Jul 6, 1998
DEVELOPMENT: SOUTH MAY BE TRAPPED BY TNC-LED GLOBALIZATION
Geneva, 2 July (Chakravarthi Raghavan) -- The 'new internationalization' -- TNC-led liberalization/globalization of the
world economy -- may benefit Third World countries, but could also freeze them into a starkly hierarchical international division of labour, exacerbate disparities between rich and poor nations and have a corrosive effect on the future capacity of Third World states to structurally transform their economies.
In presenting these possible outcomes, US academic Peter Evans argues that while in principle Third World nations (now welcoming TNCs and FDI with open arms) could compete for rich returns in the domestic markets of advanced nations, by establishing a powerful set of domestic institutions, the new internationalization not only diminishes the prospects of constructing such institutional endowments, but even tends to erode them where they already exist.
The views of Evans, and other leading academics and experts on transnational corporations (TNCs), foreign direct investment (FDI) and the role of the state in industrial and development policy, in papers presented at a UN University/Wider Institute conference in Cambridge late in 1995, have been published in a book on 'Transnational Corporations and the Global Economy.
Edited by Richard Kozul-Wright, an economist at UNCTAD (and formerly at the UN Centre on TNCs at New York) and Robert Rowthorn, Professor of Economics at Cambridge, the UNU/Wider publication (437 pp) is by MacMillan Press, London.
The authors of the chapters, all of whom have researched and published on various micro- and macro-economic aspects of TNCs and their impacts on development of developing countries include Paul Bairoch and Kozul-Wright, William Milberg, Pascal Petit, Amitava Krishna Dutt, Ha-Joon Chang, Mica Panic, Mira Wilkins, Yilmaz Akyuz, Edward Amadeo (formerly Brazilian academic and Brazil's labour minister), Michael Mortimore (ECLAC, Santiago) and Simay Mihaly (formerly director of Wider).
As editors Kozul-Wright and Rowthorn put it in their introduction, the essays in the volume caution against the "strong globalization thesis", both by recalling earlier episodes of globalization, questioning the extent to which a global economy has arrived or is likely to, and describing the very different dynamics resulting from the interaction of national and international forces.
While the eminent academics and international economic officials in their chapters have focused on various aspects of TNCs and States in development, there is no discussion by any of them of the idea of or the need for any multilateral rules on investment.
The reason is perhaps simple: it was not an issue in 1995 when UNU/Wider prepared for and convened this meeting. It was an issue conceived in secrecy by a few governments at the OECD, pushed by some Europeans through extra-budgetary resources at UNCTAD and elsewhere, and a little later at the secretive and non-transparent World Trade Organization and the even more secretive IMF (through its moves for capital account liberalization). Few other wings in governments anywhere, or academia, were aware of or took the issue of multilateral rules seriously at that time. Only an NGO campaign early this year drew attention to it.
Two broad themes underpin the papers in the volume, according to the editors. Firstly, since national economic performance is both a cause and effect of globalization, the links between domestic economic institutions and TNCs are more complicated than often appears.
Secondly, since countries at different levels of development face different problems, there must be diversity in the design and implementation of economic policy if the potential benefits from globalization are to be fully exploited.
These themes, and the various proposals and ideas advanced by the authors, in effect counter the idea of a common global rules to give rights of investment to TNCs, and deregulate/delimit the state roles.
But, Kozul-Wright and Rowthorn, in an article in a forthcoming issue of Oxford Review of Economic Policy, have questioned the thesis that the road to development for poor countries is to attract FDI on a very large scale like Malaysia. The various current proposals pursued on several fronts (including IMF and the WTO) for a liberalised and transparent international investment regime, and the more far-reaching proposals for a Multilateral Agreement on Investment, the two economists say in the article, neglect the regional integration aspects and the need for poorer countries to promote their domestic supply capabilities.
The collection of papers in the volume is an antidote to the romanticised views about globalization, and the positive effects of TNCs and FDI on development, spewing out of international organizations.
In a forward to this book, Giovanni Andrea Cornea, Director of UNU/Wider, says that while there is a vast literature around the changing role of TNCs in the world economy, "much of it has failed to engage with the broad issues of economic development", Wider's traditional concern, and the book seeks to fill the gap.
