Special Reports
 
 


LIBERAL DEMOCRACIES:

ARE THEY AT THE MERCY OF MULTINATIONAL CORPORATIONS?

by

PETER CRISELL

________________
  

   

"The twentieth century has been characterised by three developments of great political importance: the growth of democracy, the growth of corporate power, and the growth of corporate propaganda as a means of protecting corporate power against democracy." (1)

The danger of corporate power
President Franklin D. Roosevelt once said: "The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than the democratic state itself. That in its essence is fascism: ownership of government by an individual, by a group or any controlling private power." In a previous article, it was argued that the private power of multinational corporations (MNCs) undermines democracy when these companies do not pay their taxes. The use of tax havens, we argued, contributes to inequality and poverty, distorts markets, undermines financial and other regulation, and curbs economic growth. Furthermore, such activities accelerate capital flight from the poor to the rich countries, and promote corruption and crime around the world (2).

In this article we examine whether corporate power itself – global and ubiquitous – is a threat to democratic government in other respects. Hitherto the creed of free market capitalism has sought to give legitimacy to multinational corporate power. Now that the global economy lies in tatters, it would seem only right to consider whether this ideology is now completely discredited and whether MNCs can be subject to democratic control.

The global reach of multinational corporations
There is nothing new about MNCs i.e. businesses that have facilities and assets in countries other than their own. They have been around since the beginning of overseas trade. They date back at least from the 17th and 18th centuries during the period of colonisation. Multinational businesses played a large part in the commercial and industrial development of Asia, South America, and Africa. By the beginning of the 20th century, improved communications linked world markets more closely, and in the aftermath of World War Two the world economy had become even more closely bound. What we now call ‘globalisation’ describes the spread and connectedness of production, communication and technologies across the world as well as the complexity and size of the networks involved, and the sheer volume of trade, interaction and risk

This interconnectedness has placed limits on the power of national governments to direct and influence their economies. Shifts in economic activity in countries like the USA and China are felt in countries all round the world. Financial markets, technology and, to some extent, manufacturing and services have become internationalised. These - together with institutions such as the World Bank, the European Union and the European Central Bank - all place further constraints and obligations on individual nation states.

Opinions differ as to whether globalisation is a blessing to be encouraged or a curse to be resisted – or indeed, whether its spread has been exaggerated. The official policies of the International Monetary Fund (IMF) and the World Bank, in which the wealthier nations are well represented, is that the creation of a global free market for goods and services is a desirable objective. But to its opponents, globalisation enriches the rich and impoverishes the poor. Even its advocates have some reservations. One commentator has argued that there is a very serious case not against 'globalisation'... “but against the particular version of it imposed by the world's financial elites. The brand currently ascendant needlessly widens gaps of wealth and poverty, erodes democracy, seeds instability, and fails even its own test of maximizing sustainable economic growth”.(3)

Globalisation and the multinationals
As the world becomes more globalised, MNCs have grown in number and visibility. Access to local markets is gained by merger, direct acquisition or by creating joint ventures with firms already in the market. MNCs may also set up or acquire local businesses operating in the same markets as their own. Of more than 40,000 MNCs, most have headquarters in the USA, Japan or Western Europe. There are car manufacturers like Ford, Toyota and Volkswagen. Ford, for example, has manufacturing operations in six continents. Shell, BP and Exxon Mobil are among the multinational oil companies. Canon, Hewlett Packard, Dell, Microsoft are technology companies. Coca Cola and McDonalds are food and drink companies. Many have budgets larger than many of the smaller nation states. 51 of the 100 largest economies are corporations. According to the World Trade Organisation (WTO), the top 500 MNCs account for 70 per cent of worldwide trade.(4) This gives them enormous political power and influence at every level - locally, nationally and globally.

The advantages to MNCs of expanding their activities into different countries are manifold: transport, distribution and labour costs may be lower, trade barriers can be avoided and supplies of raw materials secured. Their size allows them to benefit from economies of scale and to lower their costs. The large profits generated can be used for high risk research and development. Manufacturers whose brands become widely known can supply goods and services of minimum standard, which is reassuring for consumers.

