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    Globalization and the External Relations
    of Latin America and the Caribbean
    Edition Nº 53.

    January-June 1998.

    TITLE Globalization: fact versus fiction
    AUTHOR Aldo Ferrer
    Former Minister of the Economy and
    Public Works of the Republic of
    Argentina and International Advisor.


    By authorization from the publishers, following is an abridged version of the first chapter of the book Hechos y Ficciones de la Globalización. Argentina y el MERCOSUR en el Sistema Internacional by the Argentinan economist Aldo Ferrer, published by Fondo de Cultura Económica in December, 1997.

    I. Introducción

    Ever since the advent of an economic order encompassing the whole planet, countries' relations with the international environment have determined their level of development. Capital formation, technological change, the distribution of resources, employment, the distribution of income and macroeconomic equilibria are, indeed, strongly influenced by relations with the international system.

    Therefore, how a country's economy interrelates with the international environment determines whether it will grow or lag behind. In other words, all countries must face the dilemma of how to develop in a global world.

    That dilemma reflects, in the first place, the existence of different levels of development and, therefore, uneven relations of power. Developing countries must close the gap that separates them from the world's leading economies in order not to be caught in an international system dominated by these.

    The current debate on globalization's nature and range is nothing new. It goes back to the same historical problem of how can each country solve its development dilemma in a global world so as to avoid getting caught in a network of relations administered by the main interests and powers for their own benefit.

    The question is, nothing less, whether marginal countries will have the freedom to choose their own destiny. That is, whether they will be able to devise and carry out viable national development projects that will allow them to be active participants in the globalization process.

    II. The Facts

    The globalization of the world economy is apparent in four main areas: international trade, transnational corporations, financial flows and regulatory frameworks.

    International trade. Ever since 1945 trade has grown faster than production. Between 1945 and 1996, and with major fluctuations throughout the period, the world's product has increased at an 4% average annual rate and international trade at an average 6% rate. Consequently, in the second half of the the XX Century, exports increased from 10 to 20% compared to world product .

    Practically all countries registered this increase. Between 1950 and the beginning of the 1990's it grew from 3.6 % to more than 7% in the United States, from 8.5% to 24% in Germany and from 4.7% to more than 9% in Japan. In developing countries as a whole, this ratio increased from 16.5% to 20%.

    Transnational corporations. During the last decades, private direct investment increased rapidly. Currently, 30 thousand transnational corporations, with 270 thousand subsidiaries throughout the planet, are operating in the world economy. Almost three billion dollars have been invested in these subsidiaries, generating an annual output of more than 2 billion dollars. The transnational operations of the 100 major corporations in the world represent around 50% of their total activities.1

    Transnational corporations' transnationalization of production has resulted in an intensive flow of materials, final products, technology and services between the home corporations and their subsidiaries. The importance of this process is illustrated by the fact that it is estimated that close to 1/4 of world trade is the result of relations within a corporation's subsidiaries. The evolution of electronics and the consequent strides made in data and information processing have facilitated transnational corporations' decision making process and the organization of its production at a world scale.

    Financial flows. The expansion of international trade and direct private investment is nothing compared to to the steep growth of global financial markets. Ever since the end of World War II, international financial operations have increased three or four times faster than world production and investments in real assets. This increase has been particularly sharp since the 1960's.

    An analysis of just one aspect of global finances, i.e., net international bank loans, reveals that for each 100 dollars in fixed assets investments in the world, loans reached 6,2 dollars in 1964 and more than $130 at the beginning of the 1990's.Compared with international trade, during those same years the ratio was 7,5 and 105 respectively.2

    Financial flows consist mainly of short term capital operations unrelated to trade, investment and real production activities. The variety of financial instruments has multiplied and become very sophisticated. Speculative profits are the main objective of most international financial transactions. It is estimated that 95% of all foreign exchange markets' operations, which total, daily, around 1,3 billion dollars, are movements of funds speculating on interest rates, exchange rates and stock markets' expectations.

    Financial markets are decisive players in the globalization process. Those who participate in international trade and lead transnational operations have limited freedom of action to produce immediate changes in the international distribution of resources. On the other hand, financial operators have absolute freedom to move funds and launch, within hours, speculative attacks against any currency, possibly with the exception of the dollar, the yen and the German mark.

    The Regulatory Framework. Ever since the end of World War II international economic and financial transactions have been progressively eased. In the area of trade, tariff reductions targeted manufactured goods, mainly high technology goods. Between 1950 and 1990, the average tariff on manufactured goods imports fell from 14% to 4,8% in the United States, from 26% to 5,9% in Germany and from undetermined, very high levels to 5,3% in Japan. On the other hand, industrialized countries retain high tariff and non tariff barriers on agricultural goods from temperate climates and other sensible goods, an euphemism that encompasses high labor manufactured goods (such as textiles) in the production of which developing countries have a competitive advantage.

    The regulatory framework has changed anew, as a result of the GATT Uruguay negotiations which led to the creation of the World Trade Organization. Within this framework, and for the first time in history, similar and more liberal rules have been adopted on private direct investments and services as well as stricter regulations on intellectual property.

    Informatics technology eased communications between financial markets. However, widespread deregulation, which has been practically absolute for current account and also capital transactions, has been the decisive factor in the growth of financial markets. Once post war reconstruction was completed in Europe and Japan, the industrialized economies joined the United States in its liberalization of foreign exchange regimes and financial accounts.

    This process coincided with the transformation of the international monetary system from a fixed parity regime to one of fluctuating exchange rates. The change was caused by unbalances in the United States' balance of payments and its 1971 decision to abandon the gold standard.

    The turbulence caused by the change in the main currencies' parity and markets' volatility did not stop the accelerated growth of international financial flows. The International Monetary Fund has been promoting financial deregulation in developing countries.

    III. The Fiction

    These are the facts that have led to today's globalization. From them, a fictitious scenario has been construed based on the following tenants:

    The technological revolution. The extraordinary technological progress achieved, particularly in the microelectronic and informatics area, has set into motion forces that are beyond the control of the state and social actors. Thus, we are living in a global village united by the informatics revolution.

    Resources management. Today, most of the world economy's resources are under the control of transnational actors: mega corporations and global financial markets. Global markets, rather than national economies, are the venue for most economic transactions.

    Consequently, decisions on the assignation of resources, the accumulation of capital, technical changes and the distribution of income are currently concentrated in the hands of transnational power centers. Therefore, decisions are adopted outside national boundaries. Global markets decide, daily, what is to be the future of each country. Borders have been erased by the technological revolution and states are unable to exercise influence regarding crucial matters.

    Competitiveness' conditions. Enterprises, not countries, compete in the global market. In a world without borders, enterprises' survival and growth depend on their competitiveness, based on their own resources' management capacity, technical changes and access to the opportunities the global system has to offer. Firms function within a planetary scenario and it is there that they must fight for their lives to dominate markets and resources. Globalization has imposed a sort of economic darwinism in which only those who are able to adjust to the needs of the global habitat will survive. Severed from its national environment, firms fend for themselves in the global scenario.

    Historically unprecedented globalization. We are, therefore, facing an unprecedented phenomenon. According to globalization's fiction, today's scientific and technological revolution has caused a fracture in humanity's historical development and in the world order that began with the Renaissance and the birth of the nation state.

    Globalization has destroyed the sovereignty of the state, at least in economic and financial matters.In reality, sovereignty resides with the market. Today the world is a global village where power resides in the hands of transnational actors. In this sense, globalization is an utterly contemporary phenomenon. Never before have events at the global level affected countries in such a decisive way, nor have countries ever been so powerless in the face of such developments.

    IV. The Fundamentalist View

    These fictional interpretations of the nature and reach of prevailing financial and economic links have given rise to a fundamentalist view of globalization. According to this view, in a global world the development dilemma disappears since, today, the main decisions are taken by transnational agents and not societies and their states.

    Consequently, the overwhelming message is that the only thing that can be done is to adopt market friendly policies.Which are these policies? Those that favor the interests of the dominant parties. These include economic liberalization, deregulation of real and financial markets, the reduction of the size of the state to the minimum needed to insure security and legal order, fiscal balance and price stability.

    The proper policies would, then, attract transnational actors and stimulate them to promote the economic growth and international competitiveness of the chosen countries. This would make possible to accumulate capital and increase productivity, and, presumably, to expand employment. On the other hand, those policies the market perceives as negative would result in capital flight, instability, economic stagnation and marginalization.

    At the same time, global competitiveness forces the state to facilitate enterprises' maneuvers in the market without boundaries. The first obligation is to reduce enterprises' domestic costs, particularly labor costs. Competitiveness and, in the final analysis, enterprises' capacity to create employment depend on the scaling down of social security systems and the flexibilization of the job market.

    Macroeconomic equilibria and price stability are essential elements of any responsible policy. However, the fundamentalist proposal goes much beyond that. According to it, structural transformations that imply accepting, unconditionally, the rules of the game imposed by the dominant interests and powers in the international system are what is needed.If this is so, the development dilemma does not, indeed, exist in a global world. In practice, there would be no alternative other than passively adapting to the existing order.

    Today, the fundamentalist vision is the accepted wisdom on economic and financial matters. This outlook rescues the orthodox theory of free play by economic actors in national areas, regions and the world market. The difference is that, today, this theory is justified more on the basis of developments that are beyond the control of societies and their political systems, than on economic rationality.

    In the classical approach, since David Hume and Adam Smith, the assumption was that the natural order is reflected in the laws of demand and supply and their effect on the assignation of resources and the distribution of income. The political message, then, called for a rebellion against the authoritarianism of absolute monarchy and mercantilist interventionism. In that new liberal order, an invisible hand made sure that public and private interests coincided. In this manner, the regime that best allowed for fuller employment of resources and the best possible life style was one where transactions could be done freely within national markets and by international markets at world level.

    Today,the fundamentalist view of globalization also implies the existence of a natural order, but this order is based, simply, on the power structure of the contemporary world order. It is the return of absolute and discretionary power,no longer of the monarchy, but of the market.

    The fundamentalist view also affects on the current debate on democracy's governability. If power is rooted in the markets, then the issue is to insure that democracies formulate market-friendly policies. Therefore, when societies and their political system object to ratifying markets' decisions, that would be non governability. They are ungovernable.

    Let us now briefly analyze an alternative view of globalization and its political implications.

    V. The Real World and Globalization

    An observation of reality reveals that the world does not behave as popular wisdom would have it. Let us discuss some main issues:

    Regulatory frameworks and media globalization. A good portion of what is perceived as globalization is the result of the deregulation of financial transactions and the liberalization of trade in goods and services. It is not an unavoidable result of the technological revolution, nor does it escape the control of social actors and nation states.

    Markets' sovereignty is a self fulfilling prophecy. It is based on the regulatory frameworks established by the world power centers and, therefore, it mirrors an historical period and political decisions. Global financial markets are what they are today because of the widespread deregulation of their activities. Some mild interventionist measures, such as the small tax suggested by Professor James Tobin to discourage speculative capital movements, would allow monetary authorities to regain the control they have lost. Meanwhile, large financial operators do, indeed, have the capacity to launch speculative attacks that affect advanced countries' currencies (such as, for example, the franc, the British pound and the lire) and even Europe's monetary system.

    The way financial markets behave is based on political, rather than real, elements. Before the 1030's crisis, the gold standard and capital movements' freedom also appeared to be in the natural order of things. As later developments demonstrated, the multilateral trading and payments system fell like a house of cards under the impact of a real economic crisis.

    On the other hand, globalization is, to a good extent, a media phenomenon. Probably 90% of all the economic information available in the world and within each country is related to operations and businesses o f a transnational nature: international loans, parity and interest rates, stock exchanges, trade, transnational corporations' investments, mergers, strategic alliances, privatization and foreign investors participation in them, etc.

    Also, the dominant opinions are voiced by well known economists in developing countries' main academic centers, financiers and businessmen, officials and spokespersons from multilateral financial organizations, the treasury and central banks of the main economies. At the same time, in the internal arena, the prevailing criteria are of those who share the fundamentalist view of globalization.

    Based on this information, heavily dominated by international business and conventional wisdom, it is not hard to conclude that, indeed, everything happens in the global village.

    Nevertheless, most economic activity goes on outside the media globalization's sphere. Small and medium sized enterprises operating in all productive sectors, basic education and health services, medium sized public investment, a good portion of the research and development activities carried out by universities, laboratories and enterprises, housing and big and small cities' infrastructure and other activities ignored by media globalization are the environment in which most people are born. grow, love, work, educate their children and end their days. It is there where most of production , employment, trade, savings and capital accumulation occur.

    The market and resource management. Most economic transactions do not occur in the global market, but rather in the national ones. More than 80% of national production is targeted to countries' internal markets. Exports represent less than 20% of world production. Around 9 of each 10 workers in the world produce for their country's markets.

    The enormous mass of financial resources that circulates internationally is a bubble of transactions on paper, options and other instruments that are mostly unrelated to the real activity of production, investment and trade. Almost 95% of capital's accumulation in the world is financed through countries' internal savings.

    Today, investments by transnational corporations' subsidiaries represent 4% of fixed world capital formation. In recent years, that percentage was between 3 and 8% for developing countries as a whole and between 3 and 10% for Latin America. It is interesting to observe that in Korea, one of Asia's countries with the highest growth rates, that percentage is below 1%.3

    In several countries, such as Argentina and other in Latin America, a significant portion of transnational corporations' direct private investment is aimed at acquiring existing assets, particularly through the privatization of public firms. Therefore, its effective contribution to the expansion of productive capacity is less than what economic indicators suggest.

    Subsidiaries' contribution to world production is around 7%. Even in developed countries, where 85% of private direct investment originates, the ratio between their transnational corporations' subsidiaries' product and and their national product is around 6%.

    These ratios are below those of underground economies (excluding criminal activities such as drug trafficking). Fluctuating between an 8% minimum (Switzerland), and a 26% maximum (Italy), with a 10% for the USA and 15% for Germany4, the underground economy's participation in industrial economies' total product is two to three times greater than that of transnational corporations' subsidiaries. In developing countries this gap is even wider.

    Competitiveness conditions. In the real world, countries and systems compete, before enterprises do. Transnational corporations are what they are because they are rooted in the economic, social and political reality of their countries of origin. The large North American, German or Japanese enterprises would not have such weight if they were severed from the rich productive and social background of their respective countries and from the public policies that support them.

    In developing countries,the relationship between state intervention and enterprises' competitiveness is even more apparent. In these economies, enterprises' relative backwardness requires more vigorous active policies than those adopted by mature, industrialized economies. To attempt to explain the development of Korean or Taiwanese enterprises omitting the support of their respective nation states would be like attempting to explain the adventures of Quixote omitting the Lions' Knight.

    The fundamentalist view's insistence on the reduction of labor costs through a phasing down of social security systems and a preference for transitory industrial relations, represents a direct threat to productivity growth. Productivity is based, essentially, on human resources' skills and stable social relations that may increase the quality of life and strengthen employees' commitment to the firm's development.

    The fundamentalist argument that labor reforms are essential to create employment is frankly inconsistent. It is always possible, and necessary, to improve regulatory frameworks in all markets, including the labor market. However, within the context of the policies based on a fundamentalist view, no reduction in labor costs could compensate for the decrease in the growth rate or the negative consequences of income concentration.

    VI. The Origins of the Fiction of
    Globalization and the Fundamentalist View

    In a world united by information and images it is not difficult to believe in the fiction of globalization. By all appearances, this is a world without boundaries. However, we have seen how , in the real world of production, investment and employment, the global order coexists with countries' internal markets and savings.