An UNCTAD senior official, Mr. Karl Sauvant, last month told an NGOs from North and South that the role of FDI in development is not a new issue (and there are over 50,000 books and articles on the subject), and while FDI has positive and negative effects, all governments have concluded, and so has the literature on the subject that FDI contributes to development.
And a WTO official, Zdenek Drabek, in a paper in a recent FONDAD publication, claimed that the merits of FDI and globalization are undeniable, even though globalization may also have some adverse effects, and that the argument about the negative or poor impact of FDI on development is based on fear of globalization which corresponds to the "residual of the 1970s thinking", and that fears about denationalization, decapitalisation, adverse impact on balance-of-payments, savings and domestic growth are not viable and receive declining support from academics, policy-makers, journalists and other experts.
But the writings in this volume among others by Evans, Panic, Milberg, Mortimore, Akyuz (UNCTAD's chief macroeconomist) and Amadeo give considerable academic and other expert support for the concerns of Third World nations and public interest NGOs.
In his paper, Evans analyses the changed attitudes and relationships between Third World states and TNCs and their new global production structures to supply sophisticated distant markets and says that while this new internationalization may work to the advantage of Third World countries, it could also prove to be a "frightening trap" by freezing them into a more starkly hierarchical international division of labour and exacerbating current disparities between rich and poor nations.
Evans, professor at the University of Berkeley (and before that at Princeton) and who wrote in 1979 about TNCs in Brazil, notes that a generation ago controversies over the impact of TNCs in the Third World were central to scholarly debates. That controversy has now died and, whether or not TNCs are optimal instruments of development, no Third World country considers excluding them.
Recent works on TNCs, he notes, focus on cross investment among advanced countries - an area which makes more sense for theorists of trade and investment, for policy makers or TNC managers, since Third World cases complicate the calculus without providing commensurate leverage on general solutions.
And in poor countries, an expanding set of desperately pressing problems and absence of evident alternatives kills interest in the question whether industrialization dominated by TNCs is less desirable than one relying more on entrepreneurship - private or public.
But "something is lost in this silence," says Evans, since the impact of TNCs on Third World development is significantly greater than during the days of controversy.
Despite the near ubiquity of Third World reliance on FDI, patterns of TNC involvement and its consequences have been very different across countries and regions, and any effective response to the predicaments of poor countries depends on separating winning strategies for dealing with TNCs from losing ones.
Archetypal of the old 'internationalization', characteristic of the post-war 'golden age of capitalism', was US investments in larger countries of Latin America, aimed primarily at producing manufactured goods for domestic markets of the host country, and built around wholly-owned subsidiaries, the kind of investment central to the import-substitution industrialization (ISI).
The new internationalization which has taken shape since 1973 represents a different paradigm. Its production strategies are defined by global markets rather than local ones, though it leaves Third World domestic markets even more internationalized. Global production networks are typically constructed around a series of 'strategic alliances' among TNCs, but occasionally include Third World entrepreneurial groups. Manufactured exports from the Third World back to the rich country markets are central to the new paradigm, while the flows from the advanced countries to the Third World increasingly take the form of services and intangibles. This new internationalization pervades all regions of the Third World, but East Asia, not Latin America, is the archetypical site.
In 'predatory' states, for many officials the issues involved in foreign investment is simple: how to extract greatest personal share from the wealth or income generated by the private actors. Their interactions with TNCs have been bargaining models among sets of individual maximisers.
But in states with apparatuses more like Weberian bureaucracies pursuing collective goals, there is a strong interest in maximising future productive potential of the territory governed, either to increase welfare of citizens or increase local productivity base for future revenue collection. In either case, the state has a strong shared interest with capital, and is a natural ally in economic transformation.
And Third World capitalists, operating in an internationalised economy but tiny relative to global competition, are in a particularly difficult position to take risks. The state thus has an advantage over individual entrepreneurs, can take a longer perspective and play a pivotal role in overcoming collective action problems. And whether or not the quest for profitability moves in the direction of investments giving local citizens new productive assets to work with may well depend on the state's capacity to transcend the limits of individual entrepreneurs, operating in a peripheral position to the world economy.
But the logic of relationship between state and transnational capital is different, since most TNCs can take risks confident that even major blunders by them cannot threaten their long term survival. Hence, while more likely agents of economic transformation, they are also unreliable allies, since it would be much harder to convince them to take the kind of risks that Third World states are most interested in.
