Business is the victim

Diane Coyle
24 February 2003

Business is the reason more and more of us are leading longer and healthier lives. It is the source of the prosperity that has improved our quality of life so much every generation for the past two hundred years. It is companies and the people working for them, not governments or campaign groups, which generate wealth and innovate.

Companies, even the biggest multinationals, are part of our society so corporate values are vitally important. We have certainly gone through a period when the behaviour of some corporate executives diverged too far from what most of us would think is acceptable, and that has triggered a healthy period of reflection about how to improve corporate governance.

But that process will only be fruitful if it is built on facts – and not the kinds of myths and inaccuracies repeated by Friends of the Earth (FoE).

For example, just over half of the world’s population lives on less than $2 a day. That is 2.8 billion people too many in poverty, but 34 per cent fewer than claimed by FoE.

Another error: while big companies are big and small countries are small, ‘more than half’ the top 100 world economies are not multinational corporations. That misleading claim makes the mistake of comparing the market value of a company to the GDP of a country. It is like comparing the capital value of my house to your annual salary and concluding from these data alone that I am vastly richer than you.

In fact, there are about 1000 companies with annual incomes of over $1bn – and only 21 countries with annual national income of $1bn or less. Wal Mart, the biggest corporation in the world by revenue, had global sales of over $200bn last year, making it bigger than economies such as New Zealand or the Czech Republic but smaller than Belgium or Turkey.

One can only hope that FoE’s claims about the environment are more accurate than its economic claims. For the arguments it puts forward about the power of large businesses are a farrago of nonsense.

Take the proposition that the power of corporations is growing. In what ways could we measure or assess this growth? All the evidence I know of suggests corporate might is diminishing, not growing.

For example, the share of the private sector in almost all economies around the world is shrinking, while the size of government is growing. (The main exceptions are the former communist countries. In the US the government’s share in the economy has been stable.)

The tax revenues paid by corporations are almost everywhere rising, not falling. There is no ‘race to the bottom’ as countries supposedly compete for multinational investment by offering larger and larger tax breaks.

The number and extent of regulations imposed on companies by governments is not declining. There is no evidence of competitive deregulation by developing countries. In developed countries, the regulatory demands on companies are clearly increasing – as they should be in some areas such as accountancy requirements. International coordination by regulators also means companies are facing higher standards.

The globalisation of trade and investment means they are facing tougher competition from each other too. There are more companies operating in almost every line of business. McDonalds is closing branches – either the curse of Naomi Klein has worked, or its customers have a wider choice of alternatives now and are opting for new culinary experiences.

Global rules are already controlling corporate behaviour more effectively than in the past. And institutions including the World Trade Organisation and the Organisation for Economic Cooperation and Development – both of which have seen FoE protestors outside their meetings – are enhancing the development of global corporate governance.

Quite right too. We should expect the highest standards of behaviour from all organisations, including private corporations. There have been some recent examples of unacceptable corporate behaviour, Enron and WorldCom for example. The record of the American authorities indicates that any executives found to have defrauded their employees, pensioners and shareholders will go to jail, as their counterparts in the late 1980s discovered. Let’s hope they do this time too.

Of course, we rightly expect more from powerful executives than obedience to the letter of the law. Like anybody in a position of leadership and influence, they ought to abide by the highest moral standards, and be accountable for their actions in the court of democratic opinion as well as a court of law.

In fact, there are strict requirements on any company incorporated in any developed country – and therefore on almost all multinationals – to publish detailed information about their activities. The amount of information they publish is increasing steadily.

It will only be a matter of time before they are even publishing annual environmental reports. I predict the number of the top 350 UK companies doing so will jump between the 2001 and 2002 annual reporting round. The Association of British Insurers recently reported that the great majority of the top 100 companies are already doing so.

They are doing this not because FoE thinks they should, but because it is what their customers, shareholders and employees want. For corporations are collective organisations that reflect the values of the societies in which they operate.

Globalisation has turned the behaviour of multinationals into such a hot issue because values and standards differ widely between societies. We expect some of our standards to be applied universally, including for example not using slave labour or exploiting children. Environmental standards fall into the universal category too, even if only for the selfish reason that environmental problems in one country may affect us all.

In other areas, companies behave differently in different countries and rightly so. Pay and conditions ought to reflect local norms – most multinationals in practice offer a better deal than local employers and the jobs they create are highly prized. But if pay and benefits were the same as in the UK or US those jobs would never have been created.

More important, the investment in new equipment and buildings and the transfer of know-how would never have taken place. Even in an apparently low-tech industry such as tourism, multinational investment is vital in transferring knowledge – how to operate a reservations system, what arrangements for cleaning and catering are most efficient, what standards are expected by visitors and so on. There is no industry in the global economy that could easily be built up from scratch without links to overseas markets and investors.

There is also clear evidence that countries which succeed in attracting multinational investment see living standards rise, sometimes dramatically, because of the economic growth it stimulates. For example, in Indonesia real living standards rose 2.5% a year from 1990–2000, despite the Asian financial crisis at the end of the decade; it was over 4% a year from 1980–2000. Even the lower growth rate of the 1990s turned a £1000 a year income to £1280 a year, in inflation-adjusted terms, in ten years.

The 20 years or so of this modern era of globalisation have brought – contrary to myth – the fastest decline in poverty in history. Income inequality has stabilised or even narrowed since 1980; although currently at an extreme level, the big increase in inequality actually occurred from about 1870–1920 in the last era of globalisation.

Although most of Africa has stagnated, many other developing countries have enjoyed two decades of rapid growth which has benefited their poor as well as their rich, created a middle class, and put them on the path to catching up living standards in the rich countries.

Multinationals have played an essential role in the success of globalisation. And it is a success despite the concerns we all have – not just campaigners – about widespread poverty, injustice, conflict and abuses of power.

Demonising all multinationals because of unacceptable behaviour by a few could prompt governments to act in ways that reduce investment and growth – and that would be destructive. Businesses, operating on the profit motive, make economies grow. Growth is what reduces poverty.

Growth in poor countries may harm the environment (although the negative relationship between growth and environmental indicators in some low income countries does not carry over to rich countries which have a cleaner environment than poor ones). Economic activity – all human activity – has an environmental impact.

It is a serious problem and one we have only recently started to address – but it is absurdly simplistic to say it is caused by ‘destructive’ multinationals. It could just as accurately be described as being caused by ‘greedy’ consumers, although that would play rather less well in anti-globalisation campaigns.

The trouble is that we humans – and especially the poorer people amongst us – do want more. FoE demands the ‘right’ to a clean environment. Fine, except that it conflicts with the ‘right’ to a comfortable standard of living. This is not a trade-off that stricter regulation of multinationals can possibly mediate. (It is not even a fixed trade-off; our understanding of both ‘clean’ and ‘comfortable’ have changed over time, and so have the technological possibilities.)

FoE has found an easy and popular target. Let’s just hope governments have the sense to remember, even as they insist on properly high standards of corporate behaviour, that we all need businesses – big, thriving and, yes, highly profitable ones. For it is businesses that deliver the economic growth which has, in less than a quarter of a century, slashed poverty, increased life expectancy, cut mortality rates, and transformed our quality of life for the better.

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