ARPA:Multinational enterprise, power and the state

Stephen G. Brooks Producing Security: Multinational Corporations, Globalization, and the Changing Calculus of Conflict, Princeton, New Jersey, Princeton University Press 2005 (336 pp). ISBN 0-69112-151-6 (hard cover) RRP $94.95.

As a global hegemon the United States has always been preoccupied with its standing in the international order. Recurrent fears over its imminent decline, incessant preoccupation with geo-political strategies for the maintenance of empire, or, more recently, ‘neo-con’ assertiveness aimed at flexing military muscle to regain political ascendancy, all testify to America’s perennial hegemonic anxiety. In scholarly writings such concerns have been periodic and many of them celebrated; Paul Kennedy’s The Rise and Fall of Great Powers, for example, spurned a national debate in 1988 about the future of American power in the face of Japan’s then apparently unstoppable economic growth and the problem of American ‘imperial overstretch’.

More recently, scholarly studies from both the left and right have reignited America’s fears about its place in the 21st century. Immanuel Wallerstein’s The Decline of American Power: The US in a Chaotic World (2003), for example, sees the natural contradictions of capitalist development in the periphery usurping American technical and economic dominance.Similarly, Philip Bobbitt argues convincingly in his opus, The Shield of Achilles: War, Peace and the Course of History (2002), that what he calls the ‘market-state’ will mediate new forms of state-society relations, circumventing the divide between state-based and market-based economic systems in ways that systemically transform the location of power, diffusing it ever more widely between Western Europe, America, and Asia.

Reputable Wall Street investment houses, too, are converts to this new received wisdom. In the much publicised Goldman Sachs 2050 BRICs report, John O’Neill, its principal author, maps the future as one where the BRIC economies (Brazil, Russia, India, and China) will likely become the main sources of ‘new global spending’, where India’s economy will be ‘larger than Japan’s by 2032, and China’s larger than the US by 2041’. By 2039, the report concludes, ‘the BRIC economies taken together could be larger than the G6’ combined (O’Neill 2005; Wilson & Purushoth 2003). Indeed, even at the very heart of government, the US National Intelligence Council concludes in its 2020 Project that:

America, it seems, will have to surrender to the future and accept its fate as a likely significant, but much diminished player in the stakes for global economic and political power. All eyes will be looking East to China and India especially, the vast populations and rapid economic growth of which will drive a Pacific 21st century.

Surrendering to the Future: A Second Rate Power or Diffuse Power?

The story of America’s imminent decline and future second rate status might now be common parlance—if not official government policy!—but the diagnosis of the causes of this shift remain mostly untested. Extrapolations of current economic growth rates, as in the Goldman Sachs 2050 BRIC report, for example, make bold assumptions that China will enjoy uninterrupted economic growth of near on 10 per cent per year for the next 20 years; that no financial crisis will visit the mainland, that social stability will persist, and that China’s political system will not collapse or suffer any major crisis. All these assumptions are highly problematic. More obviously, these assumptions are nested in a view of the world that might itself now be outdated—or quickly becoming so. Much of the debate surrounding American power, for instance, rests on a view of the nation state as the major repository of power. Thus, follows the logic, if America does not have hegemonic power who will? If America loses power who will gain it? As Niall Ferguson notes, ‘[w]e tend to assume that power, like nature, abhors a vacuum’. On this view, world politics is always a process of sovereign states ‘bidding for hegemony. Today it is the United States; a century ago it was Britain’ (Ferguson 2004) and next it will be China or India.

It seems curious, however, that we accept 19th century thinking premised on 17th century concepts like sovereignty and the nation state to extrapolate a future where change is assumed constant and the contest for power endemic, but where the entity that contains power, the nation state, is assumed unchanged! But what if, asks Niall Ferguson, ‘this view is wrong? What if the world is heading for a period when there is no hegemon? What if, instead of a balance of power, there is an absence of power?’ (Ferguson 2004). Equally, what if the nation state is altered, its role in securing economic well-being diminished, its sovereignty impaired? What does the future look like then? Would it be meaningful to talk about power in the context of a contest between states, or to talk about unipolarity, multipolarity, or a balance of power?

These questions have not been the most popular among mainstream analysts of international relations. Yet, for a growing number of analysts they are by far the more interesting questions to pose. Stephen Gill, for example, was among the first to begin to re-focus the power question toward issues of change in the configuration of the global political economy (Gill 1990). Before him, Robert Cox’s exemplary scholarship into the relationship between historical modes of production and the nation state led the way in looking more deeply at the systemic parameters from which states derive power (Cox 1987). For Cox, power is not just a function of sovereignty, military might and territoriality, but a complex combination of economic and social orders premised on specific modes of production (industrial or post-industrial, for example). These give rise to different competitive ordering dynamics in the international system which, in turn, result in changing spatial and political-geographic outcomes. Under industrial modes of production, for example, spatial politics is premised on colonialism, inter-state competition for scare resources and mercantilist forms of protectionism. Under post-industrial modes of production, by contrast, spatial politics is premised on disaggregated forms of production emphasising factor mobility and the de-territorialisation of economic sovereignty (what many call globalisation). For Cox and Gill there is, then, an implicit association between forms of economic organisation and the systems of governance and political-geographic outcomes that ensue.

Both Gill and Cox pioneered what we might now identify as a concern with structural power in the international system and the interplay between modes of production, states and commercial processes—that is, how economic systems support certain systems of power. More recently, of course, this strand of analysis has broadened its scope to examine the role of private sector actors like multinational enterprises as well as private sector authority in the international system; industry organisations and various commercial networks that arise from this authority and their affect on the state (Gill 1990; Cox 1987). Susan Strange’s tour de force in The Retreat of the State: The Diffusion of Power in the World Economy (2000) led the way, followed by more micro-focused studies analysing how private sector authority has created private led regulatory regimes and international agreements—regimes that essentially create new forms of governance (the World Trade Organization, the International Civil Aviation Organization, the Bank of International Settlements, etcetera.) (Strange 2000; Cutler et al 1999).

Beyond the State?

Underlying all these perspectives, of course, is the implicit acknowledgement of the role of economic forces beyond the state which impact the Westphalian system of sovereign nation states. While the sub-field of international political economy has generally been innovative in addressing this problem, placing front and centre the changing dimensions of private non-state actors and their repercussions for the state, in security studies the state has remained the central analytical object of inquiry. Non-state actors or even sub-state processes have mostly fallen outside the focal plane of security analysts. The volume by Stephen G. Brooks, Producing Security: Multinational Corporations, Globalization, and the Changing Calculus of Conflict, is thus a much welcomed addition to the security literature; indeed one of the more innovative in recent memory. It is, as Brooks suggests, ‘the first systematic study of how unprecedented change in the global political economy influences international security’ ( p. 5). In a sense, though, it is much more than this, since its focus on multi-national corporations (MNCs) implicitly addresses many issues associated with the emergence of a transnational set of actors whose interests transcend the nation state and alter, fundamentally, their relationships.

Brooks’ thesis is straight forward enough. Traditional approaches to globalisation have measured the impact of economic interdependence by looking at the relationship between trade flows and security. Historically, Brooks argues, this made sense since interdependence and globalisation were trade dependent. In the contemporary era, however, this logic is now redundant: ‘Until recently, trade was ‘the primary means of organizing international economic transactions’. Today, however, trade is a second-order phenomenon: where and how multinational corporations (MNCs) organize their production activities is now the key integrating force in global commerce’ (p. 3).

It is, argues Brooks, the disaggregation of integrated vertical and horizontal production structures (that is, the transition from industrial to post-industrial modes of production) that creates new production networks. And it is these, suggests Brooks, which change the security environment. How? Essentially by changing the incentive structure in the international system, changing the capabilities of states and by changing the nature of the actors themselves:

In a nutshell, there is a ‘marked reduction in the benefits of conquest among the most advanced countries’ together with a technical dispersal of weapons development capabilities. The result? Advanced states increasingly experience a coincidence of interests because the globalisation of production creates economic and functional interdependencies, obviating the benefits of aggressive or unilateral forms of mercantilism. None of this necessarily holds true, of course, for developing states or for the relationship between advanced and developing states; albeit, argues Brooks, the incentives to engage in co-operative inter-state relations for welfare gains does create underlying norms that condition the behaviour of developing countries.

The force of Brooks’ thesis rests on the case that the globalisation of production creates a kind of self-reinforcing symmetry between states: some of this expressed formally through integration as with the European Union; some less formally as with the North American Free Trade Association, but both delivering enhanced economic security through the procurement of greater amounts of foreign direct investment (FDI) and further growth (p. 53). In essence, there is an increasing, perhaps even prohibitive, opportunity cost associated with being closed off from MNC investment. Advanced states are under pressure to adopt yet more institutions and practices that moderate the transaction costs for foreign investors; whether by developing credible commitments and state investment guarantees or by constructing efficient regulatory regimes that are supportive of investment flows.

Brooks argues that this process is most forcefully felt in the globalisation of production of military technology, where no state is able to go it alone and isolate itself from the collective technological developments that are now spread across numerous states. The phenomena of co-production, co-development, and of offshore licensed production programs that grew out of Cold War collective security strategies, has, ironically, now created the conditions that subvert national weapons development autonomy.

Added to these dimensions is the emergence of legions of inter-firm alliances in all facets of production across numerous industry sectors. The state is thus enmeshed in highly complex production networks over which its control, or ability to regulate control, is obviated by the logic of investment guarantees, de-regulation and reductions in impediments to inter-state flows of goods, capital and services in order to attract FDI. The security logic of the state, especially for advanced states, is thus transformed by the globalisation of production. Rather than focus upon the state, analysts should be looking at economic processes, inter-firm alliances, and the desegregation of production chains and how these change the capabilities and incentives of states and, ultimately, the nature of the state itself.

Where has the Power Gone?

Brooks’ thesis is well executed and amply illustrated with case examples and detailed empirical analysis. His scholarship cannot be faulted. His thesis, however, stops short of its logical destination: articulating a theory of the changing dimensions of power in the international system between states and markets or states and private sector authority.

This is strange since Brooks is keen to rehearse the enormous growth in both FDI and MNC activity and the share of FDI that MNCs now control. Like others before him, Brooks surveys various official data that reveal the extent of MNC contributions to global economic production and to the livelihoods of tens of millions of people. To take just some of this data illustrates the rapidly changing dimensions of private sector authority in the international system. As of 2003, for example, the number of MNCs in the global economy had grown to 65,000, operating some 850,000 foreign subsidiaries and employing approximately 80 million employees with global sales in excess of US$11 trillion dollars (pp. 16–46) (UNCTAD 2003; Held et al 1999; Jarvis 2005).Fully 30 per cent of global trade now takes place within firms as intra-firm trade. Annual growth in FDI has outstripped global economic growth at a rate of almost two to one over the last decade. And MNCs now account for perhaps as much as 10 per cent of global employment (direct and allied) (Jensen 2006, p. 25; Jarvis 2005).

As Brooks and others would doubtlessly agree, this is not simply a question of one entity now outstripping the power or size of the other. Such crude comparisons miss the point entirely. Rather, the question has to be asked to what extent the complex relations between private non-state actors like MNCs and the countless forms of intra-firm exchanges and inter-firm alliances that exist, usurp the notion of the ‘national economy’? Or, to put it another way, at what point does the notion of ‘economic sovereignty’ begin to lose efficacy as a descriptor of the workings of the domestic economy? If, for example, one of the dominant forms of inter-state competition is now competition for FDI, to what extent does this modulate state behaviour, creating defacto compliance towards fiscal, regulatory, and monetary norms favoured by MNCs? Does this change state-MNCs bargaining relationships?

Many analysts would now answer these types of questions in the affirmative, suggesting that fundamental changes in the relationship between state and private sector actors. Two examples serve to illustrate this point.

International Agreements and Power: The Preserve of Nation States?

In conventional thinking, international agreements are agreements between nation states, negotiated by nation states and the professional stratum of public officials and diplomats appointed through the instrumentalities of domestic political systems. But can this model still explain the legion of international agreements that now exist? Susan Sell, for example, when exploring the advent of the intellectual property (IP) rights regime discovers that, rather than prompted by the activities and interests of nation states, the regime actually owes its existence to a group of MNCs. It was, Sell demonstrates, the actions of twelve US-based multinational corporations and their defacto regulatory and protectionist power which promoted them to collaborate and form an industry-based ‘intellectual property committee’. This committee and its extensive activities succeeded in having the existing laws of industrialised countries adopted and ratified in having the Trade Related Aspects of Intellectual Property (TRIPs) accord of the Uruguay round (Sell 1999). As Sell notes, the TRIPS accord ‘illustrates the increasingly porous boundaries between public and private authority, domestic and international politics, and domestic regulation and international commerce’ (Sell 1999, p. 192). This is not a question of private sector authority usurping the ‘power’ of the state to regulate the domestic sphere or to engage in international treaties, but a case of private sector authority being able to use the agency of the state to protect its commercial interests internationally.

This blurring between public and private sector authority can also be observed in the context of the economic sovereignty of the state over fiscal, monetary and regulatory policy. For the majority of international relations scholars, the state is assumed to be the penultimate juridical entity, able to exercise its sovereignty relatively unhampered by external non-state actors. It sets taxation policy, decides how best to service the welfare needs of its citizens, decides on the level of national debt, and formulates budget and fiscal policy on the basis of domestic desires. But can these assumptions about the economic sovereignty of the state continue to be sustained?

Timothy Sinclair suggests they cannot (Sinclair 1994; 2005; Gill & Law 2004). As Sinclair demonstrates, credit ratings agencies like Standard and Poor’s, Moody’s, and Fitch, while seemingly innocuous and obscure, in fact exert enormous defacto power by issuing ratings on the credit worthiness of sovereign debt and various government debt instruments (sovereign bonds). This power is not manifest but diffuse, transmitted through qualitative gradings of the investment rectitude and ‘soundness’ of government fiscal and monetary policy. The norms by which the ‘soundness’ of fiscal and monetary policy are assessed are determined solely by private, non-elected actors, transmitted to the market as ratings downgrades or upgrades, and acted on by diffuse sets of institutional investors who then decide if to lend to governments and what risk premium to impose on that lending. In other words, private sector authority defines the norms of fiscal governance with which states are required to demonstrate compliance. For states that fail to comply, the costs are high. Costs go beyond forgone economic gains or outright market penalties (withdraw of capital or denial of access to capital, for example), political elites, domestic institutional legitimacy, and the well-being of the polity. The ‘unconscious’ power of credit ratings agencies, then, blurs the boundaries between public and private, between the state as the traditional sovereign custodian of markets and capital, and the market as an institutional subset of the state and compliant with its regulatory authority.

Springtime in Beijing, Winter in Washington?

What might all this mean? Simply that the conventional boundaries on which much of our understanding of power and the global economy has been built: private versus public, state versus non-state, national versus international, and on which the assumed capacities of the ‘sovereign’ state and the functioning of the Westphalian system rest, are now less meaningful than they once were.

Brooks is aware of this implicitly, but does not explore the logical extrapolations of his thesis. Others are more aware. Philip Bobbitt, as already noted, sees the boundaries blurring with the emergence of the ‘market-state,’ supplanting economic (market) and regulatory (state) processes with interrelated power systems that are co-dependent and non-exclusive. Stephen Gill, Robert Cox and Timothy Sinclair, among others, also see the changes in the global political economy as fundamental, and in various ways transforming the dimensions of the Westphalian system.

