The Rebel Road…

I know you’ve come to kill me. Shoot, coward, you’re only going to kill a man. – Ernesto Che Guevara

The New World Order – I

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“The evidence strongly suggests that global income inequality has risen in the last twenty years. The standards of measuring this change, and the reasons for it, are contested – but the trend is clear. The ‘champagne glass’ effect implies that advocacy of globalisation is not enough; international organisations need to move beyond integration into the world economy as the primary goal of policy”
— Robert Hunter Wade.

Ever since globalisation has started, the financial situations of countries have been heavily determined by fluctuations in foreign financial resources. Moreover, importance of public and private investment in financial assets and aid coming from the developed countries to developing and underdeveloped countries is gaining stronger roots. This global flow is taking place mainly in two ways: first, by direct and portfolio investment in the Third World countries and second, by public and private developing assistance to these countries. Private foreign direct investment (FDI) in the Third World countries has shown a tremendous growth as can be observed from a rise in annual rate of $ 2.4 billion in 1962 to $ 120 billion in 1997. The engine of this incredible increase in private FDI is the emergence of multinational corporations (MNCs) as giant players in the world economy.

Alongside the boom in the private FDI, there has been a marvelous growth in the private portfolio investment in LDCs as a significant element in private capital flows. This can be seen by a growth of 1150 percent in just eight years from $ 7.5 billion in 1989 to $ 86.3 billion in 1997. Beside these commercial motives of direct and portfolio investment, there is a considerable component of foreign aid in the foreign inflows of capital in the Third World countries. Public foreign aid is mainly directed through bilateral and multilateral funding, credit and technical assistance flows and is known as official development assistance (ODA). It has grown modestly in absolute terms but has fallen as percentage of developed-country GNP allocations from 0.51 percent in 1960 to 0.25 percent in 1996. Other than public foreign aid, there is a private non-governmental way via private NGOs that is more of a voluntary and local-based method according to Todaro in the article ‘The Great Gadfly’.

But the real questions that this article will attempt to address are: Does this international flow of foreign financial resources has helped the process of development in Third World countries in any way? Has MNCs business improved the poverty situation? Has foreign aid made life of masses in the underdeveloped countries any better? In short, has the MNC, as an economic entity, contributed to the betterment of society? Whatever the reason may be, it is quite evident that the situation in the underdeveloped countries has worsened ever since this novelty of foreign direct investment has begun.

Multi-national corporations have now been ruling greater part of world business. With the passage of time, the volume of sales of many MNCs has increased more than the GDP of many developing countries. Intra-firm MNC sales of intermediate products amount for a quarter of total international exchange and 80 percent of global trade is controlled by top 500 MNCs according to Nawal El Saadawi in his article, ‘Neo-colonialism and Media’s dark age’. But the distribution of all this trade among different regions of the world is highly asymmetrical where LDCs receive around 2 percent, Africa receives less than 3 percent and the top nine countries receives 71 percent of total investment. This is understandable as MNCs only want their profits to be maximised and they will do so wherever they will get the opportunity.

In fact, MNCs have factually turned into international industrial units looking for any prospects of expansion and thus profits. When compared to the total global exports, MNCs’ sales volume is greater, $ 7 trillion in 1995, and these sales are on the rise at 30 percent higher rate. This is an illustration of increased economic influence of major global industrial units even in comparison with that of the developed countries.

“Spreading the benefits of economic development and technological innovation may indeed be required to achieve and maintain peace and prosperity. But the proliferation of MNCs does not guarantee such an outcome. Despite intensifying international competition, MNCs are not promoting the ineluctable convergence and integration of national systems of innovation, trade and investment, nor are they forcing deep convergence in the national economies in which they are embedded. They cannot do so because they themselves are not converging towards global behavioural norms” (Dorimus, 3).

The important point to note is that the growing power of MNCs is now challenging the state structure. Thus, most important outcome of this enormous economic weight is that the MNCs in countries of their operation are in a position to decisively alter and adjust the policy and authorities’ decisions in their favour. MNCs also get relaxation in tariffs and quota structures from local governments. More often, these decisions are clearly detrimental to development. This is truer in the Third World countries where government structures are already weak and policy decisions can be molded by bribing few officials at the top. External relations office of these MNCs mostly concentrates on these foul tactics, further undermining the institutions.

“With the growing influence of these MNCs, it is feared that they even gain such a position from where they can affect decisions in the political realm, which is very dangerous for a country’s national sovereignty. Increasing business circle of these corporations is seen as a way of economic subjugation of the poor countries. Also, they take more money and resources out of the economy than what they pay in taxes to local governments, a point raised in favour of MNCs. Silvia Borzutsky comments on the inverse nature of Globalisation and good governance in the Third World, “In practice, globalization entails an expansion of the power of the developed countries and multinational corporations at the expense of the power of the third world governments. The governments of the LDC have found themselves deprived of the means and mechanisms that would allow them to control their economic policies. Instead, we have seen the expansion of the power of institutions such as the IMF and the World Bank, as well as the power of the governments of the industrialized countries and large corporations” (Borzutsky, 26).

Mostly, supporters of MNCs business argue on the basis of neo-classical theory that MNCs help fill domestic savings and investment needs gap, thus helping the developing countries. But quite the contrary, investment done by MNCs is of almost no use as a big chunk of profits earned is diverted back to the countries of MNC origin. Rather, the situation is aggravated by the fact that MNCs crowd out local investors who become incompetent in front of fair and unfair games played by giant corporations. In addition, their oligopolistic nature only enhances their power as they can easily play around with profits and prices by colluding and deciding the areas of operation among themselves. Long production chains within MNCs help them avoid high taxes by ‘transfer pricing’.

(to be continued)

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Written by redtribution

April 20, 2008 at 10:18 am

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