21 Sep Who runs the world?
Words: David Smith, The Sunday Times
Illustration: Rachel Cameron
It is more than 40 years since Joseph Nye, the American political scientist, wrote his seminal article on multinational corporations for Foreign Affairs, the journal on international politics produced by the US Council on Foreign Relations. Nye’s article, ‘Multinationals: The Games and the Rules: Multinational Corporations in World Politics’, was addressing what at the time was a growing phenomenon: large businesses operating across borders and increasingly exerting considerable power over governments.
As he put it: “As dramatic as the rise of the multinational corporation has been its increased political prominence.” While attracting inward investment from these new leviathans of the world economy brought benefits, many governments even then had come to fear this kind of economic takeover as their predecessors had been concerned about military invasion.
And, predicted Nye in 1974: “The odds are that both the size and political impact of multinationals will continue to grow … Predictions that 300 giant corporations will run the world economy tend to be based on simple projections of past ten-percent annual growth rates, and fail to take into account some of the disadvantages that appear with large size, particularly in manufacturing, when temporary monopoly advantages have been competed away. The challenge to governments will come more from global scope and mobility than from corporate size. Even smaller multinationals can make crucial allocative decisions that challenge the welfare goals of governments. Corporate mobility (which is greater in service and some manufacturing than in extractive industries) is not only a challenge to small states, but also to large states like the United States.”
Nye was right about the continued rise of multinationals and that their power and influence would be exerted in a more subtle way than the ‘Coca-Colonization’ feared in the 1970s. Global businesses have learned to become more culturally aware as they have become larger. Even so, most modern economic developments would not have occurred without the multinationals that were all-powerful back then, and the new ones that have emerged since. Globalisation is not the result of countries interacting with each other but corporations. They drive the trade and investment flows that provide the fuel for economic growth. Perhaps the most significant modern economic change – the rise of China as it emerged from behind its closed and protected walls – would not have happened without Western-based multinationals. They were the ones that invested in the People’s Republic, used it as an export base, and opened it up to the world economy.
The rise of these global corporations has often appeared unstoppable. It is hard, for example, to think of the American economy without the contribution of US-based multinationals. A McKinsey Global Institute study, published on the eve of the global financial crisis, found that while US multinationals accounted for fewer than 1% of all American businesses in 2007, they generated 23% of private sector gross domestic product (measured by value-added). Even more impressively, they had contributed 31% of the gains in real GDP and 41% of the gains in productivity since 1990.
“While their activities create 23% of US private sector value added, they account for larger shares of productivity growth and US private R&D spending,” McKinsey said. “They pay higher average wages than other US companies. They account for almost half of the nation’s exports and more than a third of its imports, resulting in a more favorable trade balance than other US companies. US multinationals also exert a significant indirect, or ‘multiplier,’ effect on the economy, which magnifies their contributions further.”
American dominance persists
Despite the rise of China and of mega firms from Europe, Japan and other Far Eastern countries, US-based multinationals still dominate. The annual Fortune Global 500 list is a ranking of these big beasts in the world’s corporate jungle, who between them account for $31.2 trillion of revenues and $1.7 trillion in profits. The two figures are not directly comparable, but as an illustration, the $31 trillion of global 500 revenues compares with global GDP of around $75 trillion. It is the equivalent, in other words, of more than 40% of the world’s GDP. These 500 companies employ more than 65 million people between them.
Though there are firms from 36 countries that rank large enough to feature in the Fortune Global 500, America still dominates with 128, more than a quarter, followed by China with 95, Japan with 57, France with 31, Britain and Germany with 28 each, South Korea with 17, Switzerland and the Netherlands with 13 each and Canada with 10. America’s Walmart, the world’s biggest corporation, was instrumental in locating production in China and has operations globally. Many of the other global giants, including China’s Sinopec, BP, Royal Dutch Shell and ExxonMobil, are in the oil industry.
Not all the world’s biggest companies would meet the definition of a true global corporation, particularly in China, where for some firms size mainly reflects domestic turnover. Most, however, do. Again, comparisons between GDP and corporate revenues are imperfect, but they show that Walmart would have ranked as the 28th largest economy in the world in 2013, with Royal Dutch Shell as 29th, ExxonMobil as 30th and Sinopec as 31st, all of them with bigger revenues than the GDPs of, for example, Austria, South Africa, Thailand, Denmark, Singapore and Nigeria. A top 100 of global economies and global corporations would include 37 international businesses among its numbers.
Countries with a smaller GDP than Walmart’s annual turnover:
Austria, South Africa, Venezuela, Colombia, Thailand, United Arab Emirates, Denmark, Malaysia, Singapore, Nigeria, Chile, Hong Kong, Egypt, Philippines, Finland, Greece, Israel, Pakistan, Portugal, Iraq, Ireland … and many more.
Does that mean that multinationals, not governments, run the world? Combine even a few of these like-minded businesses and you are talking, if not of world government by big corporations, but of an enormous concentration of potential power. When politicians rub shoulders with CEOs at the Davos World Economic Forum in the Swiss Alps each January, the question of which of them genuinely has their hands on the levers of power is a valid one.