    Thus, we live in a paradoxical world. In it, real and symbolic global forces of enormous weight coexist with internal factors. For vulnerable countries, such as those in Latin America, globalization represents undeniable restrictions. The new regulations resulting from the Uruguay Round and the GATT and their application within the WTO introduce criteria regarding intellectual property, services and the treatment to be granted foreign investments that may not be ignored. Moreover, large countries exercise their power in bilateral relations, as, for example, in the case of the United States regarding the intellectual property regime for the pharmaceutical sector.

    The existence of a world order and of a power system in international relations cannot be ignored. Nevertheless, the fiction of globalization and the fundamentalist view represent a vast deformation or reality. Where do they originate?

    The first, obvious explanation points to transnational actors. It is natural that from the perspective of the power centers, the world should appear as a global village without borders. Financial operators and transnational corporations pretend to operate in this global village without any interference from nation states. In this respect, the fundamentalist vision is the power ideology of the contemporary world.

    In Latin America, the foreign debt and financial vulnerability contribute decisively to the fundamentalist view. Debt servicing obligations are the main cause of the current account balance of payments deficit and the resulting need for external financing. Therefore, economic policy must meet markets expectations through neo liberal policies. These policies regulate fiscal and monetary behavior, cover structural adjustment programs that include a reduction of the size of the state, privatization, financial deregulation and the liberalization of national economies. According to conventional wisdom, these policies are the unavoidable result of globalization and no alternative course of action is possible without running the risk of capital flights and a financial and economic collapse.

    The fundamentalist view is rooted in other probable and more subtle causes. To a large extent, the globalization fiction is the work of academia. Academicians are for ever attempting to explain the complexities of reality through global models that reduce fundamental factors into a few variables. According to some observers5 this tendency denotes an intellectual inability to accept reality's challenge and the renounciation of responsibility to solve real problems.

    In Latin America there is also a tendency to build houses of cards on the basis of a few, important data on the global world. Declarations by the President of the United States' Federal Reserve Board or a mega merger are enough to hint at the existence of a "new phase of capitalist accumulation" across national borders. Conventional wisdom seizes upon this new evidence in order to strengthen its own twisted view of the world.

    But there are other reasons. Since the globalization fiction and the fundamentalist view are the ideology of the power centers, developing countries , where conventional wisdom prevails, are subject to an unprecedented process of cultural colonization.

    The most influential economists from these countries are, in fact, being trained, particularly in United States universities, in the centralist view. We are thus facing an extraordinary process of rationalization of subordination and dependency.

    In the scientific production area, the results of this tend to be negative. For example, let us just compare the technical sophistication currently employed to analyze trivial issues with the enriching contribution of Raúl Prebisch, Celso Furtado, Carlos Díaz Alejandro and other eminent Latin American economists. Today's predominant economic analysis has lost touch with the history of development and its economic, cultural and political complexities. Therefore, it is mostly superficial and untranscendental.

    As some financial and economic failures registered under the leadership of highly qualified economists have demonstrated, the application to reality of the dominant ideas has produced even worse results. At any rate, this is a circular process. The followers of the fundamentalist view are considered the epitome of scientific seriousness and this is a necessary prerequisite for professional success, whatever the results may be.

    The global ization fiction and the fundamentalist view promote not very rational policies and bad results. This is because such policies subordinate the administration of available resources, the accumulation of capital and technological change to the interests and objectives of economic and social agents that control only a minor share of resources and markets.

    Therefore, it is not surprising that in several countries the productive sectors are being divided into dynamic sectors, those associated with transnational enterprises, and stagnant sectors, the majority of the productive apparatus, where marginalization and unemployment prevail. This results in a formidable loss of resources, the deterioration of production and social and political instability.

    VII. Conclusions

    Usually, globalization is blamed for the increasing lack of balance within the international system, unemployment, the concentration of revenues and other negative tendencies of economic and social development. Nevertheless, the problem resides in the application of inadequate policies within a global, international context.

