Australian Financial Review
Tuesday, December 15, 1998
Globalisation is causing a shift in the roles of government and business. In this article, Jean-Pierre Lehmann reviews some of the major developments and argues that since the end of the Cold War the rivalry between nations has assumed a predominantly economic form. Foreign policy is increasingly subordinated to commercial policy. Yet at the same time the interests of national governments and corporations are diverging.
As corporations become more independent of their national roots, governments will have to equate national competitiveness with the ease with which they can attract foreign and domestic corporate investment. Unfortunately because the population at large may be unenthusiastic about globalisation, governments risk attracting business while losing votes.
Different metaphors
Different metaphors define the roles of government and business in world economic affairs. Historians distinguish between flag and trade and argue which took precedence over which in, say, the opening of China at the time of the Opium Wars.
More recently, governments have been described as the scriptwriters of the world economy with business as the actors. The scriptwriters draw up the rules, the actors play accordingly - albeit inevitably with some improvisation along the way.
The writers from the various nations will, needless to say, seek to produce a script that favours the strengths of their own actors and protects their weaknesses. In this process the actors seek to influence their writers.
However, this pattern is now being challenged. This is because globalisation has led to a radical shift in the roles of governments and corporations in the international business and economic policy arenas.
The World Trade Organisation
International trade is driven by movement of capital, technology, business strategy, government policy and an international economic order.
From the mid 19th century to 1995 - the year the World Trade Organisation was established following the completion of the Uruguay Round of trade negotiations under the General Agreement on Tariffs and Trade - the world was permanently divided into at least two major (though varying) camps.
Until the early-to-mid 20th century, the division was between the metropolitan economic powers and their colonies International economic policy was often accompanied by gunboat diplomacy. From the end of the second world war until the end of the Cold War, the division was between the (more or less) market-based economies that joined the GATT and the centrally planned socialist economies.
A parallel division during this period was between the North (the industrial world) and the South, otherwise known as the Third World. In the first three to four decades of the postwar era, many Third World countries veered towards the centrally planned economic model and practised policies of protectionism and import substitution.
For the most part, therefore, not only did they not join the GATT but indeed looked upon that institution with some suspicion and hostility.
The end of the Cold War has brought about the end of divisions. There is now only one international trade club. Although not all of the world's nations are members yet, almost all want to join. Between 1990 and 1996 the GATT/WTO welcomed approximately 30 new members, bringing the current total to 132. There are a further two dozen pending applications, including China, Russia and the oil-rich countries of central Asia.
For this and other reasons the international economic order is totally new and it looks as though the name of the World Trade Organisation will indeed correspond to reality.
Rival capitalisms
At another level, however, the end of the Cold War can be seen as leading to a crucial transformation from geopolitics to geoeconomics.
The global rivalry between nations, in other words, is no longer about conventional sources of power (military might, territory, political clout, ideology) but about fundamentally, indeed exclusively, economic sources of power. These include technology, management skills, industrial bases, capital, government-industry relations and so on.
In the late 1980s and early 1990s, as the world was moving from the Cold War to the post-Cold War era, there erupted what became known as the capitalism versus capitalism debate. The premise was that while the conflict between capitalism and communism had ended, the conflict between different types of capitalism was just beginning.
Although there were variations on the theme, the principal capitalist systems identified were those of Japan/East Asia, continental Europe and the US/UK. The subtitle of Lester Thurow's book called Head to Head (1992), a classic of the genre, was The Coming Economic Battle among Japan, Europe and America - which he predicted Europe would win. Jeffrey Garten's contribution, A Cold Peace: America, Japan, Germany and the Struggle for Supremacy (1992), argued that although the US had won the (geopolitical) Cold War it was about to lose the (geoeconomic) Cold Peace.
A major claim of these and other authors was that the advantage gained by Japan especially, but also by some of the European countries, was the close relationship, indeed collusion, between government and industry.
However, just as the capitalism versus capitalism debate was gathering steam it came to a sudden halt. The reasons are twofold. One is that the predictions about the demise of the US economy and its capitalist system in the face of the German juggernaut and the Japanese tsunami have so far proved to be wrong. Indeed, at present both the German and Japanese economies are sluggish. There is growing consensus that the American model must be emulated.
