A CRITIQUE OF NEO-LIBERAL GLOBALIZATION?

by Prof Gerald Epstein*

Amherst, Mass 1 Oct 99 -- 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 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 cheer-leading 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 lines, one finds a strong theoretical and empirical case against much of the basic neo-liberal view of the impact on TNCs on economic development. Simply put, the standard neo-liberal argument in favour of liberalization 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 reduce 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 characterize 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 globalization 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 small - on the other.(p. 324)

* A substantial share of recent FDI has taken the form of mergers and acquisition (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 and indeed, TNCs may be contributing to increased world inequality. (p 328)

* And the process of global liberalization 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 mobilize resources '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, a significant advance on earlier approaches toward TNC 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 multi-lateral 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-a-vis developing country governments.

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 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 globalization 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 WTO or the IMF or national governments in the developed economies to end their insistence that developing countries subscribe to the very liberalization 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 NGOs, domestic governments and other groups will accelerate their efforts at blocking the liberalization 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 liberalization 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 globalization. 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 LIBERALIZATION 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 the WIR, 1999 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 liberalization process which gives them increased access and free reign 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 OECD's 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.

In its autopsy of the MAI, WIR-99 concluded 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 politicized, business groups which had been 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 bi-lateral 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 liberalization would be gained." (p 136)

In short, the dangers to the TNCs 'liberalization project from the mobilization of "civil society" appear to be real indeed.

Implicitly, then, the authors of the WIR, seem to be supporting the mobilization 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 liberalization 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 liberalization 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 mobilizing foreign investment that will benefit developing economies, is to mobilize 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 mobilization 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 mobilize 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 mobilizing 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 is 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 devoted 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 multi-lateral 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).

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 liberalization 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, the WIR, 1999 continues to be taken in by its own rhetoric on the importance of TNCs: if TNCs are such an important agent of globalization, then developing countries need them to develop. While it is true that TNCs are an important agent of globalization, 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 mobilize 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 mobilize 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 globalization 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 the WIR-99.

[* Prof. 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)

This document was published in the South-North Development Monitor(SUNS), edited by Mr C. Raghavan. It is being circulated for the benefit of the NGO community.

For recirculation please obtain permission from Mr Raghavan at suns@igc.apc.org