Financial Times - February 6, 2002
COMMENT & ANALYSIS: Countries still rule the world: The notion that corporations wield more power than governments rests on flawed calculations and conceptual confusion By MARTIN WOLF <martin.wolf at ft.com>
Of the largest economies in the world, 51 are corporations; only 49 are countries. Critics of "corporate globalisation", some of whom protested against the annual meeting of the World Economic Forum in New York, rely on this supposed fact to justify their view that governments lie prostrate before unbridled corporate power.
Theirs is a paranoid delusion. The calculations on the relative size of corporations on which so many critics of globalisation depend come from the left-of-centre Institute for Policy Studies in Washington, DC.* But they rest on an elementary howler. The authors, Sarah Anderson and John Cavanagh, compute the size of corporations by sales but that of national economies by gross domestic product.
Yet GDP is a measure of value added, not sales. If one were to compute total sales in a country one would end up with a number far bigger than GDP. One would also be double-, triple- or quadruple-counting.
To take one example, Bethlehem Steel sells steel wire to Bridgestone, Bridgestone sells tyres to Ford and Ford sells cars to consumers. If national income statisticians added the sales of Bethlehem Steel, Bridgestone and Ford, the steel would appear three times: it would be triple-counted. Instead, they sum the value added by each company, which is the difference between their value of sales and the cost of inputs bought from outside the company.
This example comes from a paper by Paul De Grauwe of the University of Leuven and Filip Camerman of the Belgian Senate, in which the empirical claims of the corporate critics are demolished.** What, the authors ask, happens if corporations, too, are measured by value added, as national economies are? The answer is that they tend to shrink by between 70 and 80 per cent. In 2000, sales by General Motors were Dollars 185bn but value added was Dollars 42bn; sales by Ford were Dollars 170bn but value added was Dollars 47bn; and sales by Royal Dutch/ Shell were Dollars 149bn but value added was only Dollars 36bn.
The critics argued that in 1999, 14 of the 50 largest economies and 51 of the 100 largest were companies. In fact, only two of the top 50 economies, measured by value added, and 37 of the top 100 were corporations. For the critics, GM is bigger than Denmark and Wal-Mart is bigger than Poland. Properly measured, Denmark's economy is more than three times bigger than GM. Even impoverished Bangladesh has a bigger economy than that of GM.
But the flaw in such claims is not just factual but also conceptual, since countries and companies are radically different. A country has coercive control over its people and its territory. Even the weakest state can force millions of people to do things most of them would far rather not do: pay taxes, for example, or do military service. Companies are quite another matter. They are civilian organisations that must win the resources they need in free markets. They rely not on coercion but on competitiveness.
Does anybody doubt that the US legal system could break up Microsoft if it wanted to do so? Or that Microsoft would itself disappear if it ceased making products its customers wanted? Even the property rights of companies depend on the coercive power of states. In the 1970s, for example, the strongest oil companies were unable to resist nationalisation of their assets by some weak developing countries.
Some of these points can be illustrated empirically. Since companies must compete, they can fail. They do. Some countries perform better than others. But the ups and downs of corporate life are far more dramatic. Between 1980 and 2000, 20 companies had dropped out of Fortune's list of the top 50 companies and five out of the top 10. The economic power of corporations - their command over the markets in which they operate - is limited.
There is also evidence of a decline in the economic power of corporations. One indicator of power is market concentration, on the - admittedly questionable - assumption that this indicates the potential for monopoly profits. Yet there is no evidence of a general increase in concentration. In some important sectors - telecommunications, for example - concentration has certainly declined.
More fundamentally, the analytical assumptions of the critics are wrong-headed. Globalisation means an increase in competition and a reduction in monopoly power. Just ask GM or Ford what Toyota means for them.
Wrong numbers, incorrect understanding of trends and, above all, a misleading analytical framework - the critics are guilty of all these. But the worst of these is the last. By comparing the ability of companies to grow by satisfying customers, paying employees and rewarding investors with the ability of governments to exert coercive power, they are guilty of, at best, confusion and, at worst, deliberate misrepresentation. Companies are not comparable with states. Even if they were far bigger, they would still not be.
Does this mean there is nothing to the critique of corporate power? Not quite. Two points are correct. First, open borders increase the choices open to citizens, particularly to owners of mobile factors of production. This limits the coercive power of states. To critics, this represents an erosion of democracy. To supporters, it represents an increase in individual freedom. Both are correct, in their own terms, though the impact is not of corporations but of markets.
The second and more directly relevant point is that corporations do influence political decisions through lobbying and election contributions - as the Enron case demonstrates. For reasons explained by the late Mancur Olsen, famous for his influential analysis of the logic of collective action, concentrated interests generate unbalanced political outcomes. Yet corporations are not unchallenged masters of the universe. What changed in the 1980s and 1990s was not corporate power itself but what governments thought would work.
The change we have seen over the past 20 years should not be called "corporate globalisation". It is market-driven globalisation unleashed, consciously and voluntarily, by governments. Corporations are neither as big nor as powerful as critics claim. The firmly held belief in the opposite position is another urban myth.
* Top 200: The Rise of Corporate Global Power, Washington DC, December 2000 ** How Big are the Big Multinational Companies? Mimeo, January 2002