"The freer the market, the more dynamic the economy" seems to be the almost universal credo of the late 1990s. As things currently stand (they may again change) it is one world under the Pax Americana.
Divergence of national and corporate interests
A second reason the capitalism versus capitalism debate was aborted is because in many respects it is no longer relevant. In the past decade power in the world economy has become increasingly diffuse. To return to our earlier metaphor, governments may still be the scriptwriters but more than ever they are being dictated to from many sources. In addition, privatisation has contributed to the relative curtailment of state power in economic affairs.
These forces have brought about a growing divergence of interests between national governments and multinational corporations. This trend, which has received a good deal of academic and polemical attention, is assuming global proportions. The following anecdote will illustrate the point.
In early 1997 I had a conversation in Tokyo with a director-general of the Ministry of International Trade and Industry. As we ruminated over the general debris of the Japanese economy, including the phenomenon known as hollowing out (domestic companies moving an increasing proportion of their operations abroad), he exclaimed that a good part of the problem was that Japanese corporations were no longer adhering to the national interest.
About an hour later I was in the office of the vice-chairman of one of Japan's most successful multinationals. I repeated to him the comment that had been made at MITI, to which he responded like a flash: Who is MITI to say what is the national interest? Although the image of Japan, Inc. may have corresponded more to a caricature of reality than to reality per se, such a conversation would nevertheless have been inconceivable a few years earlier.
Japan, no doubt much to the chagrin of those who proclaim its unique culture, is complying with a global pattern. In all industrialised countries, irrespective of their capitalist system, the divergence between companies and countries has increased. For example, while the roots and the origins of success of companies such as Ericsson, Tetra Pak and Astra may lie in their Swedish past, their success today may be in spite of, rather than because of, being Swedish. The Swedish economy is doing terribly the companies mentioned above are doing well thanks to their escaping the Swedish environment.
In the late 1990s the deep travails in which the Japanese economy finds itself do not mean that the demise of leading Japanese corporations is at hand. The global dynamism and success of Canon, Hoya, Honda, Toyota, TDK, Rohm and Sony, known as the seven samurai, contrasts with the quagmire of the Japanese economy.
The pattern of diverging national and corporate interests in industrial countries will tend to apply, pari passu, to developing countries. Thus as the South Korean economy struggles to cope with the crisis that broke at the end of 1997 the dynamic businesses of the most globally oriented chaebol will move the necessary distance from the home base.
Similarly, the future prospects of the Charoen Pokphand Group, the Salim Group and Sime Darby are not exclusively dependent on the future prospects of their countries of origin, respectively Thailand, Indonesia and Malaysia.
Indeed, a lesson already written in bright neon lights from the turbulence in East Asia is the obsoles-cence and danger of crony capitalism.
A new paradigm of national competitiveness
In earlier decades it was often claimed that it is companies, not countries, that compete against each other. This was never entirely true: countries did compete against each other, some more aggressively and some more successfully than others. Japan, South Korea, France, Germany, Sweden, the US and others established government-corporate alliances under various guises via industrial policies, subsidies and so on. These alliances were aimed at combining strengths to gain competitive advantage in international markets.
Such efforts were by no means invariably crowned with success. The point is that when nations sought to compete, they did so essentially by erecting platforms to launch domestic companies (national champions) to predominance through technology, exports, industrial base or a combination of some or all of these. Although this form of national-corporate competition has not been eradicated, a new paradigm driven by different forces has emerged.
The divergence of national and corporate interests has been accompanied, and in part caused, by a huge increase - by a factor of six in the period 1985-96 - in foreign direct investment. FDI is driven, in turn, by both push and pull forces. Companies that feel there are too many restrictions at home - regulations, market size, quality of education, labour market rigidities and so on - are pushed to seek better conditions abroad.
Pull is exerted by the appeal of expected lucrative returns in foreign countries due to market size, growth prospects, cost of labour and other factors.
So as corporations go about the world competing to gain market share, countries are competing to retain and/or increase their share of both domestic and foreign investment.
Hence the efforts of governments need to be directed not only at seeking to get foreign companies to come in, but at preventing native companies going out, not by controls but by incentives. When, for example, NEC announces its intention to invest in a new manufacturing facility, the competition to attract the investment might be between, say, Wales, Penang, Virginia and Kyushu. The same locations may also compete for an investment from Motorola, GEC and others.
This really marks a major difference with the past. In the 1950s, 1960s and 1970s FDI was not welcome, especially, but by no means exclusively, in developing nations. Multinational corporations were seen as running dogs of exploitative capitalist imperialism. countries, today FDI is welcome practically everywhere.
Stephane Garelli, responsible for the compilation of IMD's World Competitiveness Yearbook, has become more inclined, indeed explicitly so, to regard national competitiveness and national attractiveness as synonymous.
It is for this reason that the UK has been promoted in the rankings in recent years, while the ex-arch tiger South Korea has been demoted.
Korea's residual hostility to FDI makes it unattractive to foreign investors while the interventionist shenanigans of its government are driving the better Korean compa-nies abroad.
Business and international relations
The above picture represents an important part of the current global business landscape but there are other pictures to be painted, including ones that offer striking contrasts. In reality two other forces need to be recognised.
Globalisation has not brought an end to the politicisation of international trade. This is especially true of certain markets (for example China, the Middle East) and certain areas of trade (for example major infrastructure projects and other very big ticket items such as defence and aerospace).
Companies competing in such markets and/or sectors may not emerge as winners simply on the basis of business advantages but on the basis of political clout.
The second force, which converges with the first, has to do with the evolution noted earlier from geo-politics to geoeconomics in the post-Cold War era.
In the past the activities of govern-ments in the commercial field had to be guided, sometimes tempered, by strategic considerations about the geopolitical balance of power. The example most often cited is the conflicting positions with respect to Japan of the US Trade Representative Office and the Department of Commerce on the one hand and the State Department and the Pentagon on the other during the Reagan and Bush administrations.
The US government's Structural Impediments Initiative offensive against the Japanese market was to an extent countered by the Pentagon and State Department objective of having Tokyo join the Strategic Defence Initiative (star wars). By the time the Cold War had come to an end and the Clinton team had ridden into Washington determined to sort out Japan, the tsunami had already begun to break under its own weight of asset inflation and mismanagement.
The point is that whereas before the Cold War nations had both foreign policies and commercial policies, today foreign policy has become secondary to commercial policy.
Diplomats, except in the few remaining highly sensitive postings are, irrespective of their titles, primarily commercial agents. As nations' economies become more liberalised and as a greater number are brought under the aegis of the WTO, in principle the trend should be one of gradual depoliticisation of business. When that point is reached, not only foreign policy but commercial policy will have become redundant.
The main foreign role of govern-ment will then presumably be that of seeking to attract foreign invest-ment. Thus in the future Queen Elizabeth (or her heir) may have less cause to travel to China to promote the interests of, say, British Aerospace but she might still seek to convince high-tech Shanghai firms to invest in Scotland's Silicon Glen.
Although that is a possible panorama of global business in the future, we are certainly not there yet. The murkier kind of competi-tion will remain for the foreseeble future.
Global business, local politics
So far the trends for governments and corporations have been assessed exclusively in the context of globalisation. What needs to be remembered is that while globalisation is a prominent feature of the current scene it does not encompass all economic activity - far from it.
Furthermore, while the term globalisation has very positive connota-tions for international business executives, international academics and some international policy makers, it has either neutral or, more often, pejorative connotations to most other people.
International business executives, academics, and policy makers are a tiny proportion of the population. It is the rest of the population that counts more in politics.
For example, the proportion of Chinese people employed in the modern, entrepreneurial and outward-looking sectors of the economy is far outnumbered by those engaged in the state-owned enterprises, not to mention the peasantry.
Workers in the SOEs and the peasants are a massive constituency for the Chinese Communist Party and alienating them is politically risky. This is a very similar problem to the one President Clinton has with the unions, workers in low-tech industries and the general population of small-town America.
Globalisation is increasingly driving governments into very uncomfortable positions between the exigencies of foreign corporate investors and the rules of the WTO and their domestic anti-globalisation constituencies.
The forces of globalisation, therefore, are forces of polarisation - not so much between states but within states. The most obvious manifestation of this polarisation is the growing gap in incomes that all countries are experiencing. The tension between global business and local politics is likely to remain acute as the process of globalisation is sustained.
Conclusion: