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Revista de Relaciones Internacionales, Estrategia y Seguridad ISSN: 1909-3063 [email protected] Universidad Militar Nueva Granada Colombia

Lascurain Fernández, Mauricio CHALLENGES OF ECONOMIC Revista de Relaciones Internacionales, Estrategia y Seguridad, vol. 12, núm. 1, enero- junio, 2017, pp. 23-50 Universidad Militar Nueva Granada Bogotá, Colombia

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How to cite Complete issue Scientific System More information about this article Network of Scientific Journals from Latin America, the Caribbean, Spain and Journal's homepage in redalyc.org Non-profit academic project, developed under the open access initiative REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 23 rev.relac.int.estrateg.segur.12(1):23-50,2017

CHALLENGES OF *

Mauricio Lascurain Fernández**

Abstract

This article aims to analyze the main elements of the current process of economic globalization as and the flow of foreign direct investment and mobility. The consequences of these elements demand a series of criticisms and proposals on how local governments must address globalization and what should be the role of international institutions as an instrument that contributes to integration, particularly of the least developed , in the . The purpose of this study is to empirically determine the positive and negative effects of economic globalization on national

* Este artículo de reflexión surge como parte de los trabajos desarrollados en la Academia de Estudios Internacionales de El Colegio de Veracruz. ** Doctor por la Universidad Autónoma de Madrid, en el Programa de Nueva Economía Mundial, Maestro en Relaciones Internacionales por la Universidad de Essex del Reino Unido y Licenciado en Comercio Exterior y Aduanas por la Universidad Iberoamericana de

RevistaRelaciones de Internacionales,EstrategiaSeguridad . y Puebla. Se especializa en temas de política internacional, relaciones Lascurain Fernández, M. (2016). “Challenges of economic of “Challenges (2016). M. Fernández, Lascurain internacionales, globalización, análisis económico, inversión extranjera directa. Actualmente es Profesor-Investigador de El Colegio de Veracruz., Xalapa Veracruz, México. E mail: mlascurain@ 12(1), pp. 23-50. DOI: http://dx.doi.org/10.18359/ries.2462 Recibido: 5 de junio 2016 Evaluado: 15 de julio 2016 Aprobado: 19 de septiembre 2016 Artículo de reflexión Referencia: globalization. colver.edu.mx 24 REVISTA DE RELACIONES INTERNACIONALES, ESTRATEGIA Y SEGURIDAD societies, in order to create better public policies that allow an alternative to and a rapid adaptation to global integration.

Key words: Economic impacts of globalization, International Investment, Multinational firms, Trade.

DESAFÍOS DE LA GLOBALIZACIÓN ECONÓMICA

Resumen

Este artículo pretende analizar los elementos principales del proceso actual de globalización económica como lo son la liberalización del comercio y el flujo de inversión extranjera directa y la movilidad de capital. Las consecuencias de estos elementos exigen una serie de críticas y propuestas relacionadas con la forma en la que los gobiernos locales deben enfrentar la globalización y cuál debería ser el papel de las instituciones internacionales como instrumentos que contribuyan a la integración a la economía mundial, sobre todo en el caso de los países menos desarrollados. El propósito de este estudio es determinar empíricamente los efectos positivos y negativos de la globalización económica en las sociedades nacionales, para poder generar mejores políticas públicas que permitan una alternativa a la gobernabilidad global y una rápida adaptación a la integración global.

Palabras clave: Impactos económicos de la globalización, inversión internacional, firmas multinacionales, comercio.

DESAFIOS DA GLOBALIZAÇÃO ECONÔMICA

Resumo

Este artigo pretende analisar os elementos principais do processo atual da globalização econômica como são a liberalização do comércio e o fluxo de inversão estrangeira direta e o movimento do capital. As consequências de estes elementos, exigem uma série de críticas e propostas relacionadas com a forma na qual os governos locais devem enfrentar a globalização e qual deveria ser o papel das instituições internacionais como instrumentos que proporcione na integração à economia mundial sobre tudo no caso dos países menos desenvolvidos. O propósito deste estudo é determinar empiricamente os efeitos positivos e

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 25 negativos da globalização econômica nas sociedades nacionais para poder gerar políticas públicas melhores que permitam uma alternativa à governabilidade global e uma rápida adaptação à integração global.

Palavras-chave: Impactos econômicos da globalização, inversão internacional, assinaturas multinacionais, comércio.

Introduction development of capitalism in all its expression, which later would fade The phenomenon of economic with the beginning of II. globalization is not a new event. From the second half of Between the years 1870 and 1914,a on, especially in the last two decades, similar process developed which it would be stimulated through an experts of international economic institutional framework based on relations have called the first economies and rich countries.1 globalization. It was characterized by The institutional innovations2 the increase in the exchange of , that would follow the majority of services, and factors of , as developed countries and some well as an increase in the transfer of Southeast Asian countries would be , giving rise to the diffusion towards the advantage of the benefits of and tighter of . These innovations integration of national economies, resulted in an increased efficiency and whose result was the convergence of legitimacy of markets; therefore, better global and (Lascurain and and capable governments would be Villafuerte, 2016). The nineteenth- required to create policies to get the most century globalization encouraged the benefit from economic globalization3.

1 See Frieden (2006), for an analysis of the principal economic and political events that have shaped to the world economy in the last century. 2 As to stabilize , central banks that regulate credit and liquidity supply, establishing market rules and regulations, among others. 3 The IPCC was established by the Environment Program (UNEP) and the World Meteorological Organization (WMO) in 1988 to produce studies in and provide assessment to governments.

Mauricio Lascurain Fernández 26 REVISTA DE RELACIONES INTERNACIONALES, ESTRATEGIA Y SEGURIDAD

However, it has been proven that, as into the global economy. Within the economic globalization progresses, it anti-globalization movements, they brings challenges and opportunities point out that this phenomenon that change the global scenario, being increases income inequalities developing countries those who find worldwide and into the same countries, more difficulties of adaptation. In suggesting that it is necessary to stop it accordance with the classical theory, and implement another development the expansion of the global economy strategy. Moreover, some consider that entails prosperity through work it is only through a higher integration division and specialization according into the international economy that to in each developing countries could benefit. country. This principle motivates the international transactions, where the This debate remains open because less developed countries can take most of the arguments for and advantage of the global market to get against globalization are equally access to cheaper capital goods and valid. However, there are significant technology. On the other hand, the countries and people who remain challenges presented by globalization outside of this elitist process in which show a diminution in the ability of mainly participate the members governments to establish regulatory of the Organization for Economic and redistributive policies that limit Cooperation and Development social wellness. This situation got worse (OECD) and some emerging economies in most developing countries which do in Southeast Asia and Latin America. not have strong and efficient institutions Therefore, it is elementary to consider, capable to manage globalization as if not all, at least much of the elements demonstrated by the financial crises of economic globalization in order to of the nineties. Likewise, as it has identify the way to take advantage of been observed since 2008, developed the potential benefits of the process. countries also experience problems due to malfunction of international The purpose of this article is to identify financial markets causing the subprime the main challenges and opportunities crisis, situation that has put the presented by the phenomenon of in check, particularly economic globalization to countries. and Spain. For this, the article is structured as follows. First, two basic elements of As a consequence to these effects, a economic globalization are identified: series of criticisms and proposals arises the open trade and the flows of foreign concerning how governments must direct investment and portfolio. Each tackle with globalization and the role of of these elements will be analyzed and international institutions as instruments their effects on national economies to assist developing countries to integrate identified. Finally, the conclusions

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 27 formulate suggestions for better debilitated the national , as alternative of global governance and well as generated inequalities among the insertion of developing countries countries creating winners and losers. into globalization. The losers are usually in developing countries and in the lower classes of developed countries, while the Components and effects of winners remain in developed countries economic globalization and some emerging economies.

The steady increase in economic On the real plane, the criticisms to interdependence among countries, globalization have been strong in which has intensified since the early Latin America; this is linked to the nineties, has brought certain benefits presence of leftist leaders in countries and in some cases obstacles to countries that have turned their backs on immersed in this process, causing Orthodoxy. For example Venezuela, a great debate about the effects of first with Hugo Chavez and today with globalization in the economic growth Nicolás Maduro, is the most notable of the countries. Although in social case. However, it has not been the science it is difficult to establish the only one. Others equally critical to grade of causality between variables, global and most advocates, mainly the Washington Consensus are Evo (Eichengreen, 1996; De la Dehesa, Morales from Bolivia, Rafael Correa 2004; Bhagwati, 2004; Wolf, 2005), from Ecuador, Ollanta Moisés Humala consider that economic globalization Tasso from Peru, and Daniel Ortega has positive effects on the growth and from Nicaragua. These leaders are convergence of the countries because trying to combat the loss of national it is a factor for poverty reduction sovereignty by creating alternative and can serve as a promoter for development programs to prevail on democratic principles (Sala-i-Martin, the continent. 2006). On the other hand, critics (Amin, 1997, Murshed, 2003; Stiglitz, In this debate about the loss of 2002 and 2006; Bhalla, 1998; Hirst autonomy and sovereignty of and Thompson, 1996; Dunning and states, Rodrik (2000) develops a model Narula, 1997; Wade, 2002), affirm called the Global Economy Trilemma4 that economic globalization has that allows visualizing margins for

4 Based on the open economy trilemma (Obstfeld and Taylor, 1998; Obstfeld et al, 2004), under which a country cannot hold at the same time open a capital account, a fixed and an independent . This contrast of options causes a conflict between the objectives of internal and external stability of each of the countries.

Mauricio Lascurain Fernández 28 REVISTA DE RELACIONES INTERNACIONALES, ESTRATEGIA Y SEGURIDAD maneuver of countries in a globalized International Economic Integration world (Figure 1). According to this (globalization), it is not possible to trilemma, countries can only have maintain simultaneously two out of the three options available: and the Nation-State; it is necessary to international economic integration, choose one of the two. If Democracy democracy, and the nation state. and Globalization are selected (represented in Figure 1 as Global Figure 1. Federalism), democratic supranational organizations will have the power International Economic Integration (Global ization) to dictate laws that comply with the standards of such organisms. This would be a model of global governance Dictatorship Global adapted by supranational organizations. Market Federalism This system has been tried to be

implemented in the European Union Nation State Democracy Bretton Woods Commitment (EU) where the democratic essence persists in the member states, as they Source: Rodrik (2000) represent the of their citizens to the EU institutions. However, this International Economic Integration system presents deficiencies mainly refers to a higher grade of exposure in the field of political integration. to globalization; that is to say, a Evidence of this was the rejection situation in which the free circulation of some member countries to the of production factors and technology European Constitution. In addition, is complete. Nation-State makes if we consider that the of reference to territorial power in the international system is with independent powers to make clearly unequal and favors developed and administer the law without countries, there is a serious risk that outside influences. Democracy in this Global Federalism becomes, in fact, a context refers to a system of political Global Dictatorship. If the most favored organization where the right to vote is economic groups utilize supranational not restricted, there is a high degree bodies to implement their agendas of social mobilization, and political through their national representatives, institutions respond to the demands of it would promote both economic and citizens. political dictatorship in the world.

The Trilemma of the Global Economy A second option is to maintain the holds that if countries opt for nation state, making it responsive to

5 See Keohane (2002), for further analysis of global governance.

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 29 the needs of the international economy Some Latin American countries (called Dictatorship Market).6 This have experienced this Dictatorship would be a state that pursues global Market. According to Rodrik (2000, economic integration at the expense p. 183), “once set the game rules of a loss in the decision capacity of its on the requirements of the global citizens, that is, a loss of democracy in economy, it must restrict the ability of the economy. This is what many anti- social groups to access and influence globalization movements denounce national economic decisions.” In the and other academics and political case of Mexico, there exists a certain commentators have baptized as “The Dictatorship Market, that can be Retreat of the State” (Strange, 1996), seen reflected in the different stages “The Dictatorship of International of unilateral and multilateral trade Financial Markets” (Block, 1996), or and financial liberalization that the “The Golden Straitjacket “(Friedman, country experienced where the state 2000). of wellbeing was relaxed in favor of the international market. Also, during In spite of the global economy being the 1995 crisis, the IMF (International still far from full economic integration, Monetary Fund) restricted the policy if it is complete and no convergence space of the Mexican government occurs in the preferences of citizens, by suggesting the following of certain there would be a political space macroeconomic guidelines to facilitate reduction reflected in the isolation the borrowing of the necessary funds of participatory public debate of the to overcome the financial shock.7 organizations responsible for carrying out (Central Banks, Currently, the crisis affecting the authorities etc.). At the same time, European Union especially in they would disappear (or would be Spain and Greece is the result of a privatized) the social security systems Dictatorship Market in the sense that while the economic development citizens have seen a loss of democracy objectives would be replaced by the in connection with European and need to maintain market confidence international economic needs (Molina (Rodrik 2000: 183). and Steinberg, 2012). It has been

6 By market dictatorship we refer to a society ruled by the free exchange economy, where a loss of sovereignty of nations is observed in favor of a greater participation in the international markets by signing trade agreements. 7 The economic package received by the North American Agreement (NAFTA) was a great help to cover the obligations of the Mexican government in the short term. Without reaction from the US government to rescue its trade partner, the recovery of the Mexican economy would have taken longer, thus aggravating the social situation.

Mauricio Lascurain Fernández 30 REVISTA DE RELACIONES INTERNACIONALES, ESTRATEGIA Y SEGURIDAD proved that the requirements imposed a trade regulatory system such as by globalization inevitably collide with that established by the World Trade the commitments of domestic policy Organization (WTO). In this regard, (social protection, employment, etc.). any regime of international economic The Dictatorship Market is not the governance must be compatible with only alternative. A third option is the national preferences, ensuring that abandonment of global integration. the agreements are agreed upon by all However, this scheme would force a members. In this manner, countries will commitment as the Keynesian style be capable to belong a regional block of Bretton Woods, where democracy in their respective continent (Regional is maintained within each nation Federalism), and then in the long term state and economic integration is to reach a Global Federalism. done through limited and selective protectionist trade measures. These In the case of the European crisis, given methods previously favored the growth its experience in the construction of a of the countries of the Triad (, supranational project, it seems that in USA and Japan), as well as some Asian Europe this pathway could meet the countries with heterodox development challenges of the Global Economy models that allowed them to reduce Trilemma proposed in this work. Only their poverty levels and have constant through a more federal, political, and growth rates above 5%. However, all economic Europe, it will be able to of them nowadays have abandoned integrate the regional economy while this system and take the opportunity preserving democracy. of economic globalization to fortify their growth (Rodrik 2000 and 2007; Undoubtedly, even though in the Steinberg, 2007, p. 45). integration of the global economy politics is a determining factor Ultimately, as established by this for its constitution, the economic trilemma, the advancement of globalization is determined at least international economic integration by two factors: Trade Openness and becomes a political decision. According the flow of Foreign Direct Investment to the trilemma, the road towards (FDI) through multinational enterprises global governance would be outlined (MNEs) and capital movements. in two vertices. The first recreates the commitment of the embedded liberalism proposed by Ruggie (1982) Trade liberalization as the Bretton Woods style, which accepts the continuity of the Nation- The growth of in State and where international agencies the last decades has been fostered by make a strong and stable international technological innovations and decrease financial architecture up, allowing of barriers. This tendency started

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 31 at the end of the Second World War, At the regional level, in the same when the foundations of what would period analyzed, the become the International Trade (2016) suggests that the annual growth Organization were established (ITO), rate of trade as a percentage of GDP in which finally was not consolidated Latin America was 1.2%, the European because the US felt that the basic Union has a rate of 1.5%, the Asia text contained in the Havana Charter Pacific region 2.0%, while the United restricted US sovereignty. As a result, it States and as single countries was only accepted the part established have an average growth rate as a in Chapter IV of the founding charter percentage of GDP of 2.0% and 2.8%, of ITO about trade policy (Steinberg respectively. 2007). In this way, GATT arose, which would become the right forum for With the end of the Uruguay Round reduction of barriers to international in 1994, there was one of the most trade. important changes in the governance of international trade when the WTO After eight rounds of multilateral trade () was negotiations, being the first in Geneva created. While the GATT is primarily in 1947 with the participation of 23 concerned with trade in goods, countries and the final round in Uruguay the WTO and its agreements are in (1986-1994) with 123 participating charge of trade in services (General members, and of Agreement on Trade in Services, GATS), as a percentage of (Trade-Related GDP8 have had an average growth rate Aspects of Intellectual Property Rights, during the 1960-2015 period of 1.6% TRIPS) and investments (Trade-Related and 1.5 %, respectively, while trade Investment Measures, TRIMS). In this as a percentage of GDP9 between way, the pacts reached in the following member countries has had a constant rounds of negotiations would be under average growth rate of 1.5% in the the legal status of an international same period, up to represent 61% of treaty, and not as agreements between global GDP in 200810 (Graph 1). the parties as in the GATT rounds.

8 Exports and imports of goods and services represent the of all goods and other market services received from the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments (World Bank, 2016). 9 Trade is the sum of exports and imports of goods and services measured as a share of . 10 The global GDP average growth rate during the period analyzed was 7.5 % (World Bank, 2016).

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Graph 1. World Trade as a percentage of GDP (1960-2015).

70,0

60,0

50,0

40,0 %GDP 30,0

20,0

10,0

0,0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: World Bank (2016).

Currently, the WTO is the forum by economists and specialists in of the Doha Round11 which began economic growth is whether trade in 2001 and remains unfinished.12 liberalization is beneficial or not for a During this round one of the most country. The theoretical justification conflictive issues was negotiated, as it is for trade liberalization is associated agriculture. Therefore, the agreements with positive results in the long-term were complex, not so much for the economic growth, allowing greater weight that the agricultural trade efforts to allocate national production internationally has but because it is factors with higher yields. On the the most intervened sector in national other hand, it increases by economies. As a result, there is not facilitating business innovation and the a quick solution to these topics; in response to the rise of competitors in addition, in this occasion there were the domestic market. Also, economies more than thirty new member states in of scale can be created when trade the Uruguay Round, which held talks expands markets. In addition, through for eight years and on issues relatively the importation of cheaper capital less complicated than agriculture. goods new can be In assessing the benefits of free obtained, the facilitation of investment, trade in national economies, one and the accumulation of capital, of the most debated questions elements which condition countries

11 In Doha other topics such as market access for goods intensive in low skilled-exporting developing countries and high value-added services exported by developed countries are treated. 12 The WTO currently has 162 Member States.

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 33 to maintain macroeconomic stability product quality, etc.), or deviate them and enjoy economic benefits derived from these activities (Rodrik 2007, p. from a healthy financial management 219). (Irwin, 2005, Bhagwati, 2004). Finally, another benefit derived from trade Currently, there are empirical studies is reflected in the institutions, that is, about the effects of trade integration some emerging countries have seen in the growth and development of great contributions to the democratic countries, but the results are not process following the implementation definitive. Some studies that have of free trade policies. For example, in used time series data from different China, after the market reforms, the countries and were analyzed through repressions decreased by the regime, econometric methods such as the compared to Maoist totalitarianism World Bank (2011), Frankel and Romer (Wolf, 2005). (1999), Sala-i-Martin (2002 and 2006) and Dollar & Kraay (2001), confirm However, there is doubt about that countries with higher degree of the validity of these theoretical trade liberalization have had better justifications, especially in developing results in their living standards than countries. For example, developed in previous periods and have grown countries and some emerging markets faster than those countries in autarky. have grown steadily thanks to the implementation of tariff barriers, which While there are numerous studies were then reduced gradually, and that examine the effects of trade on then have had a sustained growth in development through regressions of their implementation of tariff barriers, the rate of GDP growth per capita, differing from the theoretical principles in recent years this hypothesis has of an immediate opening. Meanwhile, been strongly criticized, especially the new endogenous growth theory by Rodriguez and Rodrik (2000). provides an ambiguous answer about The authors indicate that in many of the benefits of trade liberalization. The these studies, trade liberalization is answer varies depending on whether measured simply as the proportion the forces of comparative advantage representing the country’s GDP with are moving economic resources respect to the volume of foreign trade. toward activities that generate long- However, it is complicated to form term growth (via in R +D, a judgment about the effect of trade expand productive variety, improving liberalization on economic growth.13

13 Furthermore, it is also possible that the observed relationship between trade volume and growth is due to other factors such as geographical ones.

