Page 1 of 2 BOOK REVIEW The free market's nasty secret The End of the Free Market (Who Wins the War Between States and Corporations?) by Ian Bremmer
Reviewed by Mladen Bonev
Ian Bremmer's book describes the ongoing competition between big multinational
corporations on one side and state-owned companies such as Russia's Gazprom and
China's CNOOC on the other. The focus is mostly on natural resource companies.
The author's sympathies are clearly stated - he is on the side of the
multinationals like Exxon Mobile, BP and Halliburton.
Bremmer is deeply concerned with the fact that state-run companies and funds
are becoming increasingly powerful and are
being allowed to use state resources. He presents this competition as a
struggle between state capitalism and free markets. The subtitle says it all.
The book logically starts with an overview of the current situation in the
global marketplace. As the author writes on p 17:
In 2000, a report by
the Institute for Policy Studies dropped a bombshell: Comparison of corporate
sales of the largest multinational companies with the gross domestic products
of the world's wealthiest countries revealed that 51 of the world's 100 largest
economies were corporations; just 49 were countries. According to the report,
General Motors had become bigger than Denmark, Daimler/Chrysler bigger than
Poland, Mitsubishi bigger that Indonesia, Wal-Mart bigger than Israel, and Sony
bigger than Pakistan. In January 2006, a report from a respected commentator
estimated that the top 100 multinationals collectively accounted for one third
of world economic output and two thirds of global trade.
The
rise of the multinationals is remarkable, and even in the global recession they
preserved and some even multiplied their financial and economic muscles. This
summer, for example, the market capitalization of Exxon Mobil was about US$315
billion and that of BP - about $130 billion, even after the Gulf of Mexico oil
spill.
Thus, in the list of 181 countries arranged by their nominal gross domestic
product (GDP) for 2009, Exxon Mobil would take the position number 30, ahead of
countries like Argentina and South Africa.
At the same time, the big multinational companies do not function like
contemporary democratic states - they have no parliaments and no courts. Such a
company could be likened to a dictatorship state with a dictator chief
executive officer (CEO) at the top, helped by his council (board of directors).
For a minor violation, every "citizen" can get deported (fired). The CEO
usually has absolute power and the top executives are paid handsomely. Exxon's
CEO Rex Tillerson, for example, is receives $4 million in compensation,
Halliburton CEO David J Lesar $6 million and McDonalds' CEO James Skinner at
least $16 million (data from Yahoo Finance). These numbers exceed by far the
compensation of the US president.
The big companies are also very focused on their areas of expertise and their
products. Microsoft, for instance, has a market cap of about $220 billion,
which puts it ahead of Denmark. While the government of Denmark has to worry
about many different things, Microsoft's executives are focused only on
software. The big multinationals apply their efforts in a single direction,
which makes them very powerful in their disputes with different governments.
During the past 30 years, the big corporations, feeling their strength, have
energetically fought for globalization and free trade. They have urged their
governments (mainly in the US, West Europe and Japan) to secure free markets
for them through international treaties and organizations. Thus, through the
diplomatic work (and sometimes through the military clout) of their
governments, the multinationals have overcome the trade barriers used by other
countries to defend their domestic industries.
In the face of these developments, countries like Russia, China, Brazil and
some others have realized that without state support their own companies will
not be able to stand to the big multinationals. Accepting free trade,
international competition and rapid privatization in the period 1993-2000,
Russia, for instance, almost lost large parts of its natural resources to
international capital.
For his discussion of state capitalism, Bremmer considers mostly China, where
the communist government in the late 70-ties decided to create special economic
zones on the east coast that mimicked free-market economies. The experiment was
very successful and gradually spread further inland. For 30 years, China has
enjoyed fast economic growth while preserving its communist government.
Discussing this growth, Bremmer clearly shows concern that state capitalism
(mainly its Chinese version) endangers free markets and restricts the
possibilities for the big multinationals. However, it is not clear why the
author is so defensive of these companies.
Bremmer does not give an exact definition of "free markets", but from the
context it is clear that this means unrestricted commercial activities of the
multinational corporations. The expectation is that their freedom will maximize
growth and profits. It is also assumed that profits from the corporations will
then trickle down to the rest of the population and will benefit everybody.
As real life shows, though, this assumption is not quite true. Maximizing
profits is usually done through payroll trimming (to reduce cost), outsourcing
and subcontracting. Many US manufacturing companies have outsourced their
operations abroad and thus have practically deprived the United States of
valuable productive capacity.
To improve efficiency, the corporations are growing like snowballs, absorbing
smaller companies and merging among themselves. This is destroying the middle
class through the destruction of small businesses and redistribution of wealth.
The wealth inequality has drastically increased and the purchasing power of the
consumers has decreased.
Also, it is not clear why growth for the sake of growth of the big corporations
is something positive and beneficial for mankind. Very recently, we saw how
uncontrolled growth in the US and the United Kingdom housing markets caused a
malignant bubble.
It is more than obvious by now that free markets do not regulate themselves. On
the contrary, unregulated market activities tend to cause bubbles and crashes.
Joseph Stiglitz recently expressed very eloquently: "Celebrated results, such
as Adam Smith's invisible hand, did not hold; the invisible hand was invisible
because it was not there." [1]
The word "multinational" explains that these corporations do not entirely
belong to any particular nation. At present, the companies on the Standard
& Poor's 500 index in the US derive about 40% of their earnings from
abroad. This share is steadily increasing and at some point will exceed 50%. So
far, companies like Exxon Mobile and Halliburton are still headquartered in the
US, but already large units of them are stationed abroad.
The workforce of the multinational companies is - not surprisingly, but with
not-too-obvious implications - also multinational: it is spread all over the
world and its American part is decreasing. We can observe a process of
decoupling; the business interests of the multinationals deviate further and
further away from the national interests of their "countries of origin". The
American multinationals, for example, are becoming more and more independent of
America. It is a well-known fact that large parts of their profits and tax
breaks are invested abroad.
In this situation, it is not clear why it is justifiable to spend American
taxpayer money for their well-being. In the present crisis, with high
unemployment in America and many other ordeals, the top executives of Exxon,
Halliburton and the likes are still paying themselves tens of millions of
dollars in salaries. In many cases these corporations have behaved
irresponsibly and disrespectfully to sovereign states. One vivid example is the
oil spill in the Gulf of Mexico caused by BP.
Bremmer defines state capitalism as a "system in which the state dominates
markets primarily for political gain". Then he says he hopes state capitalism
is doomed. But he never explains why state capitalism is so bad. Is "political
gain" something wrong?
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The
rise of the multinationals is remarkable, and even in the global recession they
preserved and some even multiplied their financial and economic muscles. This
summer, for example, the market capitalization of Exxon Mobil was about US$315
billion and that of BP - about $130 billion, even after the Gulf of Mexico oil
spill.