Referring to the Ricardian example of English and Portuguese trade and comparative advantage, Evans notes that any structural transformation needs "multidimensional conspiracies in favour of development".
Producing textiles was one such in 18th century England, but producing wines proved for Portugal to be good business for vintners but a development dead-end.
Poor countries intent on escaping their low-return niches must always be on the lookout for opportunities to reconstruct comparative advantage. But TNC managers have to be convinced that local environment offers more positive externalities for promoting new activities than a multiplicity of other national sites. They will stick to the traditional view emphasizing opportunities for profit consistent with existing local endowments. This tends to ratify and solidify a nation's existing position in the global division of labour. Consequently, choosing to rely on TNCs is a risky strategy for countries trying to avoid remaining trapped in low return activities that exhaust existing productive resources.
But risky or not, reliance on TNCs is unavoidable in the contemporary world and no Third World state can afford to exclude TNCs or even allow government policies to fall outside the limits of what is considered reasonable by the collective culture of TNC executives. As a result, Third World states have only limited room for manoeuvre to pursue goal of productivity enhancing economic transformation.
Analysing the experiences of Latin America and the resource-poor East Asian countries (Korea and Taiwan), and the experiences of other South-East Asians under the old and new internationalization, Evans says that the new internationalization of global production networks by TNCs in principle could work to the advantage of Third World producers, and the greater organizational openness of current TNC structures could open space for participation of Third World entrepreneurs.
Nevertheless, Evans says, the new internationalization is also compatible with a "more starkly hierarchical" international division of labour, one in which distribution of productive roles exacerbate current disparities between rich and poor nations.
"Third world countries risk having the investments they can attract (and therefore their future position in the international division of labour) defined by their current poverty. If this happens, the new internationalization is a frightening trap. Despite the extent to which this new internationalization was shaped by state action, the new internationalization appears likely to have corrosive effect on the future capacity of Third World states to construct transformative projects."
TNCs are still "inherently equivocal" partners in local transformative projects, and their new willingness to create local alliances has drawn local capital into global networks, reducing the local entrepreneur's stake in the transformation of local economies and their willingness to engage in joint projects with the state.
Given the centrality of state efforts in working towards a less hierarchically differentiated international division of labour, current declines in the state's capacity to shape the behaviour of local capital increase the likelihood of regressive outcomes.
The recent evolution of Third World's relations to TNCs, Evans adds, produces a contradictory syllogism.
The first proposition is that the economic logic of the new internationalization does not inevitably worsen the position of Third World countries in the international division of labour. To the contrary, it offers, in principle, the possibility of competing for rich returns generated in the domestic markets of advanced industrial countries.
The second proposition is that taking advantage of these returns is contingent on bringing to bear a relatively powerful set of domestic institutions. Most obviously, it seems to require a state capable of engaging capital in a project of local economic transformation.
The contradictory third piece of the argument is that the new internationalization not only diminishes the prospects of constructing such institutional endowments, but tends to erode them even where they already exist.
Citing the experience and example of Singapore, which has been "singularly successful" in incorporating TNCs into its own strategies, Evans says this example highlights the dilemma facing other countries.
The Singapore example confirms that its private sector has been dominated by export-oriented TNC capital from the beginning of its quest for industrialization, and yet has managed to use TNCs as instruments for delivering continually living standards to local workers. The Singapore experience also shows that the extraordinary capacity of its economic bureaucracy has clearly been essential to its success in dealing with TNCs.
"But the disturbing lesson from Singapore is just how extraordinarily robust and powerful public institutions must be in order to escape the negative predictions of the third proposition. If other Third World countries had Singapore's institutional endowments, they would have little to fear from the new internationalization."
But given that they must live in a globalized economy where the economic rules of the new internationalization are hegemonic, they are unlikely to be able to construct anything resembling the institutional armaments that Singapore has used to turn the new internationalization to its advantage.
"The obvious lesson," Evans concludes, "is that poor countries with even partial approximations of Weberian state apparatuses should take care to protect, and if possible enhance, the integrity and capacity of these apparatuses. If they don't they risk their ability to take advantage of the new internationalization.
"The lessons for countries that lack such state institutions is more murky. It is clear that following the example of East Asian NICs and relying on an alliance of the state with local entrepreneurs is much harder now that the new internationalization is in place. But it is not at all clear what the alternatives are. For those not already institutionally privileged, the local political response to global production networks remains to be invented."