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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: http://www.csis.org/americas/pubs/weintraubnewsletters112000.html For further information, contact: Rebecca Tunstall 202-775-3123 rtunstall@csis.org ISSUES IN INTERNATIONAL POLITICAL ECONOMY November 2000, Number 11 CRITICAL ASPECTS OF THE GLOBAL ECONOMY 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 world. 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 nonproprietary. 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.
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