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Secondly, it is difficult to distinguish in Latin America. On the other hand, the effects of trade liberalization and there is also evidence that reforms domestic economic policies, since favoring free trade have coincided many countries that liberalize its trade with a rise in income inequality in line regime simultaneously undertake with the Stolper-Samuelson theorem. further internal reforms that result in For example, Brohman (1996) affirms economic expansion. If these reforms that reforms in labor markets and are not taken into consideration, the trade (main elements of the package effect of trade liberalization can be of reforms instituted in Latin America confused with other measures that through the Washington Consensus)14 foster economic growth. Finally, in have contributed to inequality in many of the studies the direction of . Under the causality is difficult to be determined, Orthodox perspective, it is predicted that is to say, if trade affects further that free trade would be accompanied growth or whether economies that by an increase in income; however, have recorded high growth rates are “the income inequality seems to be also conducting a larger volume of increased in Latin America every time foreign trade (Rodriguez and Rodrik, that trade increases or is liberalized” 2000; Rodrik, 2007; Steinberg, 2005; (Berry 1998, p. 91). One possible Dollar and Kraay, 2001a). explanation for this phenomenon is that globalization favors the strongest Although it is increasingly recognized sectors of an economy. than trade liberalization has a positive effect on economic growth, many From this debate it can be concluded analysts are cautious to determine that during the current period of the potential effects of this economic globalization, the inequality between policy on income distribution (Ezcurra countries has decreased over the last and Rodríguez-Pose, 2013). Some two decades; largely, this variable has authors, defenders of globalization been favored by the rapid growth of benefits as Sala-i-Martin (2006), what has been called BRICS, especially attribute a decline in global inequality China and .15 However, different to the enormous economic growth that studies (Bhalla, 2002; Dollar and Asian countries had, especially China Kraay, 2001a) and empirical literature and India, as well as some countries reviews (Wolf, 2005) indicate that

14 The 10 points posed by Williamson (1990) as fundamental to the Consensus are: fiscal discipline, reordering public expenditure priorities, fiscal reform, and liberalization of rates, competitive exchange rates, trade liberalization, financial liberalization, , , property rights, and the elimination of barriers to foreign direct investment. 15 Group consisting by Brazil, , India, China and South Africa.

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 35 inequality has increased within each factor to reduce global inequalities, country, although in many cases, the although not inequalities within each changes in income distribution are country. Also, trade liberalization due to factors not directly related to does not lead to economic success; the evolution of international trade it is the policy mix that allows taking (Majeed, 2016). Therefore, caution advantage of globalization (Gurgul must be implemented at the moment and Lach, 2014). However, just as of affirm that trade liberalization is it is predicted by our Trilemma of causality of inequality. the Global Economy, although states pursue a great international economic For best benefits of trade liberalization, integration, globalization will then it should be accompanied by a policy limit sovereignty, and therefore the mix capable of routing a country to the scope of democratic control. However, path of economic growth (Rodriguez the lessons learned from the current and Rodrik, 2000; Winters et al, global crisis demonstrates that greater 2004). Authors like Bhagwati (2004) international coordination is needed and Ritzer (2011) argue that economic to move towards a Global Federalism globalization brings along potential in order to continue with dismantling benefits, but also inconveniences to trade in a democratic form. the nation-state, which faces a new forms of government and where it Interdependence means that the manages its problems with glocal actions taken by a Nation-State have policies (global and local) with the help consequences that will be affected by of international institutions with the the reaction of other Nation-States and purpose to reduce global international actors. These actors, as can insertion,16 situation which is read as be Multinational Enterprises (MNE) and loss of national sovereignty for national their financial flows,17 are an essential governments. part of economic globalization and increasingly participate more actively In conclusion, there is no direct in international politics influencing correlation between trade openness decision-making at the international and economic growth that can be a and national level.

16 Wade (2002), argues that agreements created during the Uruguay Round, especially the TRIMS, GATS and TRIPS restrict the autonomy of countries to choose their policy of growth, because they are subject to supranational rules favor of similarly to those national foreign . 17 There are other non-state actors such as non-governmental organizations (NGOs) and civil society in general, which have a central role in international politics as economic integration proceeds and diminishes the power of States.

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Foreign Direct Investment and national sovereignty (Anderson and Capital Mobility Cavanagh, 2000). Before addressing these discrepancies, is necessary to The development of globalization know the modus operandi of the MNE would not be possible without trade and its evolution in recent years. opening, technological innovations, and the liberalization of foreign direct First, a MNE can be defined as a investment inflows. As a result of these “ of a particular nationality advances, MNEs have constituted which owns, in whole or in part, important agents in the expansion of subsidiaries within a national international economic integration economy” (Gilpin 2001, p. 278). From because they contribute to alter this definition two elements can be trade patterns from an inter-industry identified: a) the control of a business trade to an intra-industry one, as activity abroad and b) the existence well as imposing their power in the at least of two countries, which can international political system. be identified as the country of origin (home state), which is the one the The main benefits of FDI occur through company belongs to, and the host the transfer of technology, especially country (host state); that is the one in new varieties of capital inputs that which the company owns property or promote in the domestic has subsidiaries. Companies invest in input market (Klein, 2015). Those services, manufacture, or extraction that receive FDI usually get training and exploitation of natural resources for their employees and contribute to and these actions can be performed the development of human capital. with existing infrastructures or creating Likewise, the profits produced by FDI new ones through investment, also increase the tax income earned known as “Greenfield” (Gilpin, 2001; in the country (Sanna-Randaccio and Dunning and Narula, 1997). But, Veugelers, 2003; Barrios et al, 2003; why to produce in several countries Feldstein, 2000; Gilpin 2001). Their instead of only in one? And, why is the presence and effects on national production in different locations being economies are the starting point for made through the same company criticism, such as MNEs impoverishing and not by separate companies? The the host country and exploiting the form of expansion of MNEs is given national workers. Another aspect through FDI flows that respond to criticized of MNEs is that they are more microeconomic and macroeconomic powerful than small countries and harm stimulus.18

18 These flows also tend to react positively when governments reduce the protection to local companies and when liberalizing FDI inflows (Egger and Winner, 2005).

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The movement of this kind of agreement was created, related with investment can be interpreted through investment regulation. However, since the eclectic paradigm OLI (Dunning, its start up to day, it is still in contrast to 1999) which is understood that at any the views that suggest an extension of point of time, property and activity the agreement.19 Nevertheless, there patterns of MNEs depend on: (i) is empirical evidence that countries the configuration of its competitive prefer to be liberalized without any advantages (ownership (O) specific) international rules and that greater vis-à-vis non multinational companies; protection through investment rules (ii) the attraction of competitiveness does not guarantee increased flow of of a country or region (location (L) FDI, as affirm those who promote such specific) vis-à-vis other countries; and expansion. According to UNCTAD (iii) the benefits of companies to exploit (2015) between 2000 and 2014 these two advantages internalizing more than 1500 regulatory changes in the market for advantages of specific national legislation about FDI around O, resulting in the advantage of the world were carried out, with only internalizing (I) (Dunning 1999). 16% of these having less favorable changes for FDI while the rest guessed Thus, depending on the advantages a higher liberalization. These results that arise in the OLI paradigm, MNEs were achieved without the need of a will decide where to invest to get the regulatory agreement that limits the maximum benefits. These investment host state and allows MNEs to get movements are possible due to the greater access to different markets and rapid development of information to be actively involved in these. and communication technologies (ICTs) and lower transportation and As a consequence of this deregulation transaction costs, but, above all, by the of national rules,20 global FDI flows liberalization of national regulations on have increased regularly until the year foreign investment. 2000. Subsequently, it had a sudden growth presenting a historic high in As mentioned previously, since the 2007 of $ 3,028 billion dollars (World WTO began its activities the TRIMS Bank, 2016) (Graph 2).

19 For example, some developed countries argue that the agreement still allows too much freedom of action to the host state (especially to countries in the developing world), and so they press to modify it in order to extend protection to foreign investors and ensure non-discriminatory national treatment to their companies (Steinberg, 2007). 20 The privatization of parastatals has also enabled MNEs to acquire inefficient firms in countries with low levels of competitiveness, but with a potentially attractive domestic market (Gonzalez and Maesso, 2003).

Mauricio Lascurain Fernández 38 REVISTA DE RELACIONES INTERNACIONALES, ESTRATEGIA Y SEGURIDAD

Graph 2. Foreign direct investment, net inflows (BoP, current US$)

3.500.000.000.000

3.000.000.000.000

2.500.000.000.000

2.000.000.000.000

1.500.000.000.000

1.000.000.000.000

500.000.000.000

0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: World Bank (2016).

The sharp fall of near 22% from 2000 The decrease of restrictions to to 2003 was caused mainly by the investment in most of the countries slow economic growth in most of the and the evolution of FDI in the recent countries. As well, it influenced the fall decade indicate that there is an of stock prices, the lower corporate incentive to attract it towards national benefits, the slower pace of corporate economies. Therefore, what does FDI restructuring in some sectors, and the contribute to the host state? There conclusion of privatization in some is a great debate about the possible countries. Since 2003, the growth effects of MNEs in the host country of global FDI flow would cause the and even more if it is in a process of recovery of previous indicators, being development. The cost-benefit analysis the developed countries the ones of this relationship is often complicated which received more FDI, followed by and subjective, and is easily subjected the South, East and Southeast Asia and to value judgments (Duran, 2001). Oceania, Latin America, and in last However, there is a wide literature position the least developed countries (Sanna-Randaccio and Veurgelers, in Africa. The fall of FDI presented 2003; Barrios et al, 2003; Feldstein, in 2007 was mainly due to financial 2000; Gilpin 2001; Bhagwati, 2004; problems caused by the global crisis Wolf, 2005; Sala-i-Martin, 2006) in 2008. As can be shown in graph 2, suggesting that an inflow of investment global FDI inflows declined in 2014 by from MNEs can stimulate local 16 %, mostly because of the fragility of development through increased and the global economy, policy uncertainty improved resources and capabilities for investors, and elevated geopolitical (stock of capital, technology, risks. entrepreneurial capacity, access to

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 39 markets); increased competition, According with Bhagwati (2004: 259), better allocation of resources, “companies [multinationals] that human resource development, generate work should be applauded, employment generation, etc. In this no matter what their motivation to regard, companies will wish to move invest abroad is to get benefits, and their resources such as capital and do not make the common good.” The technology towards abroad when critics do not coincide with this idea potential yield is high, especially in based on their arguments according markets where these resources are to which MNEs pay lower wages in scarce. Certainly, the mere existence developing countries. However, there of resources in a country does not is empirical and econometric evidence guarantee that these will contribute which proves the opposite (Brown et to production; however, MNEs allow al, 2002; Graham, 2000). The studies the use of those inactive resources. highlight that the salary paid by MNCs For example, oil production requires in developing countries is higher than not only the presence of oil deposits, the national average . Therefore, but also the knowledge of how to find what they do is to pay a competitive them, the equipment to extract it, and wage, according to local conditions facilities for processing it. To simply in each country. Although with some extract petroleum is a waste if there degree of caution, the arrival of FDI are no markets or transport facilities should be considered, especially in which can provide a foreign investor. those least developed countries, as an The FDI that the MNEs generate can opportunity to development and not start the improvement of resources as a threat. to educate the local staff to use the new equipment, the production A recurring criticism is that MNEs methods and, especially, to use new have become more powerful than technologies. The transfer of innovative national governments. It is said that methods of work increases productivity, the largest MNCs in the world have which increases the time available bigger budgets than some developing for other activities. Furthermore, the countries. Although cautiously, it additional competition may boost is possible to identify some studies the current companies to improve which present a completely different their efficiency, what ultimately these view to this criticism. First, in the elements translate into economic political arena, MNEs cannot compare growth (Iamsiraroj and Ulubaşoğlu, with the capacity of coercion that the 2015). government has over its citizens; in this regard, the government continues However, one of the most extended to have the central role (Held, 2010). criticisms against MNEs is that these Therefore, if MNEs are established exploit workers in developing countries. under a , these will have

