Globalisation II - Whose World is it anyway?
| In the back rooms of the OECD, an international agreement has
been drafted which, if implemented, will change the face of the 'global
economy'. The draft Multilateral Agreement on Investment goes much further than
the current WTO rules, but further down a sustainable path or a blind alley?
© 1997, Centaur Communications Ltd.) |
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(Note: This article picks up on themes and arguments that arose in earlier editions of IFS. These features may also be found on this site - see Contents.)
One of the most dramatic developments of the last decade or so has been the move towards deregulation of world trade, both in physical goods and resources, and in financial services and information. Like almost every development in market economies, this process has winners and losers and, given the complexity of trade issues, the results may be very different from those predicted by economists and politicians. The economic arguments for are well-rehearsed, and are oft repeated in the media and in political debates. As one of the engines of globalisation, it is taken as axiomatic that the financial sector will benefit from this trend, and the simplicity of these arguments is beguiling. The more complex and unsettling counter-arguments are equally powerful, but get little 'air-time', because those proposing them are not.
In the first issue of IFS, we looked at globalisation and, in subsequent features, have picked up on different strands of the basic argument. This is that the short-term narrow economic focus pursued by many of the architects of the global economy will, ultimately, kill the goose that is laying their golden eggs. The good news, as explained by Robert Theobald in the second of this issue's interviews, is that the current sea-change in attitudes is not a threat but an opportunity for companies -- including fund managers -- willing to grasp it, and to throw their weight behind it.
"The MAI will put responsible companies in an impossible competitive situation." |
Regulatory issues are one of the most crucial aspects of this, since they create the framework which determines the competitive and co-operative environment in which the industry operates. To date, the co-operative element of this has largely been to promote deregulation, particularly to widen the arena within which fund managers can then engage in cut-throat competition. However, the crucial Importance of the intersection of the legal framework with the cultural and societal norms that make it possible to do business receives much less attention. At a very basic level, it maintains the confidence that everyone is playing by the rules; at a much subtler level, it makes it possible to build and maintain relationships built on trust and responsibility.
A lack of sensitivity to cultural factors such as, for example, the way you accept a proffered business card at a meeting in Hong Kong, can have profound implications for the success of a venture. One problem with global deregulation is that it tries to put such factors into a 'local knowledge' box and carry on with the homogeneous macroeconomic agenda regardless. The assumption underlying the OECD agenda is that variations in ways of living and doing business are not differences, to be respected and built upon, but barriers to trade and development -- problems requiring education, guidance and (sometimes) threats to 'encourage' governments, regulators and businesses to pursue 'good' policies.
But before looking at the global issues and, more specifically, at the MAI, there are examples within Europe, and within the investment fund industry, of how problems with international deregulation can manifest themselves. The Investment Services Directive and the UCITS Directive have been under fire from various quarters since well before they came into force, and have challenged some of the best legal brains at the European Commission and the offices of fund managers.
As can be seen from the example of guaranteed funds, quoted by Adam Lessing of Creditanstalt Group and FEFSI (see interview below), lack of consensus can threaten the basis of international agreements even where there is a fairly high degree of cultural homogeneity, and the U.S. and Europe still cannot come to any kind of agreement for mutual recognition of their fund regulatory structures. Such problems can be seen as governments selfishly trying to protect their own industries and agendas, obstructing progress with the inevitable business of harmonisation. But they can also be seen as governments and people guarding an important pillar of their cultural identity -- their way of doing business. Implicit in the argument made by Robert Theobald is that it is in the interests of responsible business to foster and work with difference, if only to protect and sustain the social cohesion which is fundamental to a stable business environment.
Here the print copy includes interview with:
Adam Lessing has many extremely positive things to say, particularly about the importance of investor protection and the perceived integrity of the industry. However, the threat he identifies and restates in the final paragraph of the interview is of even broader significance than he suggests. As international capital flows accelerate and grow, and innovation in the markets with them, it is arguable that no broadly applicable international regulatory framework could possibly keep up -- the more countries are involved, the more difference and less chance of consensus -- unless the ultimate globalisation dream of total consumerist cultural homogeneity is realised.
In IFS Issue 1 (6/96) and Issue 4 (3/97), we looked at the ways in which orthodox trade theory fails to account for the effects of large-scale movement of capital across borders. Far from producing a situation in which trade based on comparative advantage produces net benefits for all parties, the result is a competitive externalisation of costs through wage reductions, relaxation of regulation, tax breaks etc. producing 'downward levelling' -- the so-called 'race to the bottom'. The result is a polarisation of income and wealth, both within and between countries. In the short run, this is very attractive for industry and the financial sector -- it creates wealthy elites with spending power and a ready market for private banking and other financial services.
"The world is getting better and better and worse and worse, faster and faster" - Tom Atlee |
However, aside from the human cost at the bottom end, it is potentially enormously destabilising. It stores up huge costs for the future that are not accounted for in the market, having been 'externalised' onto individuals, communities and the environment. It is closely analogous to building nuclear power stations without taking account of the costs of waste storage and decommissioning. The stock answer to these issues is that the 'rising tide lifts all boats' -- that, ultimately, the benefits of economic growth 'trickle down' and all will benefit.
The myth of the 'rising tide' looks particularly silly in the context of the MAI. With the abolition of controls on local employment, domestic content, local equity of joint-venture participation, or expatriation of profits there is very little left to feed any kind of economic multiplier, the only mechanism through which the 'rising tide' is supposed to operate. Instead, egregious companies use the resources that are cheap (less-skilled labour, natural resources etc.) and take advantage of whatever tax breaks and subsidies are offered without putting anything back into the local economy. [See also Interview with Stephen Viederman, IFS Issue 5 (6/97)]
The financial sector has thrived on increasing deregulation and the MAI is argued to be necessary to lock in the deregulation that has already taken place over the last two decades and protect the rights of investors. If this sounds like a dream come true for the international fund manager, think again. The so-called 'level playing field' it seeks to create is at such a low level as to be virtually a 'cowboys' charter'. And because it concentrates exclusively on rights without concomitant responsibilities, the MAI will put responsible companies in an impossible competitive situation.
This has a very concrete effect on the development of the financial services industries. Much has been written about the significance of developing broadly-based domestic markets, while the extractive economics described does not distribute the benefits of economic growth beyond the inward investors and a small elite -- good for the private banking market but not for wider retail development. But it still saddles the local economy with the enormous costs of economic development, and to an increasing degree, as communities, countries and regions compete to attract inward investment.
This does not foster the development of liquid and mature capital markets in such countries. In the equity markets, the MAI outlaws requirements for local participation and technology transfer, which have been instrumental in the development of any local base for emerging markets. Local businesses will find it harder to compete, and those which do begin to succeed can no longer legally be protected from majority foreign ownership and can be effectively taken out of the local equity market. The vulnerability of Asian markets is being demonstrated as this issue goes to press. Aside from the volatility, these processes also ultimately limit rather than extend the investment universe for portfolio investment.
Bond markets will also suffer since, as the costs of the 'externalities' of development mount, governments will have to borrow more to cope with the consequent social, infrastructural and ecological problems, reducing the value of their issued paper further and making it virtually impossible for them to raise more through open capital markets, resulting in them going cap-in-hand to the World Bank and the IMF. The stock reply -- that private capital will fund the development of infrastructure does not address the real issues. Private money builds roads, encouraging urbanisation and the associated urban poverty and facilitating the extraction of natural resources, but it rarely provides clean water, basic education and the tiny amounts of capital needed by the very poorest to get out of poverty traps.
The competitive pressure generated by this kind of deregulation is extreme, and such highly mobile and extractive economic activity does not foster development which is sustainable even in narrow economic terms. It accelerates the 'race to the bottom' discussed earlier, and the polarisation of income and wealth that has characterised the last fifty years of 'development'.
Canadian Bill Watamaniuk has studied the draft MAI and put together a brief summary of its main provisions. He has observed that, while the Agreement is effectively a 'Bill of Rights' for international investors, nowhere it does not contain any corresponding clauses regarding corporate responsibilities. The OECD, on their website, claim that it does not affect existing legislation on corporate responsibility, and contains specific exclusions for such areas as environmental legislation and community and consumer protection.
This statement fails to reassure on (at least) two counts. Firstly, it is still based on the assumption that such issues can be separated out and ring-fenced -- that, in economic terms, they are 'externalities' rather than fundamental to every aspect of the business environment. Secondly, while the MAI contains specific provision for companies to sue governments which, they believe, are breaking the letter or spirit of the Agreement, Watamaniuk states that "Nowhere in this document is there provision a Contracting party (i.e. a government which has signed up to the MAI) to sue for damages caused, or likely to be caused by the actions of an investor.
Prudential measures are one of many areas in which "such measures shall not be used to avoid obligations under [the] treaty." Such phrasing is so blatantly open to differing interpretations that it leaves the door wide open for abuse by those with the power and influence to get away with it, and extreme caution in enacting effective legislation at all by those who do not. Once again, it is important to consider the advantages that this might give to competitors prepared irresponsibly exploit both the degree of freedom, and the enforcement difficulties likely to be caused by the lack of political consensus.
At the heart of the matter is the question of who is actually making the decisions. What is not in question is the fact that corporations have taken on much of the power and responsibility for shaping the markets which are reshaping the world. In the current absence of real discussion about whether or not they want, or should have that responsibility, it is up to industry leaders, not least in the financial sector, to decide how, and on whose behalf, they choose to exercise their influence and take on those responsibilities. Robert Theobald (interview following) firmly believes that this is not a question of altruism, it is one of long term survival.
The MAI crystallises and structures the current emphases of orthodox economics. The changes proposed are rapid and profound. They raise serious questions about the way decisions are being made and the appropriateness of the OECD as the place for discussions. The financial sector will inevitably be heavily affected since, directly or indirectly, it controls a substantial proportion of the international flows of money, described more than once as the "life-blood" of the global economy. The fund management industry urgently needs to decide how large a role it wishes to play in the negotiations which will inevitably affect its future dramatically.
Markets have shown themselves to be remarkably resilient to 'internal' shocks. Responsible organisations can contribute greatly to moves away from the dynamic 'status quo' which the MAI seeks to advance, and towards a much broader approach which might avert many of the kind of 'external' shocks which cost money in the markets and lives on the ground.
Please follow this link to the Interview with Robert Theobald which completes this feature.
Jon Ralls, September 1997
© 1997, Centaur Communications Ltd
Acknowledgements:
The author gratefully acknowledges the contributions of a great many writers, published and unpublished, to the analysis behind this feature. Reproduction, appropriately credited, is encouraged, and feedback welcomed.
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