Nation States and Multinational Corporations

What has changed and does it matter?  I’m considering this comment on the first post in this series “Corporations need to compete on a global scale so they must have huge resources, which makes them more and more powerful.  The relationship between corporations and government is critically important.  Corporations define society in many ways while government is responsible for infrastructure, regulation, and oversight for the good of the whole society.”

The rise of highly mobile multinational corporations (MNCs) is the big change.  It matters because they are not subject to the laws of any one nation yet their decisions about production, working conditions and wages have global environmental and societal impact.

The world’s largest business (by revenue), Wal-Mart, did not even exist until I was 18.  It now has over 2M employees, operates in 28 countries and its $476B revenue exceeds GDP of the 25th largest country, Norway, as well as the  $375B shipping industry that carries 90% of world trade.  If Wal-Mart was a country, it would be China’s 6th largest export country.

Older MNCs tend to be resource extractors — the 2nd through 7th largest businesses and 15 of the top 30 are oil and gas companies.  It is because of them (and contention over the Holy Land claimed by Jews, Muslims and our Christians) that the US government devotes enormous resources to protecting Middle East regimes and transportation of their product.

Those oil and gas companies are successors to the Honorable East India Company (EIC) which traded opium from India for tea from China to Britain.  That trade was 3-way because China’s rulers wanted nothing Britain had to offer: they didn’t want opium either but the Chinese people did so the Brits shipped it in by force.  The EIC was more abusive than oil companies, but both depend on their government’s military superiority.

Newer MNCs require less military support because they are more mobile.  They depend more on communication technology for logistics and branding, on favorable tax and trade agreements, and on capital investment.

Capital reveals more than revenue, and comparing revenue to GDP is misleading, anyway, because GDP is value added, which is revenue minus (broadly defined) costs.  Revenues of the 100 largest corporations are about 20% of world GDP, but their value added is not 20% but 4.3% of world GDP.   The growth of MNC revenue and value added is more suggestive.  Revenue of the world’s 200 largest corporations grew 17% from 1983 to 2005 while value added for the top 100 MNCs grew 23% between 1990 and 2000.  The higher growth rate of value added hints at the profound underlying change.

Capital assets of the world’s 50 largest corporations increased by 686% between 1983 and 2001.  Meanwhile, the value of all non-residential assets in the USA increased by 77 %.  That indicates a dramatic concentration of productive assets in the world’s largest corporations.

The result of that increase in corporate investment?  Profits of the world’s 50 largest corporations were 11 times higher in 2005 than 1983 while employment was 2.3 times higher.  The increase in capital assets enabled them to increase profits over 4 times faster than employment.  What made that possible was the extremely low cost of borrowing engineered by the Federal Reserve in response to the economic recession that resulted from uncontrolled speculation following the deregulation of finance.

But does any of this matter?  The purpose of corporations, after all, is to seek profits with limited control by governments.  That view in the USA is relatively recent, however.  Until the Civil War, US corporations were accountable to serve the public good.  Their charter could be revoked for failing to serve the public interest and was valid only for a time, e.g., 20 years in Delaware.  It was only in 1886 that corporations were given legal rights similar to individuals.  They then became accountable to the public only by being subject to the law.

The first law allowing one corporation to own equity in others was in New Jersey in 1889.  New York, Delaware and others followed, removing more restrictions to attract big corporations.  New Jersey continued to lead and by 1900 had 95% of the nation’s large corporations.  Anti-trust laws later led to the break up of several large corporations and their power was also mitigated by labor unions.

Anti-trust enforcement was greatly relaxed starting in the 1970s along with other forms of deregulation.  Following the fall of the Soviet Union, a “Washington consensus” emerged that aligned the World Bank, the WTO and etc with free trade and privatization.  Trade barriers fell with international trade agreements.  Corporations then began getting preferential treatment by nations, just as US states did a century before.

Businesses traditionally grow by increasing sales volume while reducing labor costs and replacing labor with machines, which is easiest for businesses with the greatest access to capital.  They also grow by distributing additional kinds of goods via existing channels and brands.  And conglomerates grow via managerial efficiency, financing flexibility, and political power.

Newer highly mobile MNCs have the additional advantage of cheap foreign labor, increasingly by contracts, and less costly foreign environmental laws.  Short-term contracts and no large capital investments enable them to move quickly to other countries for even lower costs and to shift responsibility for labor practices and environmental standards to subcontractors.

That induces nations to set lower and lower workplace standards, minimum wages, environmental regulations and so forth to attract and keep these businesses.

Even without moving production facilities, MNCs can avoid taxation by incorporating in tax havens.  Corporate profits in tax havens rose 735% between 1983 and 1999, while profits in countries that are not tax havens grew only 130%.  And tax avoidance is not the only problem for national governments.

About a quarter of Wal-Mart’s employees in Massachusetts are enrolled in Medicaid or other publicly subsidized health insurance programs.  It is estimated that their use of food stamps, housing assistance, and other programs may cost 2 to 3 times as much more.  A recent House report estimates Wal-Mart employees require an average of about $3K a year in public assistance.  That shifts over $4B of Wal-Mart’s costs to US tax-payers and increases Wal-Mart profits by the same amount.

And environmental harm by MNCs is not just in 3rd world nations.  The NAFTA trade agreement between Canada, Mexico and the USA prohibits any “measure tantamount to nationalization or expropriation” of a foreign investor without sufficient compensation.  The U.S. Ethyl Corporation used that provision to sue Canada for its proposed ban on the gasoline additive MMT which contains a human neurotoxin banned in several U.S. states.  Canada paid Ethyl $13M, withdrew the ban, and published a letter stating there was no scientific evidence of harmful human health effects from MMT.

Since only individual nations can make laws, only national governments can make international trade agreements. They are the only agreements that govern the cross-border social and environmental practices of MNCs and that’s important because those practices have global impact.

Unfortunately, trade agreements are typically conducted by representatives who are appointed, not elected, which means they are not accountable for the agreements’ results.  What’s worse, meetings of the primary international trade agency, the WTO, are conducted behind closed doors.

And now, the Trans-Pacific Partnership (TPP) between the US, Japan, Australia, Peru, Malaysia, Vietnam, New Zealand, Chile, Singapore, Canada, Mexico, and Brunei Darussalam is being negotiated in secrecy even from Congress, the USA’s legislative body.

But in the most fundamental sense, nothing has changed.  Wal-Mart, giant electronics businesses, TBTF banks and others govern regulators now.  Giant oil and gas corporations have set foreign policies for close to a century.  Politicians have always been led by those who controlled great wealth.  So what should we do?

Add our voices to the mix.  Tell our representatives what MNC behaviors are against our interests.  Alert others to pressure their representatives.  What we must do, in other words, is continue to work so that democracy works.  How to go about that these days?  That will be the next post’s topic.

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