Mauricio Lascurain Fernández 40 REVISTA DE RELACIONES INTERNACIONALES, ESTRATEGIA Y SEGURIDAD to develop under the competent laws, Problems like these should be approached which ultimately are dictated by the unilaterally and multilaterally because national government.21 Second. The their consequences affect millions of way that critics establish that MNEs people in the poorest countries. One are more economically powerful of these actions has to start within the than some countries is by comparing own national governments, sanctioning the sales of companies to the GDP their own laws on institutions that allow of the countries, and these are not this kind of abuse. Multilaterally, WTO comparable variables, since they do should implement clearer and fairer not measure the same. As a result from international rules about the activities this criticism, Grauwe and Camerman of the MNEs. Some other actions have (2002) made a comparative study already been put in operation as the about the added value of companies Corrupt Practices Act Abroad, which and the result refutes criticism. The is supported by a large number of US authors conclude that “companies are companies, or the efforts of innumerable surprisingly smaller compared with national and international civil other nation-states” (Grauwe and organizations; thanks to technological Camerman, 2002: 15). Therefore, advances, they denounce the various nation-states are the most important abuses of MNEs around the world and agents vis- à -vis MNEs. make it possible to know the different abuses of MNEs globally.22 However, not everything is positive about multinationals; there are Definitely, MNEs can have positive ambiguous points on their activities effects in the host countries since they with harmful consequences: damage are capable of generating jobs and to the environment, selling harmful in many cases to contribute to the products, and the bribery and economic growth of such countries or corruption that sometimes surround regions where they are installed. Most these companies. On the other of the criticism about FDI does not hand, the lobbies of MNEs were very make sense when analyzed thoroughly, important to defend their interests although the distribution of possible in the WTO allowing that institution benefits from MNEs in the host country to apply sanctions to countries that can be asymmetric and, therefore, infringe royalty payments for patents controversial. In this sense, the abuses (Bhagwati, 2004: 276). of MNEs cannot be ignored. Here, civil

21 However, for very poor countries with extractive industries, MNEs have indeed come to impose conditions to weak governments and / or corrupt (Stiglitz, 2006). 22 See Stiglitz (2006) for proposals to reduce the abuse of MNEs.

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 41 society and national and international foreign investment to more strongly laws will play an important role to flow towards the domestic market sanction and regulate these actions. (Prasad et al, 2003). However, it has not been empirically identified a direct Regarding to portfolio investment relation between financial liberalization flows, as well as FDI, they have and sustained growth, particularly in experienced a significant increase developing countries; on the contrary, in recent decades. The increasing it is associated with a further increase integration of international is of macroeconomic instability (Stallings the result of two aspects: the initiative of and Studart, 2006, Prasad et al, 2003; the governments to liberalize accounts OCDE, 2013; Tamarauntari and Diseye, of capitals and the advances in ICT 2013; Yahya et al 2015). (Information and Communication Technology) has allowed the immediate One of the main features of this diffusion of information globally. It kind of investment is its volatility,23 is in part to these capital flows that which in most cases responds to globalization is manifested in all its speculative stimuli24 that have led to expression. However, the benefits of different financial turmoil during the portfolio investment flows are not as nineties, with strong implications to clear as FDI. the international financial system, especially in emerging markets. The first Theoretical models have identified crisis of the recent globalization was in series of potential direct and indirect Mexico, followed by Russia, the Asian channels by which financial integration Southeast, and Argentina.25 However, can promote economic growth. The Dobson and Hufbauer (2001) point out direct channels are associated with that not everything was due to capital increase in , a reduction of movements and the international capital cost through a better global system, but there was a malfunction assignment of risk and the stimulation of of domestic financial markets. While it development of the domestic financial is true that governments of developing sector (Feldstein, 2000). Indirect countries must create stronger and channels are associated to improved efficient national institutions, such economic policies and support for as those in developed countries,

23 One of the problems with capital flows in the short term is that this investment cannot be channeled to foster the infrastructure of a country because of their transient nature. 24 The possibility of speculative profits is based on anticipations of movements of variables such as interest rates, types of futures, and derivatives exchange. 25 , among other factors, caused the various economic crises that Mexico experienced in 1995, South Korea in 1997, and Argentina in 2001.