When Nye posed the question more than 40 years ago, he thought that the answer was no, and would remain so. Multinationals would interact with governments, and often there would be a lot of tension in that interaction, but extrapolating the rise of the global corporation and ending with world domination was probably not going to happen.
A few years ago, you could have been forgiven for thinking that this was too cautious a prediction. If the global corporation of the 1970s was most likely to be found in manufacturing, the big players by the eve of the financial crisis – in power and influence if not in turnover – were in the financial services sector. Investment banks, the modern masters of the universe, appeared to run the world economy. Goldman Sachs helped the Greek government make its public finances look more respectable and invented the concept of the BRICs (Brazil, Russia, India and China). The investment banking community called the shots. In America, pressure from the industry led to the scrapping of most of the Glass-Steagall Act, the legislation adopted in the 1930s to restrain risky banking activity.
Even Labour’s Gordon Brown, who had been suspicious of the banking community in his early days as Chancellor of the Exchequer, was won over. In his final Mansion House speech in June 2007 before becoming prime minister, he was fulsome in his praise. “The financial services sector in Britain, and the City of London at the centre of it, is a great example of a highly skilled, high value added, talent driven industry that shows how we can excel in a world of global competition,” he said. “Britain needs more of the vigour, ingenuity and aspiration that you demonstrate that is the hallmark of your success.”
His timing was unfortunate, and the financial crisis that quickly followed changed the nature of the relationship between governments and big business. The big banks, having called the shots for a quarter of a century, now needed to be rescued by those governments. Royal Bank of Scotland, the biggest bank in the world on the eve of the crisis, had to be rescued by the British government, while protesting that it remained solvent. Its acerbic chief executive, Fred Goodwin, was stripped of his knighthood. Most of Wall Street needed a bailout, following the collapse of one of its number, Lehman Brothers.
When Joseph Nye was writing about multinationals in the 1970s, America’s car companies were prominent among them. In the financial crisis they needed emergency help from the American government to keep going. Chrysler, Ford and General Motors lobbied for aid to see them through the crisis and eventually got it, though this did not prevent GM, seen as the bellwether of the US economy (“what’s good for General Motors is good for America”) from temporary bankruptcy. How much did these rescues, often humiliating for these big businesses and the people who ran them, change the dynamic? Was it just a short break in the rise of global corporate power, or something more fundamental?
Some see the impact of the 2007–09 crisis as long lasting, implying a decisive shift in the balance of power between corporations and governments. Though economies have shown themselves to be vulnerable, and in the case of countries such as Greece that vulnerability persists, economies survive. Corporations, in contrast, and most notably the banks, would not have survived without government and central bank support. Some see a new post-crisis form of capitalism, in which collaboration rather than confrontation between business and government becomes the norm. Others, such Mariana Mazzucato, professor in the economics of innovation at Sussex University, argue that this has always been the case.
In her new book The Entrepreneurial State, she argues that the public sector has often been the driving force behind what are generally regarded as private sector innovations, including in information technology. As she puts it, the book “challenges the image of the lethargic, regulating state versus the dynamic business sector – using historical examples to show how some of the most high risk and courageous investments that led to revolutions in IT biotechnology and nanotechnology, were sparked by public sector institutions. It offers a new way of thinking about political economy in the 21st century.”
The Governments’ response? Regulation
Whether or not this is a generally accepted view, governments have been sharpening their claws in their dealings with big business in the post-crisis era. This has been most obvious in the case of the banks, which have been subject to tougher regulation, higher capital requirements and special taxes such as Britain’s bank levy. There has also been additional pressure to ensure that multinationals do not try to minimise their tax bills. The technology giants, in particular, have been widely criticised and have come under pressure to pay their fair share of tax.
The Australian government recently announced a multinational anti-avoidance law, which will take effect at the start of 2016. Companies dealing with Australian customers will be expected to pay an appropriate amount of Australian tax. As the Australian Treasury puts it: “Approximately 30 large multinational companies are suspected of diverting profits using artificial structures to avoid a taxable presence in Australia. Where the law applies, multinationals will be subject to the Government’s new doubled penalty regime for tax avoidance and profit shifting schemes. This means that not only will tax avoiders need to pay the tax that they owe, they will also face penalties of up to 100% of the tax they owe and interest.”
So the relationship between big business and governments is constantly evolving. There are times when the balance shifts sharply in favour of corporations, and times when it shifts back. The latest book from Nye, to return to where we started, is called Is the American Century Over? He concluded that it is not, despite all the emphasis in recent years on the rise of China. Soft power, the concept popularised by Nye, includes the global influence of a country’s businesses and the worldwide importance of a country’s brands. In both respects, America is in a strong position. There may be friction between businesses and governments. Mostly, however, they are pulling in the same direction.
About the author
David Smith has been Economics Editor of The Sunday Times since 1989. He is also chief leader-writer, assistant editor and policy adviser. He also writes columns for Tax Journal, Estates Gazette and other publications. David is the author of books including The Rise and Fall of Monetarism; Mrs Thatcher’s Economics; North and South; and in 2015, Something Will Turn Up: Britain’s Economy Past, Present and Future
His website is www.economicsuk.com
This article was written for Reflect, the Equatex Magazine and blog.