A discussion 300-350words
13 Business and Global Governance
Marc Fudge
Case Scenario: Zach and Zoey discuss their future 367
Introduction 369
Global Governance 369
Three Important IGOs Not Directly Related to Business 371
Three IGOs Related to Business 372
Criticisms of International Trade and Financial Organizations 379
Factors of Economic Growth and the Role of Governments and Governance 382
Analytical Case: The BRICS Development Bank 392
Practical Skill: Leveraging international resources 393
Summary and Conclusion 394
CHAPTER CONTENTS
CASE 13 SCENARIO
Zach and Zoey discuss their future
Zach wanted to share something with Zoey and invited her out to dinner at Tyler’s uncle’s restaurant on Main Street. As they leave Happy Paws and walk past the vet office, Splurge jewelers, and the U Scream Ice Cream shop, Zach begins talking. He mentions that he and Zoey are both busy running successful businesses. Zoey has opened two more Happy Paws stores, one across the state line and the other in Anyplace, the town next to the City of Somewhere. Zach has taken over all operations of the Double Z Beauty product line and the Double Z pet product line. His grandparents are enjoying their retirement years traveling and have even been able to visit Zoey’s sister Zara in China. Tyler is full time now at Good Buddy E-Solutions, watching over the websites and several employees himself. Between
the three of them, they have been able to hire a number of people. Profits are up and life is looking pretty good. Zoey remarks that life is indeed good, and there’s not much more she could ask for. But at the door of the restaurant, Zach acts unsettled and says things could be better. Upon hearing that, Zoey raises her eyebrows.
Tyler has been keeping stats on website traffic for both Happy Paws and the Double Z Beauty products. He mentioned to Zach that a number of repeat clients are from Asia and Europe and have increasingly expressed interest in Zach opening distribution facilities, perhaps in Tokyo and Madrid. One customer has even offered to work for Double Z in Japan. Tyler provides some reports from international finance institutions such as the World Trade Organization and International Monetary Fund on targeted countries, which are very informative and surprisingly easy to read. Zach never envisioned that the beauty and pet product lines would ever grow to the level they have and therefore had never considered opening any facilities overseas. Until now.
Zach is intrigued about the growth prospects of opening facilities in other countries. He recalled his former economics professor saying that recent global economic growth has risen substantially, and while the US had improved, it was Asia’s developing nations where the greatest increase occurred, at something like 6+ percent.
As they make their way to their table, Zoey remarks that she supposes things could be better, but first they’d have to find out about the employment laws that are in place for each country into which they’d plan to expand. Maybe they could Skype Zara in China and she could help with that, Zoey suggests. She could even get them started on the tax implications of operating a business in a foreign country. Zoey also wonders how the industry standards and policies differ between Japan and Spain and the US. She asks why the growth rate has increased so much in Asia in comparison, and how long before Zach thinks it may level off or decline. Was that what was on his mind, or was it some other issue related to international trade?
Then Zoey looks around. There, in the restaurant, are her sister Zara and her parents. And over there are Zach’s grandparents and parents. And Tyler, her best friend, is here too! Zach looks at Zoey and says that yes, all those things are concerns they will have to deal with if they seriously want to expand the busi- ness overseas. But they can talk about business–government relations tomorrow. Then Zach reaches deep into his pocket, takes out that pink diamond ring Zoey had admired in the Splurge jewelry shop window ages ago, and gets down on his knee.
368 Business–Government Relations in the Global Market
Introduction
As discussed in Chapter 11, globalization refers to the increasing interdependence, integration, and interaction between people and companies in disparate locations. Everyday examples of globalization include the advance of worldwide technologies and higher levels of travel. Another important aspect is the strong trend toward global governance. Global governance is the voluntary integration of political and economic systems through intergovernmental organizations (IGOs) composed of sovereign states. Another group of international organizations, whose members are individuals and associations rather than sovereign states, are called non- governmental organizations (NGOs); they are not the focus of this chapter although they do contribute in important ways to international civil society and thus indirectly to global governance.
IGOs can have a regional focus, as we saw in the last chapter when discussing regional trading blocs such as the EU. In this chapter, we focus on IGOs that have a global scale, ultimately focusing on some IGOs that have either a trade or economic focus. While some IGOs only have an ad hoc commission, as is the case in many regional trading blocs (e.g., NAFTA), the more important global IGOs all have a substantial permanent secretariat, a legislative body where all members will occasionally convene, and often have branch offices around the world.
Global Governance
Global governance operates when member countries sign treaties to join IGOs. Member states seek access to certain IGOs and have to accept a variety of conditions of membership, must be approved by members, and must ratify the treaties by their legislative bodies (e.g., Congress), in most cases after the head of state (e.g., the President) has initially signed the treaty. That means that some countries are not given access when they seek it or are unable to meet the conditions of membership, some treaties are not ratified by their legislative body, and sometimes countries pull out of the IGO. For example, although after World War I President Woodrow Wilson was a great proponent of the League of Nations, a predecessor of the United Nations, Congress refused to ratify it and the organization eventually disbanded. It is important to note that global governance is quite different from global or world government, a case in which the world would be run by a single sovereign state; however, the world today has over 200 nation states.
Similar to regional IGOs, global governance through IGOs has been promoted because IGOs provide a multilateral forum for discussion and consensus building, they provide a structure for shared authority to allow detailed cooperation across national boundaries, and they have more permanence than simple treaties.
Global governance was weak or nonexistent for the most part until the nineteenth century. Multilateral treaties and alliances were made, but such agreements were generally highly limited to joint security issues. In the nineteenth century, with the advance of travel and technology, organizations began to be established to co ordinate navigation of common rivers such as the Rhine, or to coordinate technology that required cooperation and critical standardization such as the
Business and Global Governance 369
telegraph. For example, the ITU, today called the International Telecommunication
Union, began in 1865 as the International Telegraph Convention. Since World
War II, IGOs have proliferated, with estimates exceeding 6,000 when counting
regional and global organizations (Held and McGrew 2003). Their success is based
on the various types of benefits that countries desire, from military protection to
human rights. The reasons include sovereign protection or security arrange-
ments such as military alliances; political influence such as the effect of small
countries joining larger collectives; economic rewards such as increased trade;
and/or international well-being such as in environmental or wildlife protection or
humanitarian principles. With the rise of global governance, the “rise of the market”
has occurred and international trade has boomed under its mantle. From 1990 to
2010, for example, merchandise trade tripled (WTO website).
Of course, IGOs have drawbacks as well. First, there is always some loss of
sovereignty, even though such agreements are voluntary. IGOs can be very demand -
ing, as is the case in joining the EU, and countries may not feel the benefits are
worth the costs. IGOs often have dues, which can be substantial in some cases.
Finally, the network of global governance today is complex, overlapping, and often
confusing to citizens and newly elected officials despite some alignment and
consolidation with the United Nations (UN).
Global governance, operating through IGOs, can occur in at least seven different
functional areas. Some IGOs operate in multiple areas. Below is a list of IGO
purposes with representative examples:
1. Diplomatic, security, peace, and political cooperation: UN (General Assembly, Security Council), INTERPOL (an international police organization)
2. Resolution of political grievances: UN (Security Council and International Court of Justice)
3. Environmental well-being: The United Nations Environmental Program (UNEP), the International Atomic Energy Agency (IAEA)
4. International trading systems: WTO 5. International financial system: International Monetary Fund (IMF) 6. Social and economic well-being: UN (Economic and Social Council), World
Bank Group, the World Health Organization (WHO), the World Food Program,
UNESCO, and UNICEF
7. International standardization: ITU discussed above, International Organization for Standardization (ISO).
We first briefly discuss three examples of IGOs whose aims are not directly
related to the business world—the UN, INTERPOL, and the IAEA. Then we
will discuss in more detail three examples of IGOs whose functions include
regulating trade, finance, and international development—the WTO, IMF, and
World Bank.
370 Business–Government Relations in the Global Market
Three Important IGOs Not Directly Related to Business The most widely known IGO is the United Nations, or UN. Actually, the UN itself is a large organization, and it acts as a coordinating body for many other organizations as well. Its purposes are to keep the peace, develop friendly relations among nations, improve the quality of life for citizens of member states, and to be a center for harmonizing global actions. The UN headquarters is in New York, but it has additional offices in Geneva and Vienna. The core of the UN has five primary bodies today. The Secretariat performs the day-to-day functions of the UN. The General Assembly provides a forum for all 193 members. The Security Council is responsible for world peace and security; it has five permanent members (China, France, Russia, the UK, and the US) and ten non-permanent members. In some cases the Security Council authorizes peacekeepers (aka “Blue Helmets”): In 2013, the UN was deploying soldiers loaned from member countries in 15 locations around the world. The Economic and Social Council coordinates commissions related to population, development, women, narcotics, forests, sustainable development, and numerous other cross-societal issues; it has 54 members. The International Court of Justice settles legal disputes and provides legal opinions to the constituent bodies of the organization; it has 15 judges. The UN system is very large, containing over 30 major organizations. Some of these were created in close concert with the UN, such as the Food and Agriculture Organization (FAO), the UN Educational, Scientific, and Cultural Organization (UNESCO), the World Food Program, the United Nations Environmental Program (UNEP), and the World Health Organ ization (WHO). These organizations receive much or all of their funds from sources other than the UN. Other organizations that were created before, or separately from, the UN but have close ties to the UN system, include the International Labor Organ ization (ILO), the ITU, and several others that we will examine in detail later in this chapter.
Another example of an important IGO is the International Criminal Police Organization, or INTERPOL, which facilitates international police cooperation. Established in 1923, it has 190 member countries and a budget of around €70 million, most of which is provided through annual contributions. The organization’s headquarters is in Lyon, France, and it has a small staff of approximately 700. Its current Secretary-General is Ronald Noble, a former United States Under Secretary of the Treasury for Enforcement. INTERPOL is particularly important in capturing murderers, human traffickers, smugglers, pirates, terrorists, and drug lords, among other criminals, who cross national boundaries. It maintains a huge criminal “wanted” data base and provides the standard “most wanted” lists as well.
Yet a third example of an important IGO not directly related to business is the International Atomic Energy Agency (IAEA), whose current head is Yukiya Amano of Japan. The IAEA is headquartered in Vienna, Austria. The IAEA was created in 1957, has 162 members, and a staff of 2,500. It encourages the peaceful use of nuclear energy and provides standards for safeguarding nuclear safety, for instance in power plants. The IAEA advises the international community after nuclear disasters such as at Chernobyl, Ukraine in 1986, and Fukushima, Japan in 2011. It also assists the monitoring of non-proliferation of nuclear weapons in places like North Korea and Iran, whose programs have been subjected to sanctions by the international community and Security Council.
Business and Global Governance 371
Three IGOs Related to Business
The three largest business IGOs are the World Trade Organization (which was built on the GATT), the International Monetary Fund, and the World Bank Group. Although there are many IGOs, the dominance of these three in setting up world business regimes, bringing order to trade, sovereign finance, and development, is hard to overstate. We examine each below:
General Agreement on Tariffs and Trade (GATT): Predecessor to WTO
In the mid-1940s, The United Nations oversaw four conferences on trade— a Preparatory Committee in London (1946); a Drafting Committee in Lake Success, New York (1947); the Geneva Conference (1947); and the Havana Conference (1947–1948). At the Geneva Conference, a measure called the General Agreement on Tariffs and Trade (GATT) was created. GATT regulated trade on physical commodities using agreed-upon principles of trade liberalization, equal market access, reciprocity, non-discrimination, and transparency.
The basic idea behind GATT was to eliminate protectionism and discrimination, allowing the trade in goods to flow smoothly from one country to another, without disruption or distortion, supposedly permitting all countries to achieve larger output levels and ultimately increasing the level of economic growth everywhere.
(Hartwick and Peet 2003)
Following the neoliberal principles that had been emerging, the basic purposes of GATT were stated as:
1. Raising living standards 2. Ensuring full employment 3. Increasing real income and effective demand 4. Assuring the full use of the resources of the world by expanding the
production and exchange of goods through reducing tariffs and other barriers to trade.
(Hartwick and Peet 2003)
Furthermore, the purpose of GATT was to substantially reduce tariffs and trade barriers while eliminating trade preferences from nation to nation. Thus, in 1947, a broad set of commercial principles regarding international trade were promul- gated and a multilateral agreement regulating trade among 153 countries ensued. Although the United States Congress did not approve of the GATT framework, President Truman put the framework in place by executive order, essentially bypassing con gressional approval. Overall, countries endorsed GATT principles as they saw fit, most commonly as flexible trading principles that aimed to help contain domestic pressure for protectionism. Between 1986 and 1994 GATT trade negotiations, termed the Uruguay Round, established the World Trade Organization
372 Business–Government Relations in the Global Market
(WTO) to enforce GATT and to expand trade provisions beyond raw materials and manufactured goods.
World Trade Organization (WTO)
The World Trade Organization (WTO) was established in 1995, to provide a trade forum and to administer the world trade agreements approved at the end of negotiation rounds. Originally an ad hoc commission-style organization, since 1995 it has become one of the most important IGOs, despite being quite small, because of its importance in managing the world trading system. Currently, there are 159 nation members, which now include all major economies of the world, since the accession of China in 2001 and Russia in 2012. It is located in Geneva, Switzerland and is headed by Director-General Roberto Azevêdo.
The WTO is driven by its member states, and all major decisions are made by members as a whole. Members are represented by government ministers, ambas - sadors, or delegates. The Secretariat of the WTO plays an integral function in terms of coordinating the activities of the member countries. The Secretariat is comprised of a staff of over 600, which includes experts in the areas of law, eco nomics, statistics, and communications. The Secretariat staff assist member nations in ensuring trade negotiations progress smoothly and that international trade rules are correctly applied and enforced. In particular, the WTO follows the Most-Favored Nation (MFN) clause, which requires all members to treat one another equally. In practice, this has several implications. First, countries cannot unilaterally retaliate against one another by raising tariffs. Since tariffs protect domestic industries and workers, and raise money for governments, this clause is important for preventing frequent tariff and quota adjustments. However, whatever the MFN rate or conditions are for various products and services, countries may reduce them further in trading bloc agreements, such as free trade agreements. Second, while broad exceptions may be negotiated, this requires consensus and an extensive amount of time. Third, because countries are often perceived to manipulate trade rules, countries often use organizational mechanisms to dispute the practices of other countries.
The current round of negotiations is called the Doha Round, because the initial meeting was held in Doha, Qatar in 2001. While previous rounds increasingly focused on developed countries and issues surrounding services and intellectual property, the Doha Round was a result of developing countries expressing an interest in having more concessionary options. The Doha Round still has not been completed, because of disputes over protection of subsistence farmers in developing countries and the contention that agriculture in many developed countries is highly subsidized. A partial deal (called the Bali Package) was reached in the Ninth Ministerial Conference of the round in 2013. It provided highly concessionary terms towards agriculture in the least-developed countries, expanded assistance in meeting trade rules, and supplied a series of agreements to provide greater access to most developing countries, depending on their economic status. While the length of time taken to reach agreement had some critics wondering about the viability of the WTO, it is now hoped by WTO supporters that future negotiations will not be so contentious and long.
Business and Global Governance 373
The WTO does more than just assist in the creation of a stable set of worldwide trade agreements: It also handles trade disputes, monitors trade policies, and provides technical assistance and training for developing countries. Part of the impetus for becoming a full IGO was the development of a dispute-settlement mechanism. The Dispute Settlement Body sets up dispute panels that have binding authority of determination, although appeal within the WTO is possible. The US and EU are the most frequent complainants and respondents of trade disputes, although China is increasingly a party to disputes. While the US has a good record of success using trade disputes, occasionally it loses. When this happens, like other countries, it must either change its trade practices or be subject to WTO sanctions on non-related products (generally tariffs on popular export items). The WTO also provides trade surveillance reports on all countries on a rotating basis; the executive summary of these reports is an invaluable tool for business people wanting to gain insight into the overall trade environment in various countries. Portions of the sixth trade policy review for Brazil are summarized in Exhibit 13.1.
374 Business–Government Relations in the Global Market
EXHIBIT 13.1
Excerpts from the 2013 Trade Policy Review by the WTO for Brazil
SUMMARY
1. Brazil weathered the global economic crisis well, supported by strong domestic and foreign demand and sound macroeconomic policies. Brazil has also contributed to global economic recovery by substantially increasing imports. Solid economic growth and active incomes policies have allowed Brazil to make progress towards reducing poverty, unemployment, and income inequality.
2. Further action is required to address long-standing structural short- comings affecting the Brazilian economy’s competitiveness, such as inadequate infra structure, insufficient access to credit, and high taxes. The Government has taken measures to deal with these problems but in its quest to support sectors affected by a loss of competitiveness it has also adopted some measures that may have a restrictive impact on trade. Given the size and importance of Brazil’s economy, it is important for it to continue to open its market to trade and investment flows and for its policies to be conducive to growth.
Economic Environment
3. The Brazilian economy recorded a strong performance during most of the 2007–2012 period, with real GDP growth averaging 3.6 percent a year, albeit with important fluctuations. . . . Sustained economic growth over almost a decade and active income policies have allowed Brazil to make important
Business and Global Governance 375
progress towards reducing poverty and income inequality, while employment figures have improved.
4. Since the second half of 2011, however, growth has decelerated significantly and the average real growth rate for 2012 was just 0.9 percent. This loss of dynamism may be partly attributed to the appreciation of the Brazil - ian real and the global economic slowdown, but it also reflects long-standing structural problems affecting the Brazilian economy’s competitiveness such as inadequate infrastructure, insufficient access to credit, and a very high tax burden. To address these problems, the Government has adopted measures aimed at removing infrastructure bottlenecks, expanding concessions and private–public sector partnerships, and reducing the tax burden on certain manufacturing industries. However, to support sectors affected by a loss of competitiveness, the Government has also taken some measures that have a restrictive impact on trade, including increasing tariffs temporarily, and using preferential margins for domestic goods and services in government procure - ment, and has increased export credits. The authorities have also taken measures to increase the availability of credit and the low level of financial intermediation. In mid-2011 the Central Bank lowered the policy interest rate (SELIC) to record low levels by Brazilian standards. On the fiscal side, the Government was able to provide stimulus while maintaining a primary surplus throughout the review period. . . .
9. Brazil is one of the WTO’s most active participants, individually, and within the BRICS group of leading emerging economies. . . . From October 2008 to October 2012, Brazil initiated three complaints under the WTO dispute settlement mechanism. . . .
13. Brazil’s 2012 applied MFN customs tariff is entirely ad valorem, with rates ranging from zero to 55 percent. The simple average MFN tariff applied in 2012 was 11.7 percent, up from 11.5 percent in 2008. . . .
21. Brazil maintains a policy of free-trade zones for imports and exports, by which fiscal and other incentives are granted to promote production in, and the development and regional integration of, border areas in the north region. Eight free-trade zones have been created. . . .
22. One of the Brazilian authorities’ key concerns remains the availability and cost of credit. In this respect, the authorities consider that their policy of targeting credit is necessary to correct a market failure. To this end, Brazil maintains several official credit programmes aimed at different sectors and types of producers.
International Monetary Fund (IMF)
In 1944, a conference was convened in Bretton Woods, New Hampshire. The purpose of the conference was “international concern over the competing currency devaluations and inflationary tendencies that characterized the interwar years and the fear of a post-war economic depression” (Boskey 1956). The conference at Bretton Woods included 44 governments (see Exhibit 13.2) and conceived two
376 Business–Government Relations in the Global Market
international financial organizations (IFIs)—the IMF and the World Bank (WB). Therefore, these two IFIs are also known as Bretton Woods Institutions. The IMF was initiated from these discussions, and was formally created the following year with 29 initial countries.
The IMF is essentially the central bank to the world. It is now comprised of 188 member countries. Some of the functions of the IMF include tracking global economic trends and performance, alerting its member countries when it sees problems on the horizon, providing a forum for policy dialogue, and providing loan programs for countries experiencing economic distress. The current Managing Director is Christine Lagarde of France; by tradition, the Managing Director is always a European.
The IMF has 24 directors representing individual countries if they have large economies, or groups of countries in the case of smaller economies. Countries contribute the financial resources that can be loaned to other countries in need. For example, during the Asian recession in 1997, the IMF helped out Thailand, Indonesia, and South Korea, among others, which led to weakness in Brazil and Argentina, who also needed bailouts. During the Great Recession starting in 2008, the biggest borrowers were the European countries of Greece, Portugal, Romania, and Poland, but others lined up, too, such as Mexico and Colombia. However, the IMF has traditionally required strong conditions in order to qualify for lending, such as cutting services, increasing taxes, and adjusting interest rates. These conditions can cause such short-term pain and suffering for the public that both the IMF and the government of the day can be much decried. So while the IMF provides a sometimes necessary antidote to countries that fall victim to excessive public service and debt, this medicine more often than not hits the vulnerable members of a society harder, and many of those involved in financial manipulation or outright corruption are often less affected.
Yet the advice of the IMF has also been useful to many countries in handling global challenges. Examples include the economic turmoil caused by the oil shocks in the 1970s, the inflationary challenges in the 1980s, and the restructuring of the eastern European economies after 1989. IMF surveillance also tracks monetary policy, and in particular, currency manipulation.
EXHIBIT 13.2
The 44 nations represented at the Bretton Woods Conference were:
Australia, Belgium, Bolivia, Brazil, Canada, Chile, China, Colombia, Costa Rica, Cuba, Czechoslovakia, Dominican Republic, Ecuador, Egypt, El Salvador, Ethiopia, France, Greece, Guatemala, Haiti, Honduras, Iceland, India, Iran, Iraq, Liberia, Luxembourg, Mexico, The Netherlands, New Zealand, Nicaragua, Norway, Panama, Paraguay, Peru, Philippines, Poland, South Africa, USSR, United Kingdom, United States, Uruguay, Venezuela, Yugoslavia.
Business and Global Governance 377
IMF “Headquarters 1” in Washington, DC
EXHIBIT 13.3
Source: en.wikipedia.org.
World Bank (WB)
A global development bank, the World Bank was established in 1944 for the purpose of facilitating postwar reconstruction and development. If the IMF is the head of the international system, the World Bank is its heart. “The [World] Bank Group uses financial resources and its extensive experience to partner with developing countries to reduce poverty, increase economic growth, and improve the quality of life” (The World Bank 2011, p. 3). It was initially known as the International Bank of Reconstruction and Development (IBRD), and given the vast need to rebuild Europe after WWII, from roughly 1945 to 1955 much of the World Bank’s focus was on reconstruction. Currently, the mission of the World Bank is to alleviate poverty around the globe.
The World Bank itself is divided into the IBRD and the International Development Association (IDA). However, the World Bank Group consists of five institutions, as seen in Exhibit 13.5 below. The World Bank is headquartered in Washington, DC, but has nearly 100 global offices. It employs approximately 10,000 staff and its annual lending is generally around $18–20 billion.
378 Business–Government Relations in the Global Market
Headquarters of the World Bank, Washington, DC
EXHIBIT 13.4
Source: Wikimedia Commons.
The five institutions of the World Bank Group
World Bank Group Institution Function
The International Bank for IBRD lends to governments of middle-income Reconstruction and Development and creditworthy low-income countries. (IBRD)
The International Development IDA provides interest-free loans—called Association (IDA) credits—and grants to governments of the
poorest countries.
The International Finance IFC provides loans, equity, and technical Corporation (IFC) assistance to stimulate private-sector
investment in developing countries.
The Multilateral Investment MIGA provides guarantees against losses Guarantee Agency (MIGA) caused by non-commercial risks to investors
in developing countries.
The International Centre for ICSID provides international facilities for Settlement of Investment conciliation and arbitration of investment Disputes (ICSID) disputes.
Source: The World Bank 2011.
EXHIBIT 13.5
Business and Global Governance 379
The IBRD aims to reduce poverty in middle-income and creditworthy poor countries by promoting sustainable development through loans, guarantees, risk- management products, and analytical and advisory services. The IDA aims to reduce poverty by providing interest-free credits and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions in the world’s poorest nations.
The World Bank has a similar administrative structure as the IMF—24 directors and proportional voting (see Exhibit 13.6 for a comparison). However, because a number of loan projects in the past had negative ramifications for the recipient countries or citizens, World Bank decisions take a higher level of agreement and the process is more cautious in terms of not merely accepting the government of the day’s intentions. The President of the World Bank has always been an American; however, that tradition was questioned in the recent transition when American academic, Jim Yong Kim, was nominated by the US and elected in 2012.
Criticisms of International Trade and Financial Organizations
Despite their noble goals, the three international trade and financial organizations have often been the targets of criticisms, which mainly focus on the problem of accountability resulting from their nondemocratic operation.
One accountability issue points to unequal representation in the three organ - izations. That is, wealthy countries are over-represented in the IMF and World Bank and overly powerful in the WTO. For example, the IMF operates a shareholder- controlled organizational system in which each member is assigned a quota,
Structure of the IMF and WB
International Monetary Fund (IMF) World Bank (WB)
EXHIBIT 13.6
• Oversees the international monetary system.
• Promotes exchange stability and orderly exchange relations among its member countries.
• Assists all members—both industrial and developing countries—that find themselves in temporary balance-of- payments difficulties, by providing short- to medium-term credits.
• Draws its financial resources principally from the quota subscriptions of its member countries.
• Seeks to promote the economic development of the world’s poorer countries.
• Assists developing countries through long-term financing of development projects and programs.
• Encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC).
• Acquires most of its financial resources by borrowing on the international bond market.
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reflecting its relative size in the global economy. A member’s quota determines
the amount of its financial contribution, its access to IMF financing, and its relative
voting power in the organization. A member country cannot unilaterally increase
its quota. The increase must be approved by the Executive Board. In the past, China
has attempted to increase its quota multiple times, but has been restrained by the
board from getting what it wished. As of 2010, the US had by far the largest voting
rights, amounting to over 17 percent of the total, followed by traditional developed
Western-style economies such as Japan, Germany, France, and the United Kingdom.
The top 20 shareholders, again mainly Western developed economies, account for
over 70 percent of the voting power, leaving the rest of the members, primarily
developing economies, less than a 30 percent say in matters.
Another accountability problem comes from secretive operations in the
organizations. For example, the WTO is notorious for its Green Room process. The
term “Green Room” has its roots in British theater and refers to the room where
performers wait before they go on stage. The WTO Green Room process starts with
meetings of representatives of a limited number of WTO members specifically
selected and invited by the host (often the WTO Director-General) to work out an
agreement among themselves, and then present such agreement to the broader WTO
membership for general acceptance. In the GATT era, the quad (which refers to the
United States, the European Union, Japan, and Canada) would act as an informal
steering committee for the system. The quad, along with a few active members such
as Australia and New Zealand, and strong members of transition economies and
developing countries such as Brazil, India, and Mexico, took part in the Green Room
meetings. The process worked negatively to reach a consensus—when none of
the members present in the negotiation disagreed, there was consensus. Many
developing countries voiced concern over the lack of transparency of the process.
In addition to the Green Room process, WTO was also criticized for its secretive
discussions and reviews, such as dispute proceedings.
The WTO top-down approach to decision-making, lacking input from those
affected by its policies and projects, has made the World Bank a target for criticism
concerning accountability, especially when it involves a specific development
project. For example, the Pak Mun Dam in Thailand was a project sponsored by
the World Bank in the 1990s. The concept of the dam was proposed and approved
without local involvement. The project resulted in the flooding of a vast area of
land, including villages, farms, and forests, the destruction of fishing, the loss
of navigation, the stagnation of water, and the displacement of thousands of
indigenous people, who eventually lost their way of life (Friedrichs and Friedrichs
2002). Friedrichs and Friedrichs, in their Pak Mun Dam case study, argued that when
international and national governments ignore local constituencies, it is a form of
criminal conduct (2002).
As symbols of global governance, the WTO, IMF, and World Bank have also been
blamed for the faults of globalization, such as the enlarged social gap between rich
and poor, frequent and pervasive economic crises, immense ecological and environ -
mental damages, the callous displacement of indigenous people, and the declining
power of nation states. They have been often protested by environmentalists,
human rights activists, labor unions, anti-capitalists, and anti-globalization activists. For example, on November 30, 1999, thousands of protesters blocked entrance to the WTO meetings in Seattle, Washington, forcing the cancellation of the opening ceremonies and eventually deadlocking the Seattle round of trade negotiations (see Exhibit 13.7) (Gillham and Marx 2000). The following April, more demon - strations were held at the IMF and World Bank meeting in Washington, DC, leading to mass arrests of protesters (Griswold 2000).
In recent years, all three organizations have been striving for improvements in accountability. The WTO publishes most of its important documents online for both public and member countries who might not be present at all committee meetings. It also improved the reporting of Green Room sessions and other meet- ings. The IMF has been pressing its members to make public all surveillance reports, and posts any self-evaluation of operations as well as outside reviews of operations. It also is attempting to reform the voting system, allowing bias in favor of develop- ing countries. The World Bank is now more careful about obtaining local input, implementing a complaint mechanism for people who live in a project area, with inspection panels used for fact finding. It also requires a higher consensus of support for projects, by improving an approval vote from 50 percent to 80 percent.
Although the debate of disproportionate representation is not easily resolved, overall transparency and staff accountability have improved significantly in the three organizations during the past 20 years.
Business and Global Governance 381
WTO protests in Seattle, November 30, 1999
EXHIBIT 13.7
Source: Wikimedia Commons.
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Factors of Economic Growth and the Role of Governments and Governance
Throughout this book we have examined various angles about the useful and not- so-useful roles of government (and world governance) as it interacts with business in a market-based system. We began with the debate about the size of government (Chapter 1), moved on to theories about the relationships of business, society, and government (Chapter 2), reviewed the historical role of government with business (Chapter 3), and looked at the various economic policies of American govern- ment (Chapter 4). We examined proactive government models of support via economic development (Chapters 8–10), and finally surveyed international aspects of national and global governance related to business (Chapters 11–13). At this time we summarize those discussions.
Broadly speaking, this book promotes the idea that the market economy has provided a vastly enhanced quality of life for Americans and much of the world in modern times. Simultaneously, it promotes the idea that governments and governance vehicles are critical to modern society and necessary for the long-term health of the market itself. This begs two questions regarding quality and quantity of government and its relationship with business. First, how do you ensure that the private and public sectors balance each other to create wholesome synergies, rather than (1) opposing one another in dysfunctional ways such as misrepresentation, obfuscation, and red tape, or (2) working together in unholy alliances that privilege elites? This book does not provide specific answers, but it does point to a wide range of strategies likely to enhance cooperative relations in general, and to increase the utility at an individual level in particular.
The second question becomes what is the right amount of government and in what areas? The “reasonable” range is very large in advanced democracies today, where “successful” models range from relatively lean governments such as Japan (which nonetheless has had a large national debt for a long time) and the high-tax Scandinavian countries where complaints about government are relatively rare. There is nothing innately wrong with either advocating a much reduced govern - mental budget and role, nor is there anything inherently wrong with promoting a more robust government role. What this book has tried to do is get beyond the simplistic arguments that ignore the problems government can create, or paint it as the source of all problems. For example, it is unrealistic to suggest that cuts in government do not require realistic assessments about what is being sacrificed over the long-term; it is equally simplistic to suggest that any additional government outlays can all come from the rich. This is particularly important in terms of govern ment outlays, which are much more likely to be long-term investments in the future of society rather than wealth creation for the more affluent.
In order to make a realistic assessment of the types of contributions of governments and governance mechanisms, it is necessary to have one last review of the determinants of economic growth, but to do so with the full range of factors that have been discussed over the course of the book. In all, we suggest 12 determinants of economic growth in which government’s role in maximizing these factors varies considerably, from relatively modest to quite substantial.
As we have discussed, classical economic theory, the foundation of micro - economics, focuses on how the interplay of the important factors of labor, capital, and land can lead to competition—and thus efficiency and innovation—in an ideal market. We examine each of these factors in relation to government in light of contemporary economic demands.
Labor is not homogenous in most modern industries, and uneducated, low- quality labor is fine for subsistence and maintenance cultures. Even in Adam Smith’s day, however, long apprenticeships were the substitute for formal education in Britain and ensured a high-quality workforce in the world. Later, formal education was introduced in order to keep the quality of the workforce high (among other reasons). In comparison, eastern Europe and Russia elected to keep labor cheap and prevented widespread education. Whilst a short-term cost saving back in the eighteenth century, this frugality ensured that over the long haul, those countries would remain at the bottom of the value chain for centuries. On the other hand, the United States, like Great Britain, augmented its apprenticeship programs with com pulsory public education in the nineteenth century. Going beyond Britain, however, the US created an extensive array of land grant universities for the “common man,” the most ambitious educational initiative of its day. Not surprisingly, within decades the US became the scientific center of the world. While the system (probably better called a network) of higher education in the US con tinues to this day, the breakdown of the K-12 structure is, and will increasingly become, a drag on the American economy in the decades ahead (Finn 2009). The role of government in education has been, and will remain, very extensive, even if ever changing.
Private capital sufficiency allows a market economy to operate efficiently because it allows effective redeployment of resources (i.e., investment), especially for large operations. Classical economics points out that taxes deflate private capital and therefore provide a small to large drag on short- and long-term capital effectiveness. Yet while lower taxes are always better in order for this factor to be maximized, all things being equal, the fact remains that it is impossible for all things to be equal because of the positive and often necessary products of taxes, such as national security. More realistically, it is critical for taxes to be a good-value exchange for a service society wants. For example, while the US military machine is a worthy reason for pride, its value for service is much reduced because Congress routinely requires purchases of unnecessary military equipment, keeps unnecessary facilities open, and adds earmarks to the budget that are not defense related (New York Times 2013). Some countries have extraordinarily good and comprehensive services, includ ing various types of insurance, and have virtually eliminated poverty, a good value (because of policy integrity and administrative competence) despite higher tax levels. Some countries have infrastructures that are in complete disrepair and social services that are largely lacking, so even though taxes may be low, they are still a poor value. American opinion seems to be that there is considerable policy and administrative waste in American government, and that by cutting it we could avoid painful choices such as increased taxes or spending cuts on important programs (Swanson and Blumenthal 2013), but that is hard to square with the thinking of serious economists today (Samuelson 2009). While it is important for the modern administrative state not to overwhelm the private sector for a robust
Business and Global Governance 383
capitalist economy (e.g., not to let mindless accretion of responsibilities prevent the thinning out of programs and services as the economy evolves), it is even more important for governments to provide value for service because of both civically wise and ethical policy-making, as well as administrative competence.
Substitution of public capital for private capital is another issue regarding capital sufficiency. Again, the picture is more nuanced than commonly portrayed. On one hand, there are few cases where government capital can completely substitute for private capital, as the fall and/or transition of the communist bloc countries demonstrate. However, there are numerous examples, including the US, where governments have helped infant industries or aided industries in times of crises. Infant industries can be assisted as they gear up their technology and work against economies of scale (Krugman 1979); the East Asian countries are clear examples. However, the more nuanced issue is how to keep government strategic, and not allow them to become structural and/or perverse. For example, while America’s first major export industry, tobacco, was neither infant, small, nor strategic, it received large agricultural subsidies during the period from the Great Depression until 1982, and moderate subsidies through 2015, when all supports and subsidies are supposed to finally end (FSA 2013). Supporting an unhealthy product in the first place is dubious (being classified as an agricultural good rather than a non-essential or luxury good); and continuing even modest, indirect support through 2015 seems remarkably non-strategic. On the other hand, the US government subsidy of transcontinental railroads accelerated the development of the West by approximately 20 years (Ambrose 2001), and there were numerous subsidies, both strategic and short-term, to the tech industry when it started. The failure to keep local economic development strategic and short-term enough resulted in the Governor of California recently rescinding state support for municipal and county efforts (Dolan, Garrison, and York 2011).
Monetary trustworthiness is an issue when dealing with capital. When wars have occurred within domestic borders, it is common for money to be drained from banks and stored as precious metals and gems, which are portable and easily hidden, and for people to require them for larger purchases because printed money is no longer trusted. Similarly, the markets punish industries in countries that print too much money or that cannot manage their interest rates. Trade in the Roman Empire expanded massively because the system was both consistent and backed by precious metals. When the Roman Empire collapsed and its monetary system fell apart, so, too, did international trade for hundreds of years. Immediately after the American Revolution, when many called for the depreciation or default on US government debt accrued to pay for the war, Alexander Hamilton insisted on full repayment. That tradition of trustworthiness has generally protected markets from governmental causes of depressions, as have sometimes occurred in more unstable or untrust - worthy economies. The major exception was during the Civil War when soldiers on both sides were paid with excessive currency, leading to hyperinflation; the Union greenback was restored after the war but the Southern Confederate dollar collapsed even before the end of the war (Thornton and Ekelund 2004). Thus, monetary trustworthiness created by governments is enormous in providing a stable platform for capital to be saved and used in domestic and trade pursuits.
384 Business–Government Relations in the Global Market
Land, as discussed by Adam Smith, is really a metaphor for both land itself and its physical resources such as minerals and timber; we divide our discussion accordingly. Capitalism envisions the relatively rapid conversion of land for different uses in some areas, generally leading to land intensification; this is facilitated in a market economy when the “invisible hand” operates relatively freely. In turn, this means private possession must be protected in a system of secure ownership through trustworthy contracts and legal processes. The US is a model in this regard, ensuring that exceptions to property rights are minimized. Examples where property is devalued and less likely to be developed occur in countries in which nationalization is likely, abrogation of contracts is common, and manipulation of the legal system by powerful interests is frequent. Further, historically, the US has increased land resources by opening up the West through public land sales and land rushes, through conquest, and by allowing the private use of public lands in many cases. Nonetheless, there are exceptions in the US in which property rights are curbed (in addition to acquisition of land for public purposes such as roads and common amenities). The primary exception is the long-term degradation of land. Examples are not hard to find in an age where large industries can easily pollute their own and neighboring land. For example, the Hooker chemical company graciously ceded its former factory site to the Niagara Falls School District for one dollar, who in turn sold it to a developer whose tract homes were called Love Canal, after a canal that long before had been filled in with chemical waste. The 21,000 tons of toxic waste seeped into basements and infiltrated the local aquifer used for drinking. The level of birth defects, chromosome damage, and cancer in the area skyrocketed, requiring the eventual condemnation and purchase of the 36-block area by the federal government (Blum 2011). Another common example includes communities down - wind of smokestack industries. Today, therefore, governments must assiduously protect property owners’ rights to intensify land (to some degree modified by zoning ordinances), whilst carefully monitoring properties for their environmental effects, as an important exception to private ownership theory.
Availability of natural and physical resources is a concern of the classical dimension of growth. Lush resources include minerals, oil and gas, timber, waterways, access to water for drinking and agriculture, and so on. A single factor, such as spices in the Middle Ages or oil today, can bring wealth to a country rich in a scarce resource. Governments can assist with the exploration of resources, or the extraction of expensive ones. For example, Saudi Arabia has not only one of the largest oil reserves in the world, but it has the largest capacity to create fresh water, with over 30 oil- and gas-powered desalination plants. Yet the current power sources are so expensive that Saudi Arabia is looking to the future, when its oil reserves may run low, and is now building solar desalination plants (Todorova 2014). This example points to the need for countries to be forward looking in terms of resource conservation. For example, there are many historical cases of island and tropical cultures becoming impoverished after cutting down all their forests, or agricultural societies exhausting their soil because of poor conservation. Desertification is an enormous environmental problem in the world today, most notably in Africa, Australia, the western US, the Middle East, and Central Asia (Imeson 2012). While some desertification is caused by natural cycles, it is almost
Business and Global Governance 385
always exacerbated, and sometimes completely caused, by human activity and unsustainable population. Human causes include overgrazing, stripping vegetation, and overharvesting ground-water supplies. Ground-water depletion today causes sinkholes in Florida, land subsidence of up to 10 feet in areas of Texas, and a 300-foot drop in the water table in most of southern Arizona. Turning to an ocean example, an important source of food for the planet, fish are being caught at such an alarming rate that many species are close to extinction, and scientists predict the collapse of ocean fishing in the next 30 years (Hilborn 2012). Here, international governance structures will need to work together to ensure that this valuable resource is protected, but that many species are not fished to extinction. Govern - ments and governance vehicles are needed to monitor resource extraction and depletion as the planet looks ahead to a population of at least eight billion people in the next 20 years, and at the current rate, 10 billion by 2050.
Competition is a pillar of the classical growth model. It creates a dynamic that forces producers to pay attention to market demands, to be as efficient as possible, and to innovate. However, as much discussed in this book, there are several threats to “perfect” competition. One such threat comes from monopolies, so governments create anti-competition laws and rules to prevent single companies from manipu - lating the market and crushing incipient competition, as well as rules to prevent competitors from engaging in price collusion. Such regulation has been indispen - sable in producing a competitive environment in the US and in keeping the US at the top of the world economy. Countries that do not maintain competitive markets— and allow oligopolies, monopolies, and hyper-wealthy power elites—are much more prone to economic declines as the economy shifts over time.
Innovation is a critical product of growth for modern economies. Some experts think that innovation is the single most important factor in the current global economy (Fagerberg 1988, 1997; Cantwell 1989). Innovation comes at many different levels. Adaptation is the process of taking existing technologies or others’ ideas and adjusting them for current needs, and is sometimes known as refinement. Invention is the creation of entirely new technologies or radically new uses. In the last 50 years, many countries have been good at adaptation, especially the rising Asian countries, but the US has led in true creation. Creation takes education, experimentation, and a willingness to re-create (Wolff 1995). The US has tradit ionally had a robust and relatively inclusive educational system, a penchant for experimentation going back to Edison, and a willingness to give up past technologies for things that are new, fresh, or simply have the potential to be the “next wave.” The US government has invested heavily in research, with the annual budgets of the National Science Foundation and the National Institute of Health reaching $7 billion and $30 billion, respectively. Other agencies that assist in basic research include the Department of Defense and the National Aeronautics and Space Administration (NASA), among others. Local governments have been instrumental in attracting top talent, creating technology centers, and fostering innovation incubators. Indirectly, but importantly, anti-competitive rules have greatly aided in keeping the US at the cutting edge in a world whose competitive spirit has increased exponentially since World War II, when the US easily dominated with its economic engine fully intact.
386 Business–Government Relations in the Global Market
Infrastructure refers to the basic physical structures needed for the operation of a country, or the facilities necessary for an economy to function. Some infrastructure has more to do with internal national functions, such as the water system, sewers, the electrical grid, hospitals, and so on. Particularly important to both domestic and international commerce traditionally have been roads, canals, rail, bridges, sea ports, airports, and tunnels, which largely focused on the movement of physical goods. Wired communications infrastructure was less important as a critical trade factor, but that has dramatically changed in the last generation as commerce has moved into the age of the Internet. All great empires of the past have excelled at the infrastructure of their day. The Romans built roads to ensure quick military movement, but they were also an enormous boon to trade; they were built to last and some are still in use today. The conqueror Genghis Khan installed a postal system for his great sprawling Asian empire, which by the time Marco Polo visited his grandson, who consolidated and refined it, had expanded to 1,400 stations. The British built their great sea empire of the late nineteenth century on the excellently provisioned ports they had acquired such as Gibraltar, Hong Kong, Singapore, the Falklands, Bermuda and the Bahamas, and multiple locations in Africa, India, Australia, and the Pacific. The US government has been very forward thinking in this regard throughout its history, and has focused on unifying the country. It nationalized the postal service in 1775 and made it a Cabinet position in 1792; the transcontinental railways were initially federally sponsored; airports across the country were initially postal service centers; and the US federal highway system was completely overhauled under President Eisenhower to be the envy of the world. There are many other examples. A comparison between India and China provides a prime demonstration of the difference that infrastructure can make: India’s infrastructure continues to be old, fragmented, and overburdened (Chilkoti 2014), while China’s has been vastly upgraded, contributing greatly to its export-driven economic model. In addition to physical infrastructure, govern- ments manage the airwaves and the Internet so there is orderly and fair access, standardization, and regulation to minimize fraud, copyright infringement, and other criminal activity.
The consumer base itself, on which commerce and trade depend, can often be assumed or ignored, jeopardizing the market’s fundamental health, as the focus is often miscast on the specifics of marketplace mechanics. Yet when the market or consumers suffer, overall economic growth will also suffer, as will most individuals in society. A key assumption today is the existence of sufficient customers to drive the competitive marketplace and encourage efficiency and innovation. As a single factor, slow and steady population growth is the easiest to manage and use for economic prosperity when other factors are in place, the pattern for the US for most of its history. Elsewhere, rapid population growth has frequently been a problem, as is the case in many developing countries whose infant mortality rates have dropped since 1950, but whose birth rates have not. The most densely populated country in the world, China, instituted a repressive one-child policy in 1982 to curb population growth. While China will have many economic issues to contend with in the future, such as increasing dependence on the state by the elderly because of fewer children, this has been a considerable factor in concentrating resources on
Business and Global Governance 387
the young and on the state, rather than on unsustainable family expansion patterns. On the other hand, another immensely populated country, India, has yet to get a handle on its teeming population, and Africa’s most populous country, Nigeria, is just beginning to see its population explode (Exhibit 13.8). These countries have severe economic hurdles to overcome because of this factor. Conversely, govern - ments have special responsibility to prevent or mitigate unexpected population declines. The Black Plague in Europe decimated a third of the population and pushed the European recovery from the middle ages back a century. The US has worked to improve health through the reduction of diseases such as polio, tuberculosis, and AIDS. Another aspect of market protection by governments is the organization or support of risk reduction programs that provide assistance to consumers in old age, because of disability, or because of immediate job loss. This helps individuals in times of need, but also reduces potential wide economic swings in the economy. Yet another aspect of government assistance in maintaining healthy markets is ensuring that foreign competitors do not unfairly encroach in domestic markets and that domestic competitors are aided in the quest to expand abroad.
Consumers who have the means to purchase goods is not the same as having a sufficient number of consumers. During the twentieth century, there was a worldwide push in democratization, for not only the ability to participate in the governance process, but also for economic access and opportunity. Therefore, there has been an interest in policies that ensure a healthy and broad middle class, as opposed to the aristocratic models of the past or the economic divides between rich and poor still found in developing countries. For the purpose of this discussion,
388 Business–Government Relations in the Global Market
Population growth in China, India, Nigeria, and the USA
EXHIBIT 13.8
Billions 1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0 1950 60 70 80 90 2000 10 20 30 40 50 60 70 80 90 2100
India
China
Nigeria
United States
Projected
Source: United Nations.
economic growth has been most visible and sustained in countries with a large
middle class. There are many policies that can be enacted to encourage a middle-
class-driven economy, such as universal access to cheap but high-quality education,
minimum-wage laws (i.e., the prevention of economic serfdom), and income
redistribution through a progressive tax structure. The preferred responsible business
model has become that of Henry Ford, who proudly paid above the prevailing wage,
rather than that of the Robber Barons who preceded him, who were known for low
wages despite the vast profits of their companies. Following the Ford model, the
tech industry has not only produced incredible fortunes (e.g., Gates via Microsoft,
Ellison via Oracle, and Bezos via Amazon.com), but has provided widespread
lucrative employment even among lower echelons of employees. This has not been
common in most other industries, where income contraction has been experienced.
As a result, concerns about the increasing concentration of wealth in the US and
the world at large, leading to what many have dubbed a second Gilded Age, has
become a more and more debated issue recently (Piketty 2014; Schoen 2013)
and will become an important governmental issue in the future, no matter how it
is handled.
Climate is our final factor and is related to climate adaptation and climate change. Like other species, humans have been remarkable at adapting to
climates that are exceptionally cold, such as the Inuit in the north, and exceptionally
high places, such as the Tibetans, the Peruvians, and the Amhara Ethiopians.
Their climate adaptation is both cultural and physiological. The Inuit have culturally
learned how to cope with hunting and the ice, and their physiology has adapted
to a high-protein/high-fat diet. Likewise, those living in high altitudes are physio -
logically dissimilar from “lowlanders” because of genetic evolutionary changes in
their respiratory systems allowing them to process oxygen differently. As a negative
historical example, the large Norse settlement in Greenland started in 986, and
thrived for a while during a Medieval warm period (hence the name, Greenland);
a mini ice age started in 1275, driving the population, who did not adapt, into
extinction by 1450 (Diamond 2005). Current positive examples of climate change
are the use of the air conditioner in the US in hot deserts and the humid American
South, the successful dike building of the Dutch against rising sea levels, and the
irrigation of former deserts around the world. One negative example of climate
change is the massive amount of desertification occurring around the world in dry
regions where the effects of human causes cannot be mitigated by mechanical and
cultural measures. Other examples are very low regions such as Bangladesh, where
most land is less than 10 feet above sea level and whose large population cannot
adapt to land loss and frequent flooding that often affects 75 percent of the country.
As the earth heats up (no matter what the causes), the polar ice caps melt, and the
oceans rise, governments and world governance will need to address global warming
if growth is not to be adversely affected, leaving our grandchildren in a consider-
ably less fortunate position than we have inherited. See Exhibit 13.9 for a summary
of the factors.
Business and Global Governance 389
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ANALYTICAL CASE: THE BRICS DEVELOPMENT BANK
BRICS refers to the association of the five fastest-growing developing economies— Brazil, Russia, India, China, and South Africa. The term BRIC, coined by British economist Jim O’Neil, represents the four rapidly developing economies (before South Africa became part of it in 2010) that symbolize the shift in global economic power away from the developed G7 (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) countries. The shared demand for economic development and political interest have drawn the BRICS countries to closer cooperation.
On June 16, 2009, as a response to the US-originated global economic crisis of 2008, the BRIC countries held their first formal summit in Yekaterinburg, Russia. The summit focused its discussion on ways to improve the global economy, reform financial institutions, and enhance cooperation among themselves, as well as how developing countries could become more involved in global affairs. Following the summit, the four countries called for a new global reserve currency other than the US dollar.
With their increased economic power, the BRICS countries also demanded more say in international institutions. For example, in 2012, BRICS pledged to contribute $75 billion to the IMF to boost its lending power, on the condition that the IMF reform its voting system.
Seeing unpromising signs in the IMF, the BRICS countries started to seek their own ways. Such demands rarely went through IMF’s voting system, which is dominated by developed countries.
On July 15, 2014, BRICS held its sixth summit, in Fortaleza, Brazil. The five nations announced the creation of the BRICS Development Bank with $100 billion contributions (equally shared by each participating nation) as well as another $100 billion reserve (of which China contributes over 40 percent). The bank will be headquartered in Shanghai, China, with its first President, Chairman of the Board of Directors, and Chairman of the Board of Governors from India, Brazil, and Russia, respectively.
The BRICS Development Bank aims at offering an alternative to the existing IMF and World Bank for financial resources for development purposes. Unlike the IMF and World Bank, who assign votes based on capital share, the BRICS Development Bank assigns each participating country one vote, and no veto power from any single country.
Currently the BRICS represents 42 percent of the world’s population and 26 percent of the land mass, and a shared 18 percent of the global GDP. The five countries’ average growth rate is more than twice that of the developed world. The fast economic growth in these developing countries creates enormous demand for capital infrastructure investment. The BRICS financial pool could potentially better meet the needs for developing countries seeking loans outside the Bretton Woods institutions.
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Business and Global Governance 393
Questions for Discussion and Analysis
1. What are the driving forces to the formation of the BRICS Development Bank? 2. What are the factors that may potentially enhance or undermine the cooperation
among the BRICS members? 3. What are the economic and political implications of the BRICS Development Bank
to global governance? 4. Currently the US dollar is the primary reserve currency used by other countries.
Some economists anticipate that the BRICS Bank could potentially create a new reserve currency (e.g., RMB Yuan) for the world. If that happens, how will it affect international business?
Sources: Bryanski, G. (2009). BRIC Demands more Clout, Steers Clear of Dollar Talk. Reuters, June 26; Euronews (2009). BRIC Wants More Influence. Archived from the original on June 21; Reuters (2012). Russia Says BRICS Eye Joint Anti-Crisis Fund. June 21; Lewis, J., and Trevisani, P. (2014). Brics Agree to Base Development Bank in Shanghai. Wall Street Journal, July 15.
PRACTICAL SKILL
Leveraging international resources
Your team has been asked to provide a report for your corporation on the economic viability of placing a factory for your company in another country, which would be the shipping point for the rest of the continent. The comparison is between Argentina and Brazil. While others were assigned to look at possible cities in those countries, you were asked to provide a macroeconomic picture of the two countries. Since you want to use original research rather than secondary sources, you will be using WTO, IMF, and WB data. For example, in the case of Brazil, you would want to examine the annual WTO Country Profile and 2013 Trade Policy Review (these are only done every five to eight years), the IMF annual Staff Report for the Article IV Consultation, and a selection of the many economic forecasts and reports that the World Bank supplies.
If asked to do this as an exercise, provide a description of the types of macro-level data to be found using the information in these three important IGOs. How would you structure such a report? What other sources (IGOs, NGOs, or other) might you need for a country-level background analysis of these two countries?
SUMMARY AND CONCLUSION
1. Not only does business work in the context of national, state, and local governments, it also works through global governance structures, which is the voluntary integration of political and economic structures via treaties. Those structures are provided by international governmental organizations (IGOs) whose members are composed of sovereign states. Most IGOs have a substantial permanent secretariat, a legislative body where all members will occasionally convene, and often have branch offices around the world. IGOs operate in multiple areas. While several examples of (non-business) IGOs related to diplomatic, political grievances, and environmental purposes were mentioned, a major focus of this chapter was three (business-related) IGOs that concentrated our attentions on trade, finance, and economic well-being.
2. The current world order of trade management was started with the General Agreement on Tariffs and Trade (GATT) in 1947. It was composed of a series of trade rounds whose goal was to reach a number of member-wide agreements about increasingly low tariff levels. The World Trade Organization replaced and subsumed GATT in 1995, when it became a permanent organization and assumed a binding trade dispute settlement function. Today, world tariffs are at an all-time low and trade is at an all-time high.
3. The International Monetary Fund (IMF) functions as the central bank to the world. Some of the functions of the IMF include tracking global economic trends and performance, alerting its member countries when it sees problems on the horizon, providing a forum for policy dialogue, and providing loan programs for countries experiencing economic distress.
4. The World Bank is not a conventional or central bank: it is a global development bank. The World Bank uses its financial resources and expertise to partner with developing countries to alleviate poverty, increase economic growth, and improve the overall quality of life. It was initially known as the International Bank of Reconstruction and Development (IBRD). The World Bank itself is divided into the International Bank of Reconstruction and Development (IBRD), which focuses on middle-range countries, and the International Development Association (IDA), which focuses on the least developed countries.
5. Finally, the chapter reviews 12 factors commonly associated with growth, and the associated roles of governments and governance structures in facilitating those growth factors in partnership with business. The classically identified macro- factors are labor, land, and competition. However, our discussion divides those more narrowly (as is common in contemporary economics) into low- and high- productivity labor, private and public capital, monetary trustworthiness, usable land, availability of resources, multiple sources of competition, and innovation. Infrastructure, a sufficient consumer base, the breadth of the consumer base, and climate adaptation were discussed as important additional factors. Government has at least a small role in all factors, but a large role in many, such as monetary trustworthiness and guaranteeing a fair playing field for true competition to occur.
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STUDY QUESTIONS
1. What is global governance? How is it different from nation-state governance?
2. What is an intergovernmental organization (IGO)? What are the major purposes of IGOs?
3. Discuss the differences between the International Monetary Fund and the World Bank.
4. International trade and finance institutions have clearly provided many benefits to the global economy. Nonetheless, they have critics too, some of whom are very fierce about aspects of what these organizations do and stand for. Discuss some of the criticisms. Be sure to provide examples.
5. Discuss fully, with examples, the major factors affecting growth and government’s roles.
6. What do you think are the top five challenges facing the global governance in the twenty-first century? Discuss fully with examples.
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KEY TERMS
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