Mauricio Lascurain Fernández 42 REVISTA DE RELACIONES INTERNACIONALES, ESTRATEGIA Y SEGURIDAD they should also be responsible for as is the case of the Sovereign receiving appropriate advice on the Funds (SWF). SWF are investment implementation of the policies of the instruments under public control Washington Consensus. with large commodity through which exporting countries channel their huge The experience of Mexico and other foreign exchange reserves. Usually financial crises shows that the opening of attend low-risk investments, but the capital account must be conducted increasingly venture into risk capital with caution, and discipline, and to (Segrelles, 2008). The increase of SWF be regulated and supervised in order in sectors (some strategic as ports, to avoid future crisis. There are also banks, etc.) generates great concern proposals to prevent a massive outflow in developed countries because they of capital as the “Tobin tax” (Tobin, could reach to control them. Some 1978) which consists of a tax in each proposals set out clear rules that include financial transaction across national aspects such as: base investment . However, the opinions are decisions on economic factors rather divided between those who believe than political ones, transparency in the tax would improve the economy its investment policy, internal control of the countries affected by financial and , fair competition speculation, while others consider that with the private sector, the promotion would limit the flow of investment of international financial stability, and and would be politically impossible.26 the respect to the rules of the country However, a reform of the international in which it is invested (Surendranath et financial system is also necessary, al 2010). These rules should be fixed involving the IMF and the World Bank, to OECD, IMF, and the World Bank, in order to optimize the governance and even to the WTO (Segrelles 2008, of the international financial system p. 6). At the moment, companies and facilitate developing countries a have invested on SWF and have had a secure and better integration into the positive effect on these, however, little international . control and lack of information about their origin and finality could cause a Nowadays, not only developing future conflict. countries are concerned about the control of capital movements; Definitely, capital flows either as developed countries also seek more FDI or portfolio are important for transparency about the origin of capital the development of economic

26 See Frankel (1996), Jetin B. and De Brunhoff (2000), and Kang and Juanyi (2009) for an analysis of the benefits or inconveniences of the Tobin tax.

CHALLENGES OF ECONOMIC GLOBALIZATION REVISTA - Bogotá (Colombia) Vol. 12 N.° 1 - Enero-junio 43 globalization. Specially, FDI has Conclusions positive effects on the host state and developing countries have realized Over the course of this article it has that.27 However, the higher flow of been shown that the components of investment is still concentrated in economic globalization are posing new developed countries and emerging challenges to governments, especially economies. This phenomenon can be in developing countries, which have interpreted through the OLI paradigm had a more active participation in the sense that less developed than in the past nineteenth-century countries do not have advantages in globalization. L, and consequently MNEs prefer to invest in other markets. According From that of the to portfolio investment, it also finds late nineteenth century to the present better investment opportunities in there are large differences, both developed countries and emerging qualitative and quantitative but, in markets. However, the effects that spite of great institutional advances are generated, especially in these last and ICT, what stands out in both is that ones, suggests that it is necessary to international economic integration is have reservations about the benefits not complete yet. This fact is one of of mobility of short-term capital, since the main responsible causes for the their speculative volatility makes them great diversity of national jurisdictions unpredictable with great risk to national and geographical factors that limit economies and many of them do not incentives to international transactions have an efficient domestic financial that meet the preferences of citizens system capable of managing these from different countries. movements. Just as in the case of trade opening and under the framework That is to say, it is under the edge of of the Global Economy Trilemma, a the Dictatorship Market postulated higher regulation of financial flows by Rodrik, which creates more could be better managed through a inconveniences for most societies. Global Federalism. However, globalization is not in

27 For example, in the case of Brazil, former president Fernando Henrique Cardoso (creator of the Theory of Dependency), made during his term (1995-2002) a major effort to attract FDI from USA. In Mexico, since the mid-eighties, the different presidents in turn noted that a very centralist and nationalist posture resulted in a decrease in FDI and with it an obstacle to development. For this reason, restriction policies to FDI were declining in recent years in most developing countries. Perhaps more important is the fact that those countries that are outside the global networks of MNEs will be at a considerable disadvantage, mainly because of international trade consists of intra-firm transfers between a subsidiary and another.

Mauricio Lascurain Fernández 44 REVISTA DE RELACIONES INTERNACIONALES, ESTRATEGIA Y SEGURIDAD danger; the trend of this phenomenon the proper stage and the appropriate has been positive but limited. It was policy mix, globalization would involve identified that while globalization net beneficial results. expanses, the cost to remain in autarky increases. However, to say that globalization is capable of stimulating long-term growth Even though different empirical for all countries that are immersed studies are incapable to establish in it would be erroneous because a direct correlation between trade problems arise with inconveniences openness and growth, what they and heterogeneous results, mainly in have demonstrated is that free trade economies of developing countries. is an alternative that produces better One of these problems is the loss net results for those countries that of a model of economic and social implement this type of trade policy, cohesion as the embedded liberalism compared with those who remain in (Ruggie 1982). Through the Trilemma autarchy. of the Global Economy it was proven that countries that wish to join The analysis suggests that in order economic globalization cannot obtain to obtain these favorable results it is full sovereignty and democracy. The important to create a national scenario proposed option is to give democracy with efficient institutions, and find the a long-term continuity, as long as appropriate policy mix that together international organizations equitably with trade liberalization obtain and efficiently supply the needs of the advantage and the potential benefits nation state. of globalization. It is not sufficient with trade and financial reforms; developing To make this possible, reform of countries need to deepen and make economic institutions of international institutional reforms. In this sense, governance will also be needed. In better laws and institutions, and the this regard, agencies need to redefine proper regulation of FDI and portfolio, its role globally with ecumenically can obtain the potential benefits of accepted rules for moving forward fairly these movements. in the process of economic integration, allowing all countries to enjoy the Unifying stances towards regional potential benefits of globalization. federalism could be a driver of globalization, provided the agreements The WTO will be important in the respect the basic fundamentals of integration of developing countries. To the WTO and global moves towards do this, it must be considered a regime federalism, which requires efficient in favor of development where poor supranational institutions which countries identify their institutional reflect national interests. Hence, with structure and the appropriate policy

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