Host countries: winners or losers?
It is said that MNCs bring inward investment to their host countries which in turn benefits the local and national economy. For example, local labour is employed in building plant and supplying equipment. Industries, such as component suppliers, are established and the stimulus to the local economy may attract other businesses to the area. It is also claimed that MNCs bring to the host country new ideas and techniques, training and skills, and in so doing improve local productivity and efficiency. They also pay taxes to the host country - or at least some of them do.(2) MNCs may not only provide production and distribution facilities but may also invest in infrastructure – such as road, rail, port and communications facilities – to the benefit of the host country.

In reality, the picture is not always so rosy. The first and overriding duty of MNCs is to their shareholders. Benefits to the host country are a secondary consideration and will be withheld or curtailed if they compromise that duty. For example, it may be more profitable to import skilled foreign workers in preference to employing local labour. MNCs may also ‘outsource offshore’ by using cheap foreign labour to manufacture goods or provide services which are then sold back to the domestic market.

Where the industry is more capital than labour intensive, the benefits to the local economy may be small. Where local labour is employed, the workers are often paid slave wages. It is often alleged that MNCs have no loyalty to their host country. Some companies may switch operations elsewhere when tax benefits or government grants run out. Profits may be repatriated rather than stay in the host country. MNCs sometimes use non-renewable resources and cause environmental damage and pollution where local regulation is lax or inadequately enforced. Their size and power can also lead to the exploitation of weak and corrupt governments. Their market dominance may make it difficult for small local businesses to survive. Where they obtain monopoly power, their prices may be high and their profits excessive.

The footloose, delocalised nature of MNCs enables them play off one country against another by, for example, threatening to withhold or move investment. Trade unions claim that in economically developed countries MNCs can avoid negotiating with them by moving their jobs to developing countries where labour costs are low. Meanwhile trade unions in host countries are usually compelled to negotiate with the national subsidiary of the company in their country, on terms based on domestic wage standards, which may be well below those paid in the parent company's country. (5)

The influence of MNCs on national governments
All national governments are susceptible to lobbying by multinational business. It should be emphasised that lobbying so as to influence political decisions is a legitimate and necessary part of the democratic process. Individuals and organizations want to influence decisions that may affect them, those around them, and their environment. Government in turn needs advice and expertise in formulating policy or framing legislation. In the UK, for example, corporate employees as well as industry-wide lobby groups –such as the British Retail Consortium – may serve on advisory committees with politicians and other interested parties like NGOs.(6)

MNCs lobby politicians and governments directly or by using private lobbying companies (known euphemistically in the UK as ‘public affairs’ companies, where the industry is worth £1.9 billion and employs 14, 000 people). For lobbying to be successful, access by MNCs to government ministers and politicians is all important. The lobbying power of big business and the furtiveness with which it is exercised give cause for suspicion. The sheer size of the lobbying industry and the commercial might of MNCs, operating in a global market, suggest to many that they are concerned only with their own interests and the interests of their shareholders. The wider public interest and of the democratic institutions that are supposed to represent them are thereby sidelined.

This fear of a ‘corporate takeover’ is well described by George Monbiot who claims companies are “seizing powers previously invested in government and using them to distort public life to suit their own needs. The provision of hospitals, roads and prisons in Britain has been deliberately tailored to meet corporate demands rather than public needs. Urban regeneration programmes have been subverted to meet the needs of private companies, and planning permission is offered for sale to the highest bidder”. (7).

The suspicion that the public interest is being usurped by big business does not extend to other lobbying groups who, for example, campaign on behalf of child poverty or animal welfare. The main reason for the different attitude is that the lobbying process by MNCs is far from transparent in many countries. Some lobbying organisations attempt to disguise their true identities by setting up front organisations that purport to be independent policy think tanks. Many of them promote right wing views in support of free markets, privatisation, tax cuts etc. but in practice their agenda is to influence public policy without revealing their hand. Many of them are remarkably coy about revealing the source of their funding. In the UK the current scandal involving the resignation of cabinet minister, Liam Fox, illustrates how the transparency of information demanded of the public sector meets the unregulated opacity of the privately funded lobby group. Bribery in its crudest form i.e. cash in a brown envelope, plays its part but smoother operators prefer subtler methods like making political party or philanthropic donations. It is now commonplace for corporations to fund, part-fund, sponsor, or donate toward the cost of 'public' projects such as education, thus ensuring that decisions in these public domain are made in the interests of private businesses.

