"Economic Homogenization and the Market"

Lecture #7: “Economic Homogenization and the Market”
Erik Andersson

What is homogenization and how does it relate to markets?
- Encyclopaedia Britannica: “process of reducing a substance, such as the fat globules of milk, to extremely small particles and distributing it uniformly throughout a fluid, such as milk.”
- In other words, homogenization is the process of making something uniform in something else in order to enhance the latter entity.
- Proposition: “Globalization homogenizes markets and societies to support capitalist expansion and growth.”
o This proposition seems to be refuted by the following definition of economic systems in the Encyclopaedia Britannica (EB).
o According to EB, “The form of capitalism taken also differs between nations, because the practice of it is embedded within cultures; even the forces of globalization and the threat of homogenization have proved to be more myth than reality. Markets cater to national culture as much as national culture mutates to conform to the discipline of profit and loss. It is to this very adaptability that capitalism appears to owe its continued vitality.” (Encyclopaedia Britannica, “economic systems”)

Transnational Corporations (TNCs)
- TNCs are a strong force in the process of globalization.
- TNCs have moved away from a Fordist structure and have become network entities.
o These networks are highly mobile.
o Assembly and design can and do occur different places.
o This represents a big change in the ways that companies do business.
- Countries want headquarters and assembly lines located domestically and as thus willing to create policies that entice TNCs.
- TNCs, themselves, operate above the nation-state system.
o They can be located virtually anywhere on earth.
o They are located in places that yield the highest profits.
o They avoid place with risk (due to economic, political and/or social instability) and high costs (poor geography, difficulty shipping and receiving).

Corporate Social Responsibility (CSR aka Corporate Citizenship)
- CSR is a consequential, homogenizing force.
- CSR developed as a response to Kofi Annan’s speech in 1999 which stated that corporations can uphold human rights regardless of government policies.
- TNCs embrace CSR and thus avoid violating human rights.
- CSR established a “level playing field” in business in which TNCs agreed not to employ child labor, cap over time, allow unions, mitigate against environmental damage, etc.
- TNCs must adopt the strictest standards of the countries in which they are listed. (ie. Ericsson had to adopt US financial reporting standards.
- TNCs also adopt CSR in order to avoid consumer boycotts.

Global Ownership
- Global Ownership is becoming more concentrated and anonymous.
- It is more concentrated because companies are buying each other up through mergers and acquisitions (M&A)
- It is more anonymous because of increased investment by pension funds.

Transnational Corporations Produce Global Products
- Coca Cola, Ford, Volvo, GM, Microsoft, etc.
- These global products have local meanings.
o They are distributed in accordance with local meaning. (ie. During the 1990’s the Big Mac was considered a “rich man’s food” in the USSR.)
o Local meanings vary from region to region, nation to nation, group to group.

Global Trade Regimes: World Trade Organization (WTO) and General Agreement on Tariffs and Trade (GATT)
- These global trade regimes were designed to establish a “level playing field” among trading nations.
- They operate according to the principles of MFN, National Treatment and Reciprocity.
o Most Favored Nation (MFN): This name was inherited from the original GATT negotiations held in the 1940s. MFN holds that a country to grant the same tariffs to all members of the WTO that it grants to its most favored trading partner. In other words, if Sweden has the lowest tariffs against Germany in trading auto parts at 12%, Sweden must extend the same tariff , with respect to auto parts, to all members of the WTO. In the 1940s, the average tariff wall as approximately 40%. Today, the average tariff wall is approximately 4%.
o National Treatment: This principle states that once a product is imported into a country, that product must be treated like all other similar products bought and sold in that country. