globalizaTIOn AFTER THE FINANCIAL CRISIS JORDI CANALS General Director of the IESE (University of Navarra), Professor of Economics and Business Administration at the IESE, and Doctor of Economic Sciences and Business Administration (University of Barcelona), Jordi Canals has received Honorary Masters and Doctoral Prizes. He was a Post-Doctoral Research Fellow at Harvard University, Visiting Scholar at the World Bank and International Monetary Fund, and Guest Scholar at The Brookings Institution (Washington, D.C.). As well as a Fulbright Scholar and founding member of the European Shadow Financial Regulatory Committee, member of the Commission to Foster Market Transparency and Security (Aldama Commission), and board member of the European Institute for Advanced Studies in Management (Brussels), the Graduate Management Admission Council (GMAC), the European Corporate Governance Institute, and EQUIS (European accreditation agency). He has published a variety of texts on economics, finance, corporate government, and business administration, including: En busca del equilibrio. Consejos de Administración y alta dirección en el gobierno de la empresa (Pearson, 2008), Managing Corporate Growth (Oxford University Press, 2000), Universal Banking: Theoretical Perspectives and International Comparisons (Oxford University Press, 1997), La internacionalización de la empresa (McGraw-Hill, 1994), and Competitive Strategies in European Banking (Oxford University Press, 1993).

080-095_PAL.indd 80 19/11/09 19:31:08 INtRODUCtION that the collapse of the financial system could Historians speak undermine them. of the first In the Richard T. Ely Lecture, “Globalization and On May 15, 2009, Martin Wolf, Associate its Challenges,” given at the annual meeting of Editor and Chief Economics Commentator of The globalization, the American Economic Association on January Financial Times wrote an article in that periodi- which took 3, 2003, Stanley Fischer ended his defense of cal called “Seeds of its own destruction (Wolf place between globalization with the following words: “The pro- 2009).” Wolf reflected upon the 2007 financial 1870 and 1914, market pro-globalization approach is the worst crisis and its possible effects on market econo- economic policy, except for all the others that mies, traditional economic policies and the glo- and the second have been tried (Fischer 2003).” balization process. A few years later, after writing globalization, Globalization as a social and economic phe- one of the most solid and well-known books in which stretches nomenon is nothing new. Historians speak of defense of globalization (Wolf 2004), Wolf wrote from the end of the first globalization, which took place between in The Financial Times: “Another ideological god 1870 and 1914, and the second globalization, has failed. The assumptions that ruled policy the Second World which stretches from the end of the Second and politics over three decades suddenly look War to the present. World War to the present (Williamson 2002). as outdated as revolutionary socialism.… Yet the The first globalization failed when war broke out combination of a financial collapse with a huge in Europe in 1914. In light of the enthusiasm recession, if not something worse, will surely shown for the globalization process, Keynes change the world. The legitimacy of the market (1919, 9–10) turned an admiring eye on the will weaken…. Globalisation itself may found- growing economic integration before the out- er.... The integration of the global economy on break of the Great War, considering it positive which almost everybody now depends might be and natural. He pointed out that “a person of reversed. Globalisation is a choice.” that period considered this state of the world, Wolf’s reflections are an interesting contrast an increasingly integrated economy, something to Keynes’s observations from 1919, and to normal, certain and permanent except in its the favorable interpretation of globalization of- possibility to improve. And any deviation from fered, among others, by Wolf himself (2004) and this tendency seemed aberrant, scandalous, and Baghwati (2004). The first globalization failed avoidable. The projects and politics of militarism because of a set of erroneous policies that led Eu- and imperialism, of racial or cultural rivalries, ropean nations into two world wars. The second of monopolies, restrictions, and exclusions that globalization, however, runs the risk of failing played the role of serpents in paradise were no due to the collapse of a deficiently regulated in- more than distractions in the newspapers and ternational financial system that has developed they seemed to have no influence whatsoever on the basis of free market, deregulation, and on ordinary economic and social life, whose in- free capital flow between countries. Globalization stitutionalization seemed complete in practice.” does not depend solely on the financial system In other words, Keynes looked admiringly on but in a modern economy the latter acts as a ner- the normalcy that surrounded the process of vous system, so a dysfunctional financial system international economic integration. Following can lead to the collapse of much of the world’s the First World War, however, he was surprised economy, as we saw in the summer of 2007. by the scant attention citizens in general and In the present article, we wish to reflect on a politicians in particular had paid in previous central question: will the financial crisis stop the years to the possible effects that certain emerg- globalization process, or at least change its rate? ing social phenomena could have on globaliza- In other words, can the globalization process sur- tion, including the possibility of stopping that vive the consequences of the current financial process altogether. crisis? Before we pose this question, let us begin Nowadays, almost a century after Keynes’s with an earlier one: is globalization the principle observations, we could ask ourselves why we or indirect cause of the financial crisis? were unable to foresee the impact of the inter- Before we go any farther, we should point national financial unbalance and the growth out that economic globalization is only part of of family debt, and why we were unable to see the broader social phenomenon of globaliza- that the structures on which the globalization tion. By economic globalization we mean the process—especially the financial globalization pro- growing international integration of countries cess—has been growing and accelerating over through commercial flows, capital flows, flows the last two decades have such weak foundations of direct investment, technology transfers, and

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080-095_PAL.indd 81 20/11/09 20:04:35 the movement of workers. Globalization also has gage Investment Co. announced its incapacity social, human, cultural, and political dimen- to meet its financial obligations with regard to sions beyond the strictly economical ones. In that funds guaranteed by “sub-prime” mortgages. A sense, from a sociological perspective, Roberson week later, it declared bankruptcy. The event (1992, 8) explains that globalization “refers both was preceded in July 2007 by various warn- to the compression of the world and the intensifi- ings issued by credit rating agencies about the cation of consciousness of the world as a whole.” growing risk of financial assets guaranteed by Guillén (2001, 236) defines “globalization as a mortgage instruments. In late July some agen- process leading to greater interdependence and cies lowered the ratings of “sub-prime” mort- mutual awareness (reflexivity) among economic, gage bonds. The collapse of stock exchanges political, and social units in the world, and among and capital markets was immediate. Liquidity actors in general.” The weight of economic vari- suddenly became the financial system’s most ables on globalization is considerable, but it is coveted value. And yet, what seemed to be a not the only one. In fact, protectionist policies problem originating in a very specific segment and deficient international financial coordination of the United States’ financial markets imme- following the First World War are what halted the diately became a global problem. process of economic globalization. It is also im- The United States’ strong foreign investment portant to note that for the international economy in recent years, fostered by economic growth, and for business, globalization is not a finished good investment opportunities, and a flexible process, but rather, a developing one. When some legal regime, was directly driven by countries companies commit the error of thinking in terms with an enormous balance of payments surplus, of a completely globalized world, the number of such as Germany and China. This increased the mistaken decisions multiplies.1 exposure of international investors to the risks It is interesting to observe that what is slow- of the US market. The imbalances were fed by ing globalization today is the financial crisis. the United States’ voracity, its shrinking inter- Protectionism may also contribute to its decel- nal saving rate was financed with foreign capital eration, but it is worth remembering that the that led to an enormous current accounts deficit. coordination of economic policies can contrib- International financial imbalances cushioned by ute to the recovery of the world economy and a highly global financial system transformed a to insuring that economic integration does not US financial crisis into a global one. stop. Moreover, it is important to emphasize that Consequently, financial integration among economic globalization should not be consid- countries facilitated the rapid international trans- ered a permanent state, but rather a fluid one, mission of the crisis.2 The United States’ finan- whose rate can accelerate or decelerate. There- cial necessities have driven financial innovation, fore, when we refer to the effects of the crisis on capturing capital from all over the world. In par- economic globalization, we must limit ourselves ticular, numerous financial entities from other to reflecting on possible changes in the rate or countries that acquired US financial assets linked manner in which this process occurs. to sub-prime mortgages with the expectation of The present article is structured as follows: high profits have had to face an important drop in in the next section we will make some notes their market value as the effects of the crisis un- on the impact of globalization on the triggering fold. This obliges them to recognize their losses, and propagation of the financial crisis. Then we restructure their balance, and limit credit growth. will analyze the effects of the financial crisis on Those investors not only seek profits unavailable the globalization process. Finally, we will offer in their own countries—due in part to a lesser de- some reflections on the impact of the crisis on velopment of their financial systems (see Caballe- the globalization of companies. ro, Fahri, and Gourinchas 2008)—they also seek 1 a greater diversification of their investment port- Ghemawat (2007) clearly explains that the current process is of semi-globalization and GLOBALIZATION AND THE UNLEASHING folios. The safety that the United States offers that the obstacles that impede greater glo- OF THE FINANCIAL CRISIS international investors reinforced that tendency. balization are significant. Therefore, investments by banks and international 2 One of the characteristics of the current finan- insurance companies in financial products issued In one way or another, this scenario was fore- cial crisis is that it has been worldwide right by American institutions have worsened the cri- seen by some economists who favor global- from the start. The crisis had been brewing for sis’s international dimension. ization, but were aware of its potential risks. See, among others: Obstfeld (1998) and Rog- months, but an important outbreak began on The phenomenon of international financial off (1999). August 9, 2007 when the American Home Mort- investment reveals the flip side of financial glo-

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080-095_PAL.indd 82 19/11/09 19:31:08 balization: the emergence in the early twenty- merous banks found themselves with growing first century of gigantic imbalances in the major liquidity problems and losses in portfolios with economic powers’ balances of payments. On one investments in US financial assets. The liquidity hand, a growing deficit in the balance of goods problems rapidly led to credit restrictions and and services in the United States and Great Brit- rising long-term interest rates, with the expected ain, and on the other, an equally growing surplus effects on consumption, investment, and eco- in Germany and China’s balances of trade. In this nomic activity. case, the growing freedom of international trade, A second transmission mechanism was the especially China’s access to the World Trade Or- panic that gripped foreign investors in emerg- ganization, have fostered a process of economic ing countries during the spring and summer of growth in China that rests on a very competitive 2008. That panic led to spectacular drops in industrial base and a slightly under-priced cur- those countries’ stock indexes. According to rency. China’s efficient manufacturing and logis- data from the BIS (2009), after good perfor- tic complex has driven the growth of industrial mance following the crisis in summer of 2007, exports, making China the world’s largest factory. the MSCI indicator of stock prices on emerging The growing liberalization of foreign investment markets fell 28% in local currency between May in China has farther strengthened this country’s and September 2008—even before the fall of role as a manufacturing base. Industrial out- Lehman Brothers. On the other hand, the S&P sourcing in the United States and Europe driven 500 index fell only 12% during the same pe- by the search for lower costs and greater produc- riod. Between September 15 and October 30, tive efficiency have made it possible for China to 2008, that same MSCI index fell another 40% achieve this power as an exporting country. And (see BIP 2009). The realization that the possible the fact that other countries have outsourced in- disconnection of emerging economies had only dustrial enterprises to China and other emerging been wishful thinking led to the withdrawal of countries increases their need to import. Once funds from those countries’ markets, contribut- again, growing economic interdependence un- ing to posterior drops in the process of financial derlies the foreign imbalances of countries that assets, with the corresponding wealth effect and have also contributed to the triggering of the a considerable increase in uncertainty. current financial crisis. Consequently, the same circuits that had fos- Voracious spending in the United States has tered economic and financial integration in re- been temporarily sated by the austerity and weak cent years were now used by the investors that domestic demand of Germany and China. While had driven that process to divest, and the market economic globalization has allowed the United mechanisms that had transferred the effects of States to rapidly absorb the surplus savings of a crisis in the US financial market to the global those countries, the crisis has brought out the market also traveled along those same circuits. fact that it is not possible to construct a stable Economic globalization cannot be considered global economy, nor a balanced globalization pro- the main cause of the current financial crisis, but cess, on the basis of such fundamental imbalanc- it is true that greater international economic and es in the foreign accounts of the large economies. financial integration have made the worldwide Therefore, economic globalization has played transmission of the crisis’s effects faster and a central role in the international transmission of more intense. What can be seen as the positive the crisis. Until spring 2008, the disconnection side of globalization in one context—internation- of emerging economies, mainly China and India, al trade flows and investment in emerging coun- was hypothesized, positing that they might be tries—could, in a moment of panic, turn into immune to declining economic activity in the an accelerator of financial crises, giving greater United State and Europe. The reality, however, impetus to their international transmission and has been less flexible, and the crisis has also af- planetary impact. fected those countries, and even more so, other economies in Latin America, Africa, and Asia. THE EFFECTS OF THE FINANCIAL CRISIS Various mechanisms have transmitted the ON ECONOmIC GLOBALIZATION crisis to those emerging countries. The first is the global liquidity crisis, which has also af- The gravity of the current financial crisis and fected financial entities—some of which have its diverse dimensions raise questions about high levels of debt in international markets— certain basic aspects of the financial system: and investors in those countries. Suddenly, nu- the overlapping efficiency of financial markets,

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080-095_PAL.indd 83 20/11/09 20:04:53 the convenience of reducing the global level EffEcts of thE crisis of debt by financial and non-financial compa- on intErnational Economic activity nies with regard to total resources, the need to improve regulations and supervision, the suit- tradE flows ability of mechanisms for managing risk or the The economic deceleration caused by the re- convenience of economic incentives related to cent implosion of the global financial system the volume of transactions and their short-term has led to an abrupt fall in international trade. results. Moreover, doubts about the efficacy of Restrictions on credit to companies—including the financial system have also been cast on the credit to companies’ circulating capital—have actual functioning of market economies and, also made that drop even more intense. More- indirectly, on the future of economic globaliza- over, this reduction in economic activity has tion. Are the words about globalization and the provoked a significant excess in the capacity of policies that promote them, which Fischer ut- some sectors of the economy and a consequent tered at the end of his Richard T. Ely Lecture increase in unemployment. Over the last twelve in January 2003, still valid today? months, the automotive industry in Europe and In the following pages, we will try to argue the United States has experienced the largest that the development of the globalization pro- drop in sales in various decades. Other sectors, cess can be stopped or shifted, although, as including steel or capital goods, have experi- forms of economic organization go, the free- enced equally serious drops. market economy continues to be the least-bad Consequently, the financial crisis has not only choice. Still, its functioning could clearly be prompted a global economic recession, it has improved, as the current crisis has shown. The also brought out some of the weaknesses and market is not an absolute criterion and long-term structural risks of economic globalization: great- progress depends not only on the existence of er dependence on international trade, greater dynamic, free and open markets, but also on exposure of domestic industry to excesses of a prudent and efficient presence of the public capacity when economic activity drops abruptly, sector, which is needed to correct negative spill- and indirectly, an incorrect but latent and mani- overs generated by markets. Nevertheless, the fest perception in the most advanced economies economic globalization process has a somewhat that globalization has weakened their countries different rationale than the market economy. due to outsourcing of industrial activities. Once When the free market is proposed beyond na- again, the deindustrialization of countries like tional borders, there are not only cultural and Great Britain is lamented when, in recent years, linguistic barriers, but also economic, political, the shift to a tertiary economy had begun to and legal barriers to contend with, and some seem natural and almost desirable. of them are of very considerable size. In that Dropping demand and increased unemploy- sense, the economic globalization process could ment efficiently spur new calls for economic stop because it is an option, a choice, and as protectionism. Until now, the governments of such, it could be reversed by the policies ad- countries with the greatest economic weight have opted at each moment. resisted the temptations of protectionism rather To examine this question, it might be useful well. But this battle can never be definitively to consider that in recent decades the econom- won: the entire world’s prosperity, and especially ic globalization process has manifested mainly that of the most needy countries, depends on in a significant increase in trade and financial the existence of open goods and services mar- flows. At different moments, this process has kets that allow them to export their products to been driven with differing strength and rates by the most advanced markets. Neither China nor four main motors: public policies, the expan- Brazil, among others, would have been able to sion of international companies, the dominant so significantly reduce poverty in the last twenty values and ideas in public policies and society, years had they not been able to freely enter the and technology. Of these four, technology has not richest countries’ markets. been directly affected by the economic crisis, so Nevertheless, while trade flows parry the thrust we will not consider it here, concentrating instead of protectionism, commercial interdependence on public policies, dominant values, and compa- among countries can also help to more rapidly nies. Below, we will analyze the leading external propagate economic recovery. Emerging countries indicators of the globalization process, and will are also major clients of companies in the most then analyze the three motors mentioned above. advanced countries. If the latter increase their

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080-095_PAL.indd 84 19/11/09 19:31:08 exports it will improve economic growth, the need public recovery aid must improve the efficiency thE ECONOMIC to import capital goods or sophisticated interme- of their operations. And second, that in numer- GLOBALIZATION diate goods and also investments in public infra- ous banks, the restructuring of international op- structure. All of these tendencies are good news erations is a clear field for improvement. In the process has for multinational corporations. Consequently, just case of European banks, such as those in Eng- been driven as commercial interdependence has worsened land, Holland, and Germany, the smaller number with differing the international repercussions of the crisis, it of international operations is the result of an ex- strength and also means the possible recovery by the most plicit decision by the top directors of those very relevant economic countries will have a more banks to optimize the management of resources rates by four rapid effect on the world economy. We can thus and reduce the degree of geographic diversifica- main motors: see that, as a process, globalization can have a tion of their operations. public policies, variety of effects on the world economy, and they Underlying these decisions by banking in- the expansion are not always foreseeable or predetermined. stitutions is the need to sell assets to reduce debt, the greater demands of capitalization, an of international capital Flows awareness that some international operations companies, the The impact of the financial crisis on capital flows have been characterized by deficient risk man- dominant values has been direct, immediate and enormous. First, agement, and the need to divest themselves and ideas in the liquidity problems that initially affected US of international operations that were not very banks and investors rapidly affected all coun- efficient in some cases. This is an interesting public policies tries belonging to the international economy. phenomenon. We find that one of the most dy- and society, and Liquidity problems quickly turned into credit re- namically internationalizing sectors, banking, technology. strictions, which especially affected those com- faces a drop in its international operations as a panies with the highest debt levels. result of the financial crisis. In spring 2008, a growing perception that li- Moreover, the difficulty of regulating banks quidity problems could be long-lasting and could with international operations due to their greater possibly turn into problems of solvency provoked complexity has led to public debate about wheth- a flight of capital from emerging markets to more er it would be preferable for banks, as regulated developed economies. According to BIS data institutions, to have a smaller geographic area of presented earlier, the MSCI indicator of share operations. Unless the debate on public policies prices on emerging markets dropped 28% in in Europe changes radically, it seems unlikely local currency between May and September of that this debate will mark a turning point for in- 2008—even before the fall of Lehman Broth- ternational banking operations. Nevertheless, the ers—while the S&P 500 index fell only 12% fact that this debate has arisen is a clear indica- over the same period. This may be because the tion of the degree to which the financial global- unstoppable liquidity crisis of the first months ization process is now being questioned. of 2008 turned into a financial panic at the pos- Finally, mergers and acquisitions—another sible collapse of the world banking system, lead- important motor in the globalization process in ing investors to opt for US Treasury debt rather recent years—have also dwindled as a result of than assets on emerging markets. the financial crisis. These corporate operations Direct investments in emerging countries also have an important cyclical component, so it is dropped drastically as a result of growing uncer- natural for them to diminish in parallel to eco- tainty about global demand and demand in the nomic deceleration. And yet, at this point in the countries receiving those investments, as well as economic cycle, the drop in the number and the credit restrictions of investment firms in their volume of such operations is related to the loss countries of origin and the fact that investments of attractiveness of certain key markets, poorer in emerging countries became less attractive expectations of the stock market, general un- with the changing economic scenario. certainty about the future of globalization, and The recent restructuring of the banking sector, reduced credit facilities for undertaking acqui- mainly in the United States and Great Britain, is sitions financed with debt. provoking a greater concentration—as banks in Nevertheless, the financial crisis has also crisis are absorbed by more solid banks—as well shown how important it is for the international as a reduction in size of some of the major banks financial system to have a high degree of integra- with international operations. In this case, two tion. The enormous imbalances in the US bud- phenomena converge. First, strict indications by get and balance of payments have been financed US financial regulators that banks in receipt of with foreign savings, which would have been

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080-095_PAL.indd 85 20/11/09 20:05:09 more difficult just a few decades ago. Without inant paradigm has been that of less regulation China’s integration into the international econo- and more market, and this has been especially my, the United States would not have been able true in financial markets. to support those deficits without substantially Reflection on these criteria in the context of raising interest rates. the current crisis also leads to a reconsideration This is the second positive dimension of fi- of the public sector’s role in a market economy. nancial globalization worth noting: international This is neither the time nor place for a reconsid- capital flows have not completely disappeared eration of what have generally been correct deci- during the financial crisis. As a result, the ab- sions aimed at limiting or eliminating the public sence of liquidity in certain markets has not led sector’s participation in mercantile companies, to a generalized rise in interest rates. reducing tax pressures—especially those that And last, the crisis has revealed the enormous tax economic activity—and improving the effi- impact of public policies, particularly monetary ciency of public spending. Nor is this the place policies applied by major central banks to com- to defend a greater presence of the public sector bat the perverse effects of the financial crisis. A in countries’ GNPs, other than the discretional coordinated effort by central banks to inject li- spending considered prudent to revive economic quidity, rein in the panic, and maintain nominal activity in times of crisis. Still, it is clear that interest rates at a very low level has clearly kept the deregulation movement of the 1980s and the financial crisis from turning into a great de- 1990s coincided with a regression in the state’s pression. In that sense, the crisis has proven the role in economic activity to such a degree that efficiency of the circuits through which financial two phenomena were mistaken for each other: globalization runs, even when the imprudence of less activity by the public sector and less regula- certain banks and the lack of regulation in keep- tion. Experience shows that the first, less pres- ing with the new realities could have provoked ence by the public sector, has generally been a an even greater disaster. Likewise, central banks good one. The decision toward less regulation, have shown that even when circumstances are however, has been ill advised in some cases, very adverse—as they were in 2007 and 2008— principally in the financial sector. the financial globalization process allowed adjust- One of the main effects of the financial crisis ments that might have been more costly and less is the reconsideration of those basic aspects of efficient in other circumstances. market economies and of the need for greater regulation of financial activity. This phenomenon EffEcts of thE crisis will have some consequences on globalization. on thE motors of globalization The first is that a re-regulation of the financial sector will make international expansion by Public PoliciEs banks more difficult and will generally limit, and As we emphasized above, the financial crisis has increase the cost of, international capital flows. raised numerous questions about the future of The second is that in a period of lesser econom- the economic globalization process. That crisis ic growth a greater presence of the public sec- has undermined the foundations on which the tor as a regulatory agent of the financial sector world economy has been developing in recent de- could lead it to intervene in other areas of the cades, foundations that essentially supported free economy beyond those needed to guarantee de- and open markets, the liberalization of interna- sirable levels of social protection. The US Gov- tional commerce and capital flows, deregulation, ernment’s intervention to rescue the automotive and reduction of the public sector’s weight in the sector in the United States is a clear example of economy. At the base of this hypothesis is a set these new realities. The return of state regula- of convictions about public policies necessary to tion could have implications for greater economic guarantee the proper functioning of an economy. protectionism, which could include the shame- The first of these convictions is that deregu- less defense of so-called national champions in lated markets function better than regulated strategic sectors. This would be bad news for the markets except in certain cases, such as monop- proper functioning of economies and would have olies. The second is that financial markets tend a negative impact on globalization. towards efficiency, which signifies that share prices adequately reflect all available informa- dominant valuEs and idEas tion on companies. The third is that, in the face In recent decades, partially as a result of the of the free-market/regulation dilemma, the dom- ideas described in the previous section, which

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080-095_PAL.indd 88 20/11/09 18:57:58 have inspired economic policies in numerous continuity of many organizations, and the market countries, another opinion has become wide­ economy’s stability and acceptation as a social spread: the idea that specific aspects of social referent. The current financial crisis has pro­ life—or of society as a whole—should behave in voked a wave of distrust of the market that is not a manner similar to the marketplace, with the logical, just as there is nothing reasonable about corresponding incentives. This idea reached its how, until very recently, the market economy was peak in the moments of greatest growth dur­ praised as a successful paradigm. ing the 1990s and reappeared in the present In the corporate world, the maximization of decade before the summer of 2007. With this market value for shareholders—a new criterion notion, a sensible approach—the idea that the that has replaced the notion of maximum profit— organization of economic activity in competi­ has become the central paradigm of business tive markets is generally the most efficient so­ management, even when, for top management, lution—has been transformed into the argument maximization is neither an operative criterion nor that social life should be centered on the market. the result of decisions they can make. Clearly, Logically, the financial crisis has brought out the in this case we tended to replace a real market of weak functioning of certain markets—especially clients, products, people, efficiency, and econom­ financial markets—and has revealed the need ic results with a market based on expectations— for reasonable regulation. It has also debunked the stock market—under the hypothesis that the the myth that society mirrors the market. prices in the latter would reflect all available in­ As Nobel prizewinner, Amartya Sen, recently formation. It has finally become a widespread cri­ pointed out in reference to Adam Smith (see Sen terion that payment of top management should be 2009), “it was in his first book, The Theory of determined in terms of company results, and more Moral Sentiments, published exactly 250 years specifically, in terms of the company’s market ago, that he extensively investigated the role of value. Payment of top management is a complex non­profit values. While stating that ‘prudence’ challenge, but that challenge turns into nonsense was ‘of all virtues that which is most helpful to when the referential indicators are short­term individuals,’ Smith went on to argue that ‘hu­ rather than long­term results. Short­term results manity, justice, generosity, and public spirit, are generate perverse incentives to take risks with the the qualities most useful to others.’” Sen adds: expectation of high short­term returns, without “It is often overlooked that Smith did not take any concern for the company in the long term. the pure market mechanism to be a free­stand­ The answer to the market’s failure to explain ing performer of excellence, nor did he take the certain human and social realities is to return profit motive to be all that is needed.” In conclu­ it to its rightful place—the world of economic sion, Sen observes that all this should not lead transactions—and to recognize that in both the us to reject the market, but rather to understand personal and social spheres there are numerous the limits of the market itself. In other words, the dimensions and areas in which market logic is market has limits. Moreover, there are other per­ insufficient. Neither a stable economic system sonal and social realities for which the market nor human society can rest on foundations of offers no reasonable explanation. self­interest. If they did, the social edifice would Closely related to the previous hypothesis suffer from considerable structural weakness. about the market’s role in the economy and in It is necessary to combine a legitimate interest society is the fact that the search for one’s own in one’s own affairs with a necessary interest in benefit or interest has become a basic principle the legitimate wellbeing of others. That alone of economic and corporate organization—not to will guarantee a peaceful and enriching human mention its presence in society as a whole—and coexistence for all. At the same time, there is that search has been accompanied by an aban­ also need for an explicit defense of the com­ donment of the quest for the common weal. The mon weal, which represents the ideals of social satisfaction of personal objectives and interests life—freedom, a sense of justice, peace, human has been particularly eloquent in financial insti­ development—that make it possible for each tutions, especially investment banks and collec­ person to grow. In Sen’s words, authentic devel­ tive investment institutions, some of which have opment consists of offering people and societies disappeared with the financial crisis. The pursuit the necessary means to construct a destiny in of self­interest at any cost, sometimes driven keeping with their expectations and desires. by greed, has corroded the personal integrity of Therefore, it is not a matter of limiting the many individuals and has endangered both the proper functioning of the market in economic

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080-095_PAL.indd 89 20/11/09 22:26:52 Neither a stable life, rather, its true meaning must be found in ing social life. Limiting globalization to its eco- economic system the area of economic transactions, where its op- nomic dimensions and justifying it in the name eration is efficient for the development of peo- of benign self-interest is simply unreasonable. nor human society ple and society. At the same time, even in this Self-interest as the dominant criterion is a sign can rest on setting there is sometimes need for adequate of selfishness and a manifestation of injustice. foundations regulation of the market. The financial crisis Basing international relations on a concept of of self-interest. has made it uncomfortably clear that the lack globalization rooted in benign egoism—one that of good regulation in specific areas of financial generates mistrust because it is seen as a rather If they did, the activity has permitted the unleashing of a crisis unjust model lacking in sensitivity to the needs social edifice of brutal proportions. A more efficient and ac- of others—clearly constitutes a danger for the would suffer tive regulator might have been able to limit the peaceful development of nations and for human from considerable damage that has been caused by certain credit coexistence. investment operations and specific opaque and In that sense, the crisis is a magnificent op- structural non-liquid assets. portunity to reflect on how fitting it may be to weakness. The current financial crisis could help return base economic integration processes on noble economic globalization to its proper place—the human values that foster cooperation among economy—an area of human activity that must be people and nations. Economic efficiency as a subject to politics, which must in turn be subject manifestation of professional excellence is one to ethics, as we find in the classical ideal formu- of those human values, but a leading role should lated by Aristotle (see Aristotle 1996 and 2002). also be played by the humanization of relations That is the notion that has been present in the among people, justice, magnanimity, and the most brilliant periods of Western society. Poli- search for the common good, among others. tics must be oriented towards the quest for the common weal, an ethical value superior to that intErnational corporatE Expansion of individual interests or those of certain lobbies. International corporations have been important At the same time, economics should combine its drivers of the economic globalization process, specific and distinctive areas of competence— along with technology and public policies to the quest for efficiency in the organization of promote international trade. The international economic activity—without seeking to apply the expansion of contemporary companies has pro- idea of the market to all areas of social life. That vided the second globalization of the economy idea considers the market an efficient mechanism with deeper roots than the previous attempt be- for organizing a large part of society’s economic fore the First World War. What impact has the transactions, but, as Pope Benedict XVI observed, financial crisis had on international corporations economic activity cannot resolve all social prob- and, indirectly, on globalization? The crisis has lems simply by applying the logic of commerce; put a brake on the expansion plans of many to be efficient, it must pursue the common good, companies, but in the minds of many directors which transcends personal interest. In the final internationalization is a central element in the analysis, the market economy needs ethics in or- twenty-first-century economy. der to function in a sustainable fashion. For a variety of reasons, the crisis has led to Similarly, globalization offers indubitable ad- a drop in activity for many international compa- vantages in the quest for economic efficiency, in- nies. The first is the economic recession in many cluding access to markets in the most advanced countries, which has caused reduced sales, es- countries for products from emerging nations, as pecially in the capital goods and infrastructure has been shown by the industrialization of China sectors, but also in the automotive, telecommu- and Brazil. Still, the logic of globalization cannot nication, computing, and consumer-electronics limit itself to merely economic reasoning, much less sectors. This recession is particularly intense in to what some have called enlightened self-interest some countries and regions, especially certain (an expression coined by Alexis de Tocqueville), countries in Eastern Europe and Latin America. which would be something like a humanized The second reason is the credit restriction that version of the self-interest that Adam Smith de- has affected all companies in general, and par- scribes as the motive for a merchant’s actions. ticularly those whose investment projects have As we discussed above, Smith himself never the highest perceived risk, which is the case admitted that personal benefit should be the with international operations. only motive for an individual’s behavior, or that The third reason is the growing importance the market could be the only manner of organiz- that the location of a corporation’s headquarters

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080-095_PAL.indd 90 19/11/09 19:31:24 has to certain decisions. For years we have al- spect. The third are the opportunities for future lowed international companies to increasingly growth. International expansion is a never-ending organize themselves as networks in which center process. Presence in emerging markets that have and periphery play different roles over time, al- best weathered the crisis, such as China, India, ways according to their contributions to the com- and Brazil, has been a lifesaver for numerous pany as a whole.3 The economic recession and European companies and will continue to be so the need to increase efficiency and reduce costs in the future. have brought back the primacy of headquarters. The fourth dimension is that the crisis has Spain, in particular, periodically experiences brought out the importance of diversity among this phenomenon with the sister companies of management teams, and internationalization multinational corporations in the automotive contributes to this. The presence of top manage- and consumer-electronics sectors, among oth- ment from other countries in which a company ers. This uncertainty about the future of certain has a significant presence is a guarantee not only projects by foreign companies is perceived with of greater understanding of the local market and greater intensity in periods of economic crisis, its relevant circumstances, but also of a greater as we discovered in 1992–94—a period of lesser capacity to foresee the future in that country. growth, though not actually of crisis—and, sadly, The success of international corporations that we are seeing this again today. have done especially well in certain emerging The financial crisis has also brought the mod- markets, such as Novartis, Pepsico, and Unilever, el of outsourcing industrial activity into ques- among others, cannot be separated from the fact tion. Outsourcing offers some clear advantages that they have a very notable international diver- to companies: a very cheap production struc- sity in their top management teams. ture, and sometimes a more efficient one as well; The fifth dimension is that the crisis has re- access to raw materials or to growing markets; vealed the value of efforts to achieve information a diversification of manufacturing risks among transparency and good government in many in- various markets; and a greater proximity to the ternational corporations. Much of the intensity of final consumer. And yet, in some, the crisis has the crisis has been due to many people’s distrust brought out the negative impact on certain coun- of the value of companies. The financial crisis tries of a disconnection between manufactur- has hit all kinds of companies, but, since the ing capacity and innovation—that disconnection bubble burst, those companies with the clearest can have a limiting effect on the latter—and approach to corporate government have shown the disinterest on the part of youth in technical- a tendency to recover more rapidly. The case of scientific university studies. Great Britain would US and British banks is a clear example. Those be an example, given the growing importance of institutions that have been slow to admit their financial services in its economy and the loss losses, adjust their management teams, or mod- of industrial sectors there over the last two de- ify obsolete models of economic compensation cades. In fact, this attitude is a very real obstacle have been hardest hit