Big business not only rubs shoulders with government but can become part of it. Directors of companies are often seconded to work for the civil service. Once installed, they may be involved in government procurement roles or serve on advisory committees and are thus well placed to communicate corporate needs directly to government. The traffic is two-way. Retired politicians and senior civil servants often pursue a second career as advisers or consultants to private industry. The prospect of such preferment doubtless makes them sensitive to corporate needs while they are still in office. Small wonder that this ‘revolving door’ policy is regarded with suspicion by citizens who are not part of the charmed circle. Leaked communications between Shell and the US embassy showed Shell boasting that the company “had seconded employees to every relevant department” and so knew “everything that was being done in those ministries”. (8). The excessive corporate influence over government is highlighted in times of war. For example, it was alleged that the decision by the US and its allies to invade Iraq in 2003, had much to do with the interests of international oil companies and other businesses seeking lucrative contracts in post-war Iraq.

Media MNCs exert a special power over government by shaping public opinion and influencing government policy. The continuing saga of Rupert Murdoch’s News International and News Corporation has exposed the hold such organisation exert over politicians. Governments who submit to the interests of such powerful media MNCs can expect to receive the support of their TV networks, newspapers and magazines when they seek re-election and while they hold office. The mutual embrace between corporations and politicians has become so routine and well established that few of them seem aware there is a problem, much less a subversion of democracy itself.

Free market ideology and MNCs
The doctrines of neoliberalism have underpinned the activities of MNCs and enabled them to flourish but after thirty years of this form of turbo-charged capitalism the world economy is on its knees. It has held sway since the 1980s and serves many MNCs admirably. Its underlying principle is that people should be left alone to trade in a free market and sell their products at whatever price they can fetch. Left to their own devices, participants in the market create wealth which benefits both them and the wider society. A corollary of this vision of the world is that government intervention in the free market undermines the efficiency of the markets. Governments, it is said, lack the knowledge or incentives that drive market participants and shouldn’t meddle or interfere. Therefore, governments should not own businesses and banks which should be in private ownership. Industry and finance should be left to their own unregulated devices. Just as state intervention undermines market efficiency, welfare benefits and high taxes do the same. Likewise, governments should not be involved in international trade and investment, other than to promote their liberalisation.

The free marketeers acknowledge that such policies may cause temporary social pain – such as increased inequality – but since markets are inherently self-correcting, the economy will ultimately become more efficient and wealthier, which is to everyone’s benefit. (Free marketeers, like the Communists of old, have no difficulty in sacrificing us all for a better tomorrow). Oddly, ‘self-correction’ didn’t occur in the financial crisis of 2008 and it was the intervention of government, the supposed arch enemy of free market capitalism, that rescued the financial system from total collapse.

It is beyond the scope of this article to give detailed critique of the free market ideology – the very term ‘free market’ is itself pure fantasy – but what is clear is that after thirty years of this prevailing orthodoxy, the global rate of economic growth has slowed and the inequality between rich and poor has grown to grotesque levels. Low tax pro-rich policies have made the rich hugely richer. Wealth has not measurably trickled down to the poor. In the UK, for example, executive pay continues to rise, while seven out of ten employees have had their pay frozen or cut. While corporate profits rise in the USA, pay increases have been halted, companies have frozen pay, cut hours and shed labour. During the glory years pre-2008, the rich minority unleashed a torrent of footloose global capital, much of it ending up in London and New York thereby creating the ‘bubble economies’ in housing, property and business that brought down the global economy. The huge rewards in the financial world have generated perverse and unproductive business incentives. Banks pumped massive supplies of credit into takeovers, private equity deals and other activities. This delivered more profit by the transfer of existing wealth rather than the creation of new wealth, businesses and jobs.

The concentration of wealth leads to concentrations of economic power whose institutions are well placed, as we have seen, to lobby for lower regulation, lower taxes, and inaction on tax havens. This lack of constraint on finance serves only to prolong the financial crisis. While the falling wages of the majority suppress demand, MNCs are sitting on massive volumes of idle cash, with bank assets larger now than before the crash. In mid-2010, Vodaphone had a cash surplus of $14.3 billion, BP $12.8 billion and AstraZeneca $10 billion. The banks are also sitting on billions and, to add insult to injury, are on a lending strike to small businesses.

Such a dysfunctional and unbalanced situation is a perfect recipe for social instability. The mid-October demonstrations around the world in protest at corporate greed signify a growing awareness that unregulated market capitalism has delivered the very opposite of what it promised. As economist Ha-Joon Chang puts it: “The problems were bad enough in the rich countries, but they were even more serious for the developing world. Living standards in Sub-Saharan Africa have stagnated for the last three decades, while Latin America has seen its per capita growth rate fall by two-thirds during the period”.(9) Developing countries that did grow, such as China and India, have done so by partial liberalisation and have refused to introduce full-blown free-market policies.

If capitalism is to be reformed after its unrestrained excesses, better regulation of MNCs is an essential part of the process. MNCs must be subject to greater democratic control, so that the wider public interest is not as flagrantly ignored as hitherto. But is democratic control possible?

MNCs and the democratic deficit
It has been declared that “we have managed to globalize markets in goods, labor, currencies and information, without globalizing the civic and democratic institutions that have historically comprised the free market's indispensable context”.(10)

This democratic deficit is more serious as long as free market capitalism continues to benefit the few at the expense of the many. The neo-liberal doctrine that the wider community benefits where an unregulated market thrives has proved to be pernicious nonsense. An instance of footloose, unaccountable capitalism is the company takeover. The fact that takeovers can take place regardless of the public interest shows how the ‘shareholder value’ approach prevails over all other considerations. In the UK, hostile takeovers can be made by speculators or transient institutional investors without any government control, even though such intervention would reduce the probability of financial crises.

In a comment on a recent takeover of a British firm by a US corporate giant, Professor Prem Sikka says: “There is an increasing disparity between the people's need for jobs, economic stability, quality of life and human rights, and corporate obsession with private profits. This harsh lesson is once again evident in the aftermath of the takeover of Cadbury by Kraft. Workers had no vote or say in the take-over of Cadbury, and soon afterwards Kraft announced factory closures. This may make profits for shareholders, but does nothing for workers or local communities”. (11)

Even if a world economic slump moves opinion away from neo-liberalism to a more benign form of capitalism, there is little ground for optimism that the politicians of nation states will hold MNCs to account. Economic clout, lobbying power and penetration of government itself ensures that the commercial interests of MNCs will remain central to domestic and foreign policy-making. Legislators, available for hire through consultancies, are ready to do their bidding. This does not bode well for the long term interests of a country and its economy.

Supranational institutions and the power of interest groups
It is often suggested that governments working together in supranational institutions, such as the EU, are a more effective counterweight to MNCs and are less likely to be outmanoeuvred by them. This may be so but isn’t always the case. For example in 2006 the EU imposed anti-dumping duties on the import of leather shoes from China and Vietnam. Manufacturer, Yue Yuen, the world’s largest shoe manufacturer, evaded the restriction by raising its production at factories in Indonesia and exporting them from there. Nevertheless, co-operation between nation states in international organisations and treaty bodies is crucial in regulating international business and finance. In fact many issues, such as environmental and conservation problems, can only be addressed at that level. If supranational bodies do not intervene, democracy and human rights will be constantly imperilled.

Away from the world of international political institutions, there is perhaps more reason for optimism. Global communication means that through the various media, NGOs, trade unions, consumer groups, journalists, bloggers and activists can hold abusive MNCs to account.(12) Campaigns can quickly become international as shown by the recent anti-capitalist demonstrations that began in New York but spread to cities around the world. This means that MNCs have to work harder to protect their reputations and their ‘brands’ because they are watched more closely. This may well account for the rise of ‘Corporate Social Responsibility’ (CSR), a fashionable piece of corporate jargon, which purports to be a form of business self-regulation. Under CSR a company seeks to monitor and ensure its active compliance with the spirit of the law, ethical standards, and international norms. The European Commission has just published a new document on CSR. It declares that its “new strategy on corporate social responsibility (CSR), part of a package of measures on responsible business, aims to help enterprises achieve their full potential in terms of creating wealth, jobs and innovative solutions to the many challenges facing Europe's society. It sets out how enterprises can benefit from CSR as well as contributing to society as a whole by taking greater steps to meet their social responsibility”. (13)

MNCs and their legal liabilities
Those MNCs less squeamish about their obligations may find themselves open to litigation, initiated by individuals or groups. Corporate abuse has been particularly rampant in the extractive and chemical industries. In developing countries there is often great difficulty in accessing justice locally for cost or other reasons. This may occur if local laws are not effectively enforced or where the state suppresses opposition to MNC operations. However, there have been successes. In the UK in 2002, human rights litigation was pursued against Cape plc by 7,500 South Africans who worked, often as young children, unprotected from asbestos fibres in Cape's mines. In 2009, legal action was also brought by 30,000 Ivory Coast citizens against Trafigura for harm arising from toxic waste dumping.

