Description of the International Economic and Financial System
Succint Description of What the International Economic and Financial System is, How it Works, and to Whose Benefit
The international economic and financial system is dominated by industrial and financial transnational corporations (TNCs) whose simple if unwritten programme is based on a trinity of freedoms. They demand:
- Freedom of investment
- Freedom of capital flows
- Freedom of trade in all goods and all services including living organisms and intellectual property
Their ultimate goal is to be free to produce, distribute and invest what they want, where they want, for as long as they choose, and to be able to move capital, personnel and goods at will. Subcategories of these essential freedoms naturally include massive privatisation of publicly held companies and public services. Nothing should be excluded a priori from the market, neither healthcare nor education, human body parts or genetic material; foods, seeds, water, air or forests; art, music or sport.
TNCs can usually remain above the law, even when they cause grievous harm and damage to people and the environment. Let us recall the cases of Union Carbide in Bhopal, Shell's actions in Nigeria against the Ogoni people or the recent oil-spill on the French Breton coast as a result of Total-Fina's irresponsibility. These corporations demand deregulation and strict limitations on government intervention, except in the case of corporate welfare such as tax-breaks or publicly funded research support, which should be maintained - although welfare payments to citizens should not. In their view all taxes, particularly those on employment, are bad, except for taxes paid by consumers, salaried employees or wage earners.
TNCs measure their success by profit rates and 'shareholder value', meaning the market price of the company's stock. Some corporations even buy up their own stock to cause the market price to rise. Cost-cutting, especially through massive layoffs, is another way to increase shareholder value, and loyalty to employees or to the communities where they happen to be located is a thing of the past.
The United Nations (UN) claims there are now about 60,000 TNCs with half a million affiliates, but the ones to watch are the top one, two or five hundred. Of the top 100 economic entities in the world, 51 are corporations, only 49 are states. General Motors or General Electric are much larger than Saudi Arabia or Poland, and so on. The top 200 firms ar responsible for about a quarter of all the measured economic activity in the world - or gross world product.
All told, the 60,000 TNCs counted by the UN employ only about 60 million people worldwide. Let us generously assume that each of these jobs generate another two jobs somewhere else in the economy: this still amounts to only 180 million people employed by TNCs, or well under 10 percent of the world's available workforce. In the space of five years in the 1990s the top 100 TNCs increased their sales by 20 percent while slightly reducing their total employment.
So TNCs employ relatively few people compared to their size. They also invest much less in genuine economic activity than most people believe. During the past five years more than three quarters of what the press and the UN label as 'foreign direct investment' was actually cross-border mergers and acquisitions. The TNCs are constantly in search of greater market shares which they can obtain more easily by buying up other companies than by creating new ones.
The UN does not publish figures on financial TNCs - such as commercial banks, insurance companies, pension funds and mutual funds or brokerage houses, even though their turnovers is in the billions of dollars and often rivals the sales of the industrial giants. The last reliable figures I know of date from 1995 and were published by the Bank for International Settlements (BIS) - the central bank of central banks in Basle.
At that time banks, insurance companies, pension funds and institutional investors were handling $28 trillion worth of funds, a figure which has quite possibly doubled today. As the BIS notes, the managers of this money routinely display 'herding behaviour', meaning that they all race for the exit as soon as any unfavourable signs are perceived, particularly in fragile, so-called 'emerging markets'. As the BIS further explains, a mere 1 percent shift in the holdings of these giants is equivalent to more than a quarter of the entire stock market capitalisation of all the emerging markets of Asia taken together, and to two thirds of the value of all Latin American equity markets. (1)
So no one should be at all surprised that sudden financial crises have plagued countries such as Thailand, Korea, Indonesia or Brazil. Considering the volume and the volatility of funds floating around the world in search of profits, the miracle is that these crises are not more frequent.
Not just any profit will do: the World Economic Forum - the Davos people - publish an annual competitivity index on which, for example, France and Germany get comparatively low rankings. Why? Because in these countries average rates of return to corporate capital are 'only' about 12 percent. This is not high enough - pension funds and other institutional investors demand rates of at least 15 percent and in some places have been known to garner 23 percent. When capital is rewarded in this way, there is clearly not going to be an enormous amount left over for remunerating labour which has, indeed, seen its share of the pie decline over the past 20 years.
I try never to use the word 'globalisation' without qualifying it: we are living in the era of 'corporate-led, corporate-driven globalisation'
So these are a few characteristics of the giant corporations that make the world economic and financial systems go round. They are few in number and they hold, of course, disproportionate power. For this reason, I try never to use the word 'globalisation' without qualifying it: we are living in the era of corporate-led, corporate-driven globalisation. Although the TNCs have not yet been able to impose totally their political programme, they are adept at using a variety of official and unofficial instruments to impose the three basic freedoms I alluded to at the beginning: freedom of investment, freedom of capital flows, and freedom of trade of goods and services.
The IMF, the World Bank and the WTO
The three major official institutions helping to push forward the corporate agenda are the World Bank, the International Monetary Fund (IMF) and the World Trade Organisation. The IMF is the architect of so-called structural adjustment programmes in the poorer, highly indebted countries of the South and the East - about 95 countries at the moment. Because of their debt burdens these countries must earn the IMF's stamp of approval in order to receive loans from any source, and to obtain the Fund's approval, they must adopt its neo-liberal views about economic management. These views, taken together, are also sometimes referred to as the "Washington Consensus".
