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Subject:CSIS Column on the Global Economy
Date:Thu, 16 Nov 2000 07:08:00 -0800 (PST)

This message contains the text of Sidney Weintraub's November issue of Issues
in International Political Economy entitled "Critical Aspects of the Global
Economy." To go directly to the web version, please click on:


For further information, contact:
Rebecca Tunstall

November 2000, Number 11

Sidney Weintraub

When the word "globalization" is uttered, it evokes two contradictory
visceral reactions: it is either the essential element of recent U.S.
competitiveness; or it is inherently evil because the global spread of
multinational corporations enriches the wealthy and economically powerful at
the expense of the vast multitude of workers. In what follows, I will avoid
both attacks and praise, and instead focus on key features of international
trade and investment that characterize what is taking place in much of the

A country, if its dictatorial leader so insists, can set its own prohibitive
tariff and import structure and reject foreign investment. North Korea and
Vietnam, both nondemocratic, did this for many years, despite the horrible
cost this policy imposed on national welfare. This isolation is breaking down
in these two countries, even as it did earlier in China after the death of
Mao, and for much the same reason. Eternal poverty is not a good formula for
regime continuity.

Guarding economic sovereignty did not take the same absolutist form in most
other countries, but a profound transformation is taking place in them as
well. Import barriers are coming down and attacks against foreign investment
are being transmuted into searches to attract foreign investment. Mexico,
before its debt collapse in 1982, favored external borrowing over investment
to obtain foreign exchange, but learned to its dismay that this practice
contained its own risks when the debt could not be serviced. The philosophic
base of development then changed and foreign investment was actively sought
as an essential requirement for Mexico to augment its exports. This outlook
was the premise of NAFTA. Hugo Ch?vez, the president of Venezuela, rails
against primitive neoliberalism (neoliberalismo salvaje), but nevertheless
has kept the country's import tariffs relatively low, even as he makes a
great effort to obtain foreign direct investment to develop his country's
telecommunications and natural gas activities. Ch?vez, so far, has shown a
tendency to talk like a Marxist, much like Fidel Castro, his romantic icon,
but then act like a capitalist.

For many of the world's poorest countries, the primordial problem is not the
spread of multinational corporations, but their inability to participate in
the process. This is especially true in sub-Saharan Africa. Their poverty,
small internal markets, and accompanying political instability make them poor
destinations for foreign investment, other than to exploit minerals for
export. This does not lead to substantial job creation.

Both foreign direct investment and international trade are growing more
rapidly than world economic growth. This is a clear manifestation that the
"foreign" aspect of the world economy is becoming increasingly important. If
one looks back only 20 years, when the dominant economic model in Latin
America was to develop behind high import barriers and to downplay the
importance of exports, it is startling how much development thinking has
changed in that part of the world. East Asia, with its export orientation,
became the model, and not the preachings of those who advised Latin America
to look inward.

The bulk of the world's trade is carried on by large corporations. This is
not a new phenomenon. These same corporations are large investors in foreign
manufacturing and service activities. Indeed, the two phenomena-investing and
producing in foreign countries and then selling much of the output in still
other foreign countries, as well as the home market-are inseparable.

International trade is increasingly taking place in intermediate rather than
final products-chips for computers, parts for office machinery, engines for
automobiles and trucks, cotton and wool fabrics for apparel. Look under the
hood of your car; the transmission assembly may have elements produced in a
number of countries. The assembly line in Detroit works on a just-in-time
basis to receive the material needed from across the border in Windsor,
Ontario-and beware of a slowdown from a customs snafu that leads to a costly
disruption in the manufacturing process.

This goes by the name coproduction. The parts are produced in a variety of
locations, assembled in other places, and sold globally. Much of the sales
are within the same multinational corporation, say, from a parent to a
subsidiary (intra-firm trade), or within the same sector (intra-industry
trade). As goods pass across borders in this fashion, the absence of border
impediments (tariffs, lengthy inspection delays) is crucial, as the
automotive example between Windsor and Detroit exemplifies. Hence, the drive
for trade negotiations to lower these barriers and the proliferation of
regional economic integration agreements, such as NAFTA, to legally ensure
the absence of delays in a just-in-time world.

Economic integration and, by extension, the process of globalization, is
centered on competition in particular sectors when it comes to production and
merchandise trade. What is taking place is a form of division of labor-Adam
Smith on a regional and global scale. The global aspect is made possible by
technology, advances in communication and transportation, and by financing
far more vast than anything seen before. Corporations take many factors into
account when setting up complementary plants in foreign countries, such as
size of the domestic market, the availability and price of labor, the cost of
transportation, and the political stability of the country where the
investment is made. The growth of U.S. coproduction with Mexico was based
primarily on two considerations: proximity, and thus low transportation
costs; and inexpensive labor. Most foreign direct investment is made among
industrial countries, which is evidence that cheap labor is by no means
always the dominant criterion. This is evident as well from the paucity of
investment in the world's poorest countries.

If most international trade is conducted by large corporations, what does
this imply for the future of small and medium-sized enterprises? In just
about all countries, goods and services that are not internationally traded
are more voluminous than tradables. In addition, many large corporations have
concluded that making all inputs in-house is not the most efficient practice
and instead are subcontracting to independent producers and service
providers-and many of these are relatively small enterprises. Their products
are then exported indirectly, via the exports of the large corporations.

There is no intent in this discussion to assert that multinational
corporations invariably provide their workers with optimal working conditions
and good salaries and are always careful to avoid environmental degradation
in their operations. We know that many corporations are not that meticulous,
even though we also know that wages and working conditions in foreign
transplants generally are superior to those of domestic enterprises. We know
that foreign trade and investment results in losers in the home countries,
although by now it is clear that there are many more winners. We know that
the global spread of business benefits some countries more than others and
that some regions of countries prosper while others lag behind. The
globalization genie-in the form of investment, trade, financial flows, and
technology advances-is out of the bottle. The challenges are to minimize the
downside dangers while exploiting the upside benefits that globalization can
offer to countries throughout the world.

Issues in International Political Economy is published by the William E.
Simon Chair in Political Economy at the Center for Strategic and
International Studies (CSIS), a private, tax-exempt institution focusing on
international public policy issues. Its research is nonpartisan and

CSIS does not take specific policy positions. Accordingly, all views,
positions, and conclusions expressed in this publication should be understood
to be solely those of the author.

, 2000 by the Center for Strategic and International Studies.