Global Economy

This unit will examine aspects of the global economy including:

• the role of the World Trade Organisation
• the advantages and disadvantages of free trade and protectionism

• the deregulation of global finance and the Tobin Tax
• the characteristics of multinational companies (MNCs)
• the impact of MNCs across the world on international trade, human rights and democracy.

Background

GATT and the World Trade Organisation

The General Agreement on Tariffs and Trade (GATT) was one of the three institutions to emerge from the Bretton Woods Conference in 1944, along with the International Monetary Fund (IMF) and the World Bank. It established global rules to regulate and monitor levels of import duty on goods and aimed at stopping the competitive trade policies that had so crippled the world economy during the 1930s. Negotiation amongst participating countries resulted in agreements that lasted until the next round of negotiations was complete. The final round, with 108 members on roll, went on for more than six years. As a result, tariffs on the import of goods have been substantially reduced from an average of 40 per cent to four per cent, with a resulting increase in global trade.

In 1995, the World Trade Organisation (www.wto.org) was set up as a successor to GATT. The WTO:

• includes banking and investment, telecommunications and labour standards, as well as import tariffs on goods
• mediates between nations in dispute over trade sanctions
• allows each country one vote so it could be a realistic positive force for member countries from the south.

The WTO wields considerable power to rule against national laws if they are seen to restrict the freedom of global trade. This has been the source of a high level of public concern as it tends to value trade over environmental, social or health concerns. For example:

• the ‘free logging agreement’ sought to open up global trade in timber but at the expense of the world’s most sensitive forests. It would override international environmental agreements on raw log export bans and the Endangered Species Act.
• the EU had agreed, in the Lomé Convention, to support small-scale banana producers from former colonies like the Caribbean. In the US, banana production takes place on massive, pesticide-intensive commercial plantations. In the dispute that followed, the WTO ruled in favour of the US, saying they should not be denied access to European markets. For the small-scale producers from developing countries, the potential loss of a guaranteed market could destroy them and their nation’s economy.

Although the WTO embodies the principle of one country one vote, secret tribunals make decisions. In response to a system that seems not to be accountable to democratic processes or national governments, the International Forum on Globalisation (IFG) was formed, as a public watchdog (www.ifg.org). IFG maintain that corporate rights, embodied by the WTO, override ‘people’s and planetary rights under the UN’s Human Rights Conventions, the International Labour Organization agreements, and all the multilateral environmental agreements’. It is concerns like these that lead to mass public demonstrations, for instance at Seattle and Genoa, where leaders of G8 nations and organisations such as the WTO are meeting.

• Countries to specialise in products for export for which they have favourable conditions, while importing other products at a cheaper price.
• Consumer demands can be met as they have the option to turn to suppliers abroad when domestic suppliers fail to fill their needs.
• Lower prices are caused by increased competition as foreign goods are brought in.
• New technologies, ideas, attitudes and institutions can be acquired from abroad.
• Consumers have freedom to choose what to buy resulting in better products.
• The trade rules are the same for all countries.

• It prevents the destruction of local subsistence economies (ones in which people mainly grow their own food, etc.).
• It prevents large job loses in local industries.
• There is more money for the government from import tariffs.
• New industries can be given the chance to develop without risk of competition (for example in countries which have, in the past, relied mainly on producing raw materials).
• Industries can be protected from unfair competition.
• It prevents regions that are dependent on a few export products suffering the consequences of global price fluctuations.
• It ensures that the people have power through government rather than power being transferred to multinational countries.

The volume of world financial transactions has soared to almost unimaginable heights in the last thirty years, as countries bring down their barriers to investment. See Activity Sheet 2.1 for statistics and/or see www.waronwant.org and the websites of major banks.

Inevitably, this mass flow of money in and out of countries poses a significant threat to the stability of the global economy. In the last thirty years there have been eleven global financial crises, when speculators have panicked about their short-term investments and pulled out of countries en masse, causing job losses, bankruptcy, and poverty for the citizens left behind.

Proposed by Nobel-prize winning economist, James Tobin, in 1978, this tax could prevent such global crises from occurring. A tax of less than 0.5 per cent could be levied on foreign exchange transactions. Since short-term currency trades work on much smaller margins, this tax would wipe out profits, and hence, the incentive to speculate with foreign currency. Trade in goods, services and long-term investments would still be profitable because the profit margins, although slower to achieve, are greater than 0.5 per cent. The Tobin Tax could:

• stabilise exchange rates and make financial planning easier
• remove the power financial markets have over the global economy, so that countries are protected from speculative attack
• allow governments to act in the best interests of their citizens
• be a source of revenue for governments to fund social development
• raise enough revenue to alleviate both world poverty and environmental destruction.

The Tobin Tax Initiative can be found at www.ceedweb.org/iirp

The two main criticisms are:

The world financial community, who have a great deal of political influence, will make less money and there are a lot of practical problems with implementing a worldwide tax system.

An MNC is a business firm with a parent company in one country and subsidiaries and affiliates in other countries (trans-national companies have a global reach but no particular allegiance to one country). All MNCs share a number of features.

• They are large.
• They often operate in markets in which few firms provide the same goods or services.
• They are vertically integrated (one management controls two or more steps in the production and distribution of a product).

Some of the MNCs are so large that their annual sales figures are more than the Gross Domestic Product (GDP) of many developing and small countries. GDP is the total value of goods and services produced by a country.

In the case of smaller countries, an MNC may specialise in the production of one or two crops and account for around 80 per cent of the exports, employment and GDP. MNCs with headquarters in a few rich countries are responsible for 93 per cent of all investment in the world.

Who are these MNCs and where are they based?

MNCs are generally based in wealthy, industrialised countries. They include Nike, Coca Cola, McDonalds, Philip Morris, Microsoft, and Mitsubishi, which produce and distribute a variety of goods. MNCs can be service-providers too, for example, banking and investment institutions, or media empires such as the News Corporation, owned by Rupert Murdoch. UK-based MNCs include Diageo, BP and Barclays.

The impact of MNCs

The sheer size of MNC operations guarantees that they will have an impact across the world. The millions of people affected by them may benefit in some ways and desire the products, but they have little or no control over the operation of the company. MNCs have the potential to make a huge and positive difference to the countries in which they operate and many have done so. However, at the heart of the majority of businesses is the quest for making as much profit as possible. Sometimes human needs are sacrificed to attain this.

Most southern governments are keen to attract MNCs. In order to do so they offer concessions, which comes out of the country’s own budget. MNCs are equally keen to establish their presence in many countries for the huge economic and operational advantages available, primarily those of avoiding tax and governmental control.

Positive impacts of MNCs

MNCs can:

• boost national income
• bring in technological innovation
• create jobs with better wages and working conditions than in local companies
• take risks that small businesses could not afford
• introduce new marketing and management strategies
• generate tax revenue through exports
• contribute to local development, environmental projects and conservation of natural resources
• operate in the world’s most inaccessible areas
• help to make a local economy global and forward thinking.

Negative impacts of MNCs

MNCs can:

• wield more power than nation states because of their financial assets; have access to technology, high-level marketing and support from their own governments
• set the agenda for their operations with little regard for the economic, social and environmental consequences
• choose to buy out, but not develop, local companies simply to avoid competition
• send their profits back to the parent country
• use low-tax countries to enhance their own profits
• pull out of countries when they choose, which is a powerful bargaining tool
• make income inequality worse
• undermine domestic purchasing power by reducing wages to cut costs and increase profits
• be reluctant to share expertise for fear of giving advantage to competitors
• bring in their own skilled workforce rather than training locals
• under- or over-utilise natural resources to the detriment of the country
• carry out all their research and development in the parent country
• exploit the low-cost labour force
• undermine local subsistence farming, kill off traditional skills and hamper local entrepreneurship
• evade environmental control regulations by moving their operations to countries with lower standards.

Arms

International arms trading, although not confined to one MNC, is the biggest business in the world, estimated at $800 billion a year globally, followed by the illegal drugs trade at $400 billion. In 1997 the US exported arms to 52 countries where citizens are not allowed to choose their governments democratically. The British Labour government promised not to export arms to ‘regimes that might use them for internal suppression or international aggression’ yet allowed exports to Indonesia. Secrecy around the current law makes it impossible to monitor precisely what is going on and human rights violators, military dictatorships and corrupt governments are reinforced and kept in place by democratic governments allowing and even giving concessions in the form of tax breaks to the companies so they may continue to profit from this trade.

Social impact and human rights

Many MNCs are mindful of their responsibilities towards the communities in which they operate and have policies in place that underline their commitment. Valuable development work and investment of money and expertise by some MNCs has benefited some host communities. Performance is sometimes reported in terms of ‘social and environmental’, as well as financial achievement.

However, many MNCs operate in countries that have a poor record of human rights in the workplace and little concern about the sustainability of the environment. This is advantageous for companies since they are not bound by stringent regulations or pressured by cultural ethos to take care of their employees or the locality. Their presence in the country is criticised by some as lending tacit support to undemocratic regimes.

Sweatshops

MNCs may directly run or buy from factories with low-labour standards; these are commonly known as ‘sweatshops’. They are a cause of great public concern and have tarnished the good name of many an MNC. Some of the issues raised, aside from the appallingly low wages and long hours, have been:

• dangerous, poorly maintained machinery
• long enforced work hours
• physical and verbal abuse of workers in factories
• the use of child labour
• the presence of armed forces to intimidate workers during wage negotiations
• the firing of workers for talking to journalists and refusal by the MNC to require their reinstatement
• severe fire hazards and exposure to harmful solvents
• the sacking of workers for trying to organise unions
• pregnancy tests and use of contraceptives as a condition of employment for women.

Many of these poor conditions are due to the fact that MNCs take out contracts with local suppliers to produce their goods. It is generally these local suppliers who infringe workers’ rights, rather than the MNC directly. MNCs vary to the extent that they insist on, and effectively police, strict guidelines for working conditions.

Organisations, such as Corporation Watch at www.corpwatch.org and www.coopamerica.org observe, report and take action against MNCs who are thought to be in violation of human rights and environmental standards.

What can we do?

People can lobby governments about specific issues, avoid buying products from particular companies, buy fair trade products and put pensions, etc. in ethical investment funds.

Useful websites

• www.caa.org.uk – Contemporary Applied Arts
• www.ceedweb.org - Centre for Environmental Economic Development
• www.coopamerica.org/sweatshop/index.html – Co-op America
• www.corpwatch.org– Corporation Watch
• www.fairtrade.org.uk – The Fairtrade Foundation
• www.ifg.org – International Forum on Globalisation
• www.sweatshopwatch.org – Sweatshop Watch
• www.waronwant.org – War on Want
• www.wto.org – World Trade Organisation