changed only after Independence and active government role including a vastly expanded public-sector role in the economy.

And while some British capital flowed into India during the British rule, for railways and other projects to open up hinterland of India for trade and commerce (and help establish full British rule), the outflows -- due to adverse terms of trade, trade imbalance and profits and remittances of corporations and British servicemen and officials in India -- impoverished the country, with a famine occurring on average every two years, and resulted in capital moving out from capital-scarce and labour-surplus India to capital-rich labour-scarce England.

By that time, in the late 19th century, the United States was richer than Europe, but was a large FDI host - capital flowed from Europe (and England) to the United States.

The present flows, increasing as WIR reminds us, from Europe, Japan and the US, to the developing countries, is really an effort to get around the trade restrictions or disadvantages of supplying distant markets with goods from the home country.

In a free flow situation for capital (outward and inward), the experience of the 19th century is more likely to be repeated, and there are no facts, but mere conjectures and surmises of the WIR, for a contrary conclusion.

Even under present conditions, as several studies by NGOs for the post-Rio meetings of the UN Commission on Sustainable Development brought out, if all the flows (profits and remittances, technology and other licence fees, affiliate payments to TNC head-office management expenses, transfer pricing remittances for over-priced imported inputs and under-priced exports to TNC parents and affiliates) are taken into account, there is a net drain of capital and resources from the South to the North.

The UNCTC was originally set up, among others to undertake the gathering of such data, difficult but possible by use of proxies, to monitor TNCs. The DTCI by not doing so has forced outside scholars and critical NGO studies to resort to some approximations, which in absolute figures may be wrong, but show the trends.

The WIR promotes the view that with TRIPs and its higher levels of patent and IPR protection, and FDI investments by TNCs, developing countries enhance their technological capacities and R % D, and will be able to restructure and upgrade their economic performance. This is not a view shared by patent experts like Jeremy Reichmann; other published studies show that Brazil, with lower level of IPR protection, got more FDI than some other Latin American countries with higher, (US-levels), of IPR protection.

The 'globalization' process and the 'integration' of developing countries into the world economy is not something totally new nor are TNCs new animals on the scene - the British East India Co. and other European trading companies of the 18th and 19th century were not really all that different in their motivations, drive etc.

Nor is 'globalization' a process that could be painted in black and white, though the black is much more prominent in the periphery, because of inability of the nation state to safeguard public interest and advance equity and welfare of its peoples. It thus rests on shaky foundations.

Gunnar Myrdal, apart from his contribution to international economic discourse during his tenure as the first executive director of the ECE, focused in his extensive writings on economic development on the key theme of "cumulative accumulation" which showed that free trade and international transactions and economic relations including FDI might exaggerate divisions within the world rather than create convergence.

In the preparations for UNCTAD-IX, and its theme of globalization, rather than promoting the Multilateral Investment Agreement that can only polarize the North-South divide and communities within the North and the South, Myrdal's theme of 'cumulative accumulation' may usefully be revisited, by the DCTI and all divisions of UNCTAD -- to quote Myrdal, with an institutional consensus sepentium, rather than within each division, to avoid confusing member-countries and the wider development community.