Much of the present preoccupation with China’s imminent rise and America’s apparent demise, thus misses the point altogether. Facilitating China’s economic growth is not the rise of a Chinese state enamoured with new found power, but its demise amid the emergence of new authority structures and a fundamentally new form of Chinese state. China’s growth is entirely contingent on access to global capital, the US market, inflows of foreign direct investment from MNCs, and market assessments of the viability, rectitude and stability of the Chinese economy. If anything, it is the absolute reduction in the economic autonomy of the Chinese state and those same blurring of public and private authority structures which is enabling its growth. Both Washington and Beijing might currently be engrossed in self examination as to which enjoys the greater sway. Meanwhile the emergence of market forces, private sector authority, and the embedded reciprocity between states and markets continues to be the most compelling story of the changing power dimensions in the international political economy. The new hegemon might thus be everywhere and nowhere; not a state but a set of economic processes of which the state will form an inextricable part but not be its whole.

REFERENCES

Bobbitt P. 2002, The Shield of Achilles: War, Peace and the Course of History, Penguin Press.

Brooks S.G. 2005, Producing Security: Multinational Corporations, Globalization, and the Changing Calculus of Conflict, Princeton University Press, Princeton, New Jersey.

Cox R.W. 1987, Production, Power, and World Order: Social Forces in the Making of History, Columbia University Press, New York.

Cutler, A.C., Haufler V. and Porter T. (eds) 1999, Private Authority and International Affairs, State University of New York Press, Albany, New York,

Ferguson N. 2004, ‘The end of power,’ Wall Street Journal, Monday, June 21.

Gill S. 1990, American Hegemony and the Trilateral Commission, Cambridge University Press, Cambridge.

Gill, S.R. & Law, D. 2004, ‘Global hegemony and the structural power of capital,’ in Global Governance: Critical Perspectives in Political Science, ed. T.J. Sinclair, New York, Routledge, pp. 3–34.

Held H., McGrew A.G., Goldblatt D. & Perraton J. 1999, Global Transformations: Politics, Economics and Culture, Cambridge, Polity, p. 236.

Jarvis D.S.L. 2005, ‘Multinational enterprises, international relations and international business: Reconstituting intellectual boundaries for the new millennium,’ Australian Journal of International Affairs, vol. 59 no. 2, June, pp. 201–223.

Jensen N.M. 2006, Nation-states and the Multinational Corporation: The Political Economy of Foreign Direct Investment, Princeton University Press, Princeton, New Jersey.

Kennedy P. 1987, The Rise and Fall of Great Powers: Economic Change and Military Conflict from 1500 to 2000, Random House, New York.

National Intelligence Council 2004, Mapping the Global Future, 2020 Project, US Government.

Sell S.K. 1999, ‘Multinational corporations as agents of change: The globalization of intellectual property rights,’ in Private Authority and International Affairs, eds A.C. Cutler, V. Haufler and T. Porter, State University of New York Press, Albany, New York, pp. 169–197.

Sinclair T.J. 1994, ‘Passing judgement: Credit rating processes as regulatory mechanisms of governance in the emerging world order,’ Review of International Political Economy, vol. 1, no. 1, pp. 133–159.

Sinclair T.J. 2005, The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness, Cornell University Press, Ithaca, New York & London

Strange S. 2000, The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge University Press, Cambridge.

Wallerstein I. 2003, The Decline of American Power: The US in a Chaotic World, AK Press.

United Nations Conference on Trade and Development (UNCTAD) 2003, World Investment Report 2003, New York and Geneva, United Nations.

Darryl S.L. Jarvis is Associate Professor in the Lee Kuan Yew School of Public Policy at the National University of Singapore. His current research project is focused on political and regulatory risk at the industry sectoral level and involves a comparative study of ten Asian countries.

View other articles by Darryl Jarvis:

The Rise and Rise of Risk (Digest, 21 Jun 2004)
Australia Must Support the War Against Terrorism (Digest, 9 Oct 2001)