by the mistrust of their when preparing the new generations of company shareholders and the market. On the other hand, directors and highly qualified professionals. those banks that have shown the greatest matu- Nevertheless, the financial crisis has also rity in their mechanisms of corporate government revealed some positive aspects of corporate in- and have been capable of clearly informing their ternationalization, which could encourage this investors as to the reality of their situation and process in the future when the global economic the logic behind their strategic decisions have situation improves. The first of these is that in- been least damaged by the crisis. ternational corporations tend to systematically To summarize, the financial crisis has had a seek out efficiency when buying, producing or negative short-term impact on international cor- selling on various markets. The second is the porations, although for the time being we do not greater diversification of the risk effect—both have evidence to determine whether that impact 3 market and financial risks—especially in compa- has been greater or smaller than on more local This is the thesis defended by Bartlett and nies with balanced portfolios in various regions.4 companies. Logically, this impact has a nega- Ghoshal (2009), which became a central ref- erence in the thinking of international corpo- The positive performance of the major Spanish tive effect on the globalization process because rate organization. banks or of Telefónica during the financial cri- companies have been the fundamental driving sis—especially when comparing their evolution forces in this process. 4 The diversification of corporate risk is one with that of other companies in the same sector Still, we should also point out that the finan- of the classic objectives of company growth. in other countries—is very eloquent in that re- cial crisis has brought out some of the strengths See: Canals (2000).

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080-095_PAL.indd 91 20/11/09 22:27:17 of international corporations compared to those of the criticism directed at economic globaliza- with a more domestic profile. It is clear that a tion has been motivated by the supposed lack of company’s potential for globalization cannot be solidarity of some multinational corporations in evaluated on the basis of how strongly it is af- economically less-favored countries. In terms of fected by a gigantic financial crisis of the sort short-term economic results, the difference be- that only occurs every few decades. And yet, the tween these two concepts of a company may not impact of this crisis on international corporations be so great. But over the long term, the notion at the root of economic globalization has brought we are proposing here has the enormous advan- out some of the advantages to this kind of com- tage of greater respect for the nature of things pany. Their strengths are also a relative guaran- and an emphasis on the idea that profit should tee that globalization may slow during the crisis, not be the only dominant value in society. but it is not condemned to stop altogether. This concept also implies a set of demands that must be met if companies are to continue to SOmE REFLECTIONS ON THE FUTURE OF be the driving force in the economic globalization CORPORATE GLOBALIZATION process. These demands are related to corporate government and, very specifically, to a company’s In the corporate field it is worthwhile reconsider- sense of mission and the responsibilities and ing two critical questions that have been at the tasks of its organs of government, specifically, base of the values and ideas underlying the glo- its board of directors and top management. balization phenomenon in recent years. The first In fact, one of the dominant corporate values is the notion of the company itself. A company is in recent decades has been to view the board of a mercantile entity. As such, economic theory directors and president as agents7 with powers has posited the company’s goal as the maximiza- delegated by stockholders in order to achieve tion of profits or, in a more recent version of this the objectives set out by the latter, either di- goal, the maximization of value for stockhold- rectly, or through the expectations of financial ers. As this is an unwieldy and diffuse goal, in analysts. Those objectives were based on the practice it has been transformed into the maxi- theory of efficient financial markets and related mization of short-term value.5 to the maximization of short-term value for share- Still, above and beyond the legal reality, a holders. In order to align those agents with the company is essentially a human group that seeks shareholders’ objectives, it was proposed that to satisfy the needs of its clients through the ef- executives be paid according to results or per- ficient production and distribution of goods and formance (“pay for performance”). Once again, services, and in that process, a company must the idea of performance was most frequently as- generate economic profits, as well as offering sociated with the creation of short-term value. opportunities for its employees’ professional de- This notion of the company has created perverse velopment.6 That may seem like a more com- incentives for boards of directors and top man- plex version of the concept of a company but agement who, driven by greed, have ended up the experience of legendary companies and the making decisions leading to short-term benefits 5 testimony of their founders shows that in many even when they might have a negative impact Davies (2009) systematically shows how the companies profit is not the principal motive. on the company in the long term. The collapse theory of efficient markets and the objec- Such companies do generate profits, but they of some investment banks in 2008, as well as of tive of maximization of value for sharehold- ers eventually conquered the corporate world are the result of a process, not its essence. other companies in a variety of sectors, is a clear beginning in the 1980s. A concept of companies in which the role of example of the lack of common sense and the self-interest is appropriate and balanced with irrationality of such behavior from the standpoint 6 A more complete discussion of this idea of the the overall interests of the organization, and of of the company as a whole and of society. company can be found in Building respect- society, insures that a company will better re- Companies can be stable motors for the eco- ed companies, Canals (2010). J.M. Rosanas spond to its underlying human reality, will bet- nomic globalization process to the degree that (2009) presents the basis of an alternative to the neoclassical model of companies. ter adapt to the challenges posed by crises and their top executives make decisions based on changes, and will be able to move confidently the projection and success of the company in the 7 into the future. Moreover, this concept includes long term, rather than on personal interest. That The term “agent” comes from what is knows as “agency theory,” which seeks to explain the idea that when a company acts as a driv- is the only way that a company can become an the concept and goals of a company based ing force for globalization its role will be that of institution worthy of respect for its economic ef- on the delegation of powers by an owner or an institution seeking the common good of the ficiency, its capacity to create a positive referent “principle” to an “agent.” A formulation of agency theory can be found in Jensen and societies in which it operates, and not only eco- for clients, suppliers and other competitors, and Meckling (1976). nomic profit from its activities there. One part its positive impact on society as a whole.

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080-095_PAL.indd 92 20/11/09 22:27:18 Of course the problems posed by the current ate investment plans, debt decisions, projects financial crisis cannot be resolved with ethical for penetrating other markets and international criteria alone. It is also necessary to apply pro- investment portfolios and business. fessional criteria to both the design of economic Nevertheless, the greatest impact of the fi- policies and the direction and management of nancial crisis may be on public policies that companies themselves. Still, without ethics, even directly or indirectly affect globalization. Espe- the best policies will be useless and the globaliza- cially if governments cede to protectionist pres- tion process will not move forward, crushing the sures, defending their own countries’ companies possibilities for improvement that this process in detriment to companies from other nations. can offer when the participants fostering it are An especially positive variable that the current driven not only by self-interest, but also by the financial crisis presents in the analysis of eco- interest of others and the common weal of society. nomic globalization is an examination of the val- ues and suppositions that form the foundations SOmE FINAL REFLECTIONS on which the process of worldwide economic inte- gration has advanced in recent years. Specifically, The economic globalization of recent years can- the primacy of criteria of efficiency and econom- not be considered directly responsible for the ic results over other criteria and variables. Eco- financial crisis we are currently experiencing, nomic efficiency, freedom, solid institutions, and but it has contributed to the acceleration of its a sense of fairness and justice are essential con- international propagation. Still, just as the crisis ditions for economic and social prosperity. Com- has affected many countries that are scarcely munism collapsed in the late 1980s because it involved in the process of financial innovation met none of those requisites. Until now, the free- developed in the United States, the mechanisms market economy has met some of them reason- of propagation can act in a positive direction ably well, but nothing guarantees its existence when economic recuperation strengthens in the if it does not manage to combine efficiency with leading economies. achievements that are reasonable in terms of jus- On the other hand, the financial crisis has tice and fairness. And the future success of the led to a significant slowdown in the economic globalization process does not depend so much globalization process, partially through a drop in on technology or the economies of scale that commercial and financial flows among countries. companies might develop, as on the public poli- In particular, the liquidity crisis and a greater cies and values that societies develop with re- aversion to risk have led to capital flight from gard to that process. As Williamson pointed out ACKNOWLEDGmENTS emerging markets towards more mature ones. (1998, 70), “Yet history does supply that warn- My thanks to Antonio Argandoña and Alfredo Pastor for their valuable comments on my The crisis has also provoked a drop in interna- ing: if a globalization backlash can be found in draft of this work. Any errors are comple- tional corporate activity, as companies reevalu- our past, it may reappear in our future.” tely my own.

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080-095_PAL.indd 93 20/11/09 22:27:18 BIBLIOGRAPHY Aristotle. Nichomachean Ethics, Philosophi- Jensen, M., and W.H. Meckling. “Theory of the cal Library Series, April 2002. firm: Managerial behavior, agency costs —. The Politics. Cambridge: Cambridge Texts and ownership structure.” Journal of Fi- in the History of Political Thought, Oc- nancial Economics, 3 (1976): 305–60. tober 1996. Keynes, J.M. The economic consequences of Bank for International Payments. Annual Re- the peace. London: Macmillan, 1919. port. Basle, 2009. Obstfeld, M., “The global capital market: Bene- Bartlett, C., and S. Ghoshal. Managing across factor or menace?” Journal of Economic borders. Boston: Harvard Business School Perspectives, 12, 4 (1998): 9–30. Press, 2009. Robertson, R. Globalization: Social theory and Benedicto XVI, Caritas in veritate. Rome, 2009. global culture. London: Sage, 1992. Bhagwati, J. In defense of globalization. Ox- Rogoff, K., “International institutions for re- ford University Press, Oxford, 2004. ducing global financial instability.”Journal Caballero, R., E. Farhi, and P. Gourinchas. “An of Economic Perspectives, 13, 4 (1999), equilibrium model of ‘global imbalances’ 21–42. with low interest rates.” American Eco- Rosanas, J.M. “A humanistic approach to orga- nomic Review, 98, 1 (2008), 358–93. nizational decision-making.” IESE working Canals, J. Managing corporate growth. Oxford: paper, July 2009. Oxford University Press, 2000. Sen, A. “Adam Smith’s market never stood —. Building respected companies. Cambridge alone.” The Financial Times, March 10, University Press, Cambridge. 2009. Davis, G. Managed by the Markets. Oxford: Williamson, J. “Globalization, labor markets and Oxford University Press, 2009. policy backlash in the past,” Journal of Eco- Fischer, S. “Globalization and its challeng- nomic Perspectives, 12, 4 (1998): 51–72. es.” American Economic Review, 93, 2 —. “Winners and losers over two centuries of (2003): 1–30. globalization.” National Bureau of Eco- Ghemawat, P. Redefining global strategy. Bos- nomic Research, Working Paper no. 9161, ton: Harvard Business School Press, 2007. Cambridge, MA, 2002. Guillén, M. “Is globalization civilizing, destruc- Wolf, M. “Seeds of its own destruction.” Fi- tive or feeble?: A critique of five key debates nancial Times, March 8, 2009. in the social science literature.” Annual —. Why globalization works. Yale University Review of Sociology, 27 (2001): 235–60. Press, New Haven, CT, 2004.

NACHO CRIADO Ω si elegís... si excluís... 1996

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