    The expansion of markets and the international transference of resources have the potential to expand production, employment and the general well being. However, left to their own device, markets contribute to deepen the asymmetries prevailing in the world order and within nations.

    As the recent Brasilia Consensus suggested, it is necessary to govern globalization.6 That is, active, national policies and international regulatory frameworks are needed to free markets' growth and, at the same time, to control its negative effects, particularly in the financial area. It would be best to insure that the followers of the globalization fiction and the fundamentalist view do not finish globalization off and fracture the world order. This is a possible risk, considering the tensions that are building.

    Contrary to the fundamentalist view, the vast majority of available resources in the world economy are potentially under the control of countries' private and public actors. This is a fact in developed countries and in a good portion of developing countries, including Latin America. Only the most backward economies, such as several in Sub-Sahara Africa, probably lack the potential and the institutions to effectively administer their markets and resources.

    Hence, capital accumulation, technological change, increased productivity and the distribution of income depend, potentially, first on decisions by national, private and public actors. More than on anything else, development depends on internal factors such as the modernization of the state, institutional stability, macroeconomic balance, private investment's incentives and human resources' skills. None of these may be imported nor placed under the leadership of transnational actors.

    Without viable answers to the dilemma of how to grow in a global world, development is not possible. The discovery of America and the Portuguese's arrival by sea to the Orient represented the first global world order. Since then, history has taught us that only those countries that join the global order through their own internal development and integration, reach high development levels.7 This is as true today as it was in the past.

    The solution to the dilemma of how to develop in a global world continues to rest on each country's freedom of maneuver. Whether such freedom will be exercised to accept unconditionally the rules of the game, adopt unviable strategies or embark upon alternative ways of development depends more on internal factors than on the restrictions posed by the external environment. Those factor include territorial and population dimension, cultural and political traditions, society's level of cohesion and the leadership skills of the elites.8 These are all factors steeped, firstly, in each country's internal reality.

    Recent experience has led us to question the viability of conventional wisdom and, at the same time, to reaffirm the need for macroeconomic balance and stability. These are necessary conditions for an eventual change of route. Indeed, nothing can be built when disorder, waste and irresponsibility prevail in the management of fiscal, monetary and balance of payment policies.9 Similarly, state intervention, which creates revenues without creating wealth or increasing the quality of life, represents a perverse interference in the market and an obstacle to development.

    As for democracy, the real problem is not its supposed ungovernability. Since neo liberal policies tend to negatively affect the majority of the population, it is understandable that, from the fundamentalist perspective, democratic systems should be ungovernable. Consequently, the governability of the market is the problem that needs to be solved.

    In truth, the fundamentalist view of globalization is a modern version of absolutism and a challenge to the liberal tradition of Western democracies.

    To govern globalization, a major change of route must be undertaken. This implies, in the first place, a wide and profound debate on the options available to society in a globalized world. It also requires that the means to exercise public action be restructured so as to make the market's capacity to create wealth compatible with social balance which is, in turn, a new potential source of growth, employment and wellbeing.

    It also requires a widespread process of international cooperation to solve global issues, such as environment protection and collective security. Also, to face the stigma of poverty and marginalization when the resources available to create a new world order and increase the quality of life of the human species, are plentiful. However, this cooperation depends, above all, on the decisions the power centers adopt and these are very far from committing themselves to building a new world order.

    Meanwhile, each country must face its own reality and acknowledge that, in the final analysis, it is responsible for its own destiny.


    1. UNCTAD, World Investment Report, 1996, New York and Geneva, 1996.

    2. UNCTAD,World Development Report, 1994, New York and Geneva, 1994.

    3. UNCTAD, 1996, Op.Cit.

    4. The Economist, London, May 3, 1997, p. 63.

    5. P. Krugman, Pop Internationalism, The MIT Press, Cambridge, Massachusetts, 1996.

    6. Regional Summit on Political Development and Democratic Principles. Brasilia, UNESCO, July 6, 1997.