Rules of the Washington Consensus and of structural adjustment include strict fiscal discipline, which means limiting budget deficits and reduced government spending on fields such as health, education and infrastructure; tax reform to benefit corporations and higher-income indivuals; market-determined interest rates; open borders with regard to capital flows, imports, exports and foreign direct investment; plus privatisation, deregulation and downsizing of civil servants. Basic necessities invariably rise in price because subsidies are outlawed; exports are encouraged at the expense of local production for satisfying local needs. Mass unemployment often results as governments fire employees and small businesses fail due to high interest rates, shedding their personnel. While the IMF may call these measures structural adjustment, ordinary people call them hardship and austerity packages. And many of us sum up this doctrine as neo-liberalism.
The World Bank is the world's most important "development" lender. In tandem with the Fund, it shapes policy in dozens of countries. It cooperates with TNCs not only through procurement but also by its policy choices; for example, it lends 25 times as much to fossil-fuel based energy projects as to sustainable/renewable energy projects. The Bank also oversees massive privatisation policies from which local and foreign investors profit.
The role of the Bank and the Fund, especially the Fund, in managing recent financial crises in Thailand, Korea, Indonesia, Russia, Brazil and Mexico has been sharply criticised, not just by progressives but by important establishment figures like Harvard economist Jeffrey Sachs and the Meltzer Commission, named by the US Congress.
This group of mainstream economists recommended a much-reduced role for both the Fund and the Bank but the US Treasury so far refuses to follow these recommendations.
The US Treasury recognises, quite correctly, that the combination of debt plus structural adjustment plus massive privatisation is a far more efficient instrument than colonialism ever was for keeping countries in line. The international institutions that implement these policies help both transnational corporations and elites in the poorer countries who profit from structural adjustment because wages are lower. It's worth noting as well that every time a financial crisis strikes, cash-strapped local businesses can be bought up on the cheap. TNCs again benefit from these fire-sale prices, as do local elites.
The US Treasury recognises, quite correctly, that the combination of debt plus structural adjustment plus massive privatisation is a far more efficient instrument than colonialism ever was for keeping countries in line
Perhaps most useful of all to the corporate programme is the World Trade Organisation (WTO) because it is spearheading the drive towards total freedom of trade and its rules are binding. The decisions of the WTO's "dispute resolution mechanism"(panels of trade experts meeting behind closed doors) are enforceable through sanctions and apply to all 136 member-countries, developed and less developed, soon to be joined by China and others. The WTO's future negotiations will concern not merely the liberalisation of trade in goods and agricultural products but also rules pertaining of intellectual property, investment and government procurement. Through the General Agreement on Trade in Services it is bringing virtually all areas of human existence under its purview, including health, education, culture, the environment, tourism, energy, etc. Its Dispute Resolution Body is proving a highly effective tool for reducing standards of food safety and environmental protection. On the whole the WTO is perhaps the greatest institutional threat to democracy now functioning.
Transnationals are quite naturally interested in the greatest possible freedom of trade since fully one third of world trade takes place between subsidiaries of the same company (eg IBM "trading" with IBM, Ford with Ford and so on); a further third is trade between subsidiaries of different TNCs (eg Ford trading with IBM). Corporations have shaped the agenda of the WTO from the beginning as the director of the WTO Services Division, David Hartridge, explained:
... without the enormous pressure generated by the American financial services sector, particularly companies like American Express and CitiCorp, there would have been no services agreement and therefore perhaps no Uruguay Round and no WTO. (2)
Corporate Lobby Groups
That's a very quick overview of the official instruments transnationals use to further the trinity of freedoms. Let me now turn briefly to some of the unofficial instruments, a variety of highly effective lobbies through which the TNCs influence opinion-shapers and governments. Most people think of highly visible gatherings like Davos when they think of transnational lobbies. In reality the most important organisations are far more discrete. They include:
- The European Round Table of Industrialists (ERT) made up of the chief executive officers of 47 of the largest European TNCs. The ERT works closely with the European Commission and individual heads of state; it has virtually written some of the Commission's most important "white papers" and has taken primary responsibility for the European Transport Network ("TEN"). (3)
- The TransAtlantic Business Dialogue (TABD) composed of CEOs from North America and Europe. The TABD holds regular meetings with top politicians and international agency leaders; it strongly influences international trade negotiations and maintains permanent working committees on a variety of topics including standard-setting for goods and services so that products may be freely sold in all markets.
- The US Coalition of Service Industries (USCSI) coordinates a wide variety of sectoral service groups; works closely with the US Special Trade Representative in targeting the WTO.
- The US Council for International Business was particularly visible during the attempt to establish the Multilateral Agreement on Investment.
With regard to negotiations at the WTO, both the US government and the European Commission have set up TNC advisory groups to guide them. The US Special Trade Representative has established over two dozen committees, by industry, with over 800 people from TNCs represented. When US environmental groups brought a lawsuit against the government because they were not represented in the Wood and Paper Products Committee, a federal judge ruled in their favour. Rather than include the environmentalists, the US government is appealing the decision. The European Commission put together the European Services Forum, chaired by the president of Barclays Bank, and recently called on it to identify the most promising markets and existing trade barriers in the fields of "education, environmental, health and social services and audio-visual services". (4)
No other group in civil society has anywhere near the access to political decision-makers that TNCs enjoy.
A version of this article entitled Confronting and Transforming the International Economic and Financial System: A Succinct User's Guide was originally delivered as a speech to the International Network of Engineers and Scientists for Global Responsibility (INES) in Stockholm, 14 June 2000.
1. Bank for International Settlements, 68th Annual Report (Basle, 8 June 1998), ch 5 and 090.
2. David Hartridge, Director of Trade in Services Division, WTO, "What the General Agreement on Trade in Services (GATS) Can Do", Clifford Chance conference on "Opening Markets for Banking Worldwide".
3. See Corporate European Observatory (CEO), "Europe Inc" (Pluto Press, 1999).
4. Robert Madelin, DGI, Directorate M, to Andrew Burton, Chair of the ESF, 24 January 2000.