As well as providing redress for victims, the prospect of financial and reputational cost may sometimes deter an MNC against corporate bad practice. However, most law is nationally based and there is no body of international law that specifically holds them to account and no international forum where they can be brought to justice. This means that they usually get away with it. Violations reported to human rights organisations, trade unions or environmental organisations do not result in legal redress or sanctions. For most, the law is inaccessible and unenforceable. If potential litigants bring pressure to bear on a deviant MNC in its home state, it can easily move its operations elsewhere.

Future reforms
If international law is developed to hold MNCs to account, their undemocratic corporate governance should be re-examined– particularly those of the USA and UK – where company law and practice favour shareholders and senior executives at the expense of employees and the other stakeholders. Such structures do nothing to promote good conduct among MNCs and show ‘corporate social responsibility’ to be a public relations facade. Company directors should be elected by all stakeholders – including employees, local communities and customers.

Corporate accounting law and practices need to reflect wider social issues than profit and loss alone. Human rights and environmental issues are treated as ‘externalities’ and cold economic logic always prevails. In CSR reports, any references to these externalities are entirely voluntary and they do not disclose how, for example, human rights feature in their investment decisions. The UN Human Rights Council has developed a framework document on this subject. It states that corporations have a responsibility to address human rights and the state has a duty to protect against human rights abuses by third parties, including business. Both should provide access to remedies for any violations. As well as assessing financial and business risks, corporations should carry out a process of due diligence for their projects so that companies not only comply with national laws but manage and avoid the risk of human rights harm. Where harm occurs, corporations should provide means by which victims can seek a remedy, without prejudicing available legal channels. The UN framework document also recommends that member states should “foster a corporate culture, respectful of human rights at home and abroad”. (14)

Unfortunately small nation states are often unable to call a giant MNC to account, especially when they have signed their rights away in a ‘stabilisation agreement’ with the company, which constrains them from protecting and enhancing human rights.

Such is the weight of vested interests that it may be impossible to strike a proper balance between the power of MNCs and the human rights of those affected by their activities. If the current economic climate leads to a re-examination of neoliberalism and its more noxious myths, the balance could be restored. The hegemony of corporate power needs to be challenged and, for the sake of us all, held to democratic account.

References
1. Alex Carey in Andrew Lohrey (ed.) Taking the Risk out of Democracy, (University of Illinois Press, 1997), p.18.

2. http://www.newnations.com/specialreports/Taxhavens.html

3. Kuttner, R. (2002) 'Globalization and poverty', The American Prospect Online, http://www.prospect.org/print/V13/1/global-intro.html

4. http://www.globalissues.org/article/59/corporate-power-facts-and-stats

5. http://www.eurofound.europa.eu/eiro/studies/tn0904049s/tn0904049s_7.htm

6. http://www.parliament.uk/business/committees/committees-archive/public-administration-select-committee/pasc0809pn6/

7. Monbiot, G. (2000) Captive State: The Corporate Takeover of Britain, London: Pan.

8.http://www.guardian.co.uk/business/2010/dec/08/wikileaks-cables-shell-nigeria-spying

9. Ha-Joon Chang. 23 Things They Don’t Tell You About Capitalism. Penguin.

10. Barber, B. (2000). ‘Can Democracy Survive Globalization?’. Government and Opposition Journal of Comparative Politics Issue 3, 275–301.

11. http://www.guardian.co.uk/commentisfree/2010/feb/17/reining-in-corporate-monster

12. the following are examples of many websites which scrutinise corporate activity: http://www.corpwatch.org/index.php http://www.christianaid.org.uk/resources/corporate_reports/corporate_reports.aspx
http://www.unlockdemocracy.org.uk/blog/entry/challenging-corporate-power

13. http://ec.europa.eu/enterprise/policies/sustainable-business/corporate-social-responsibility/index_en.htm

14. http://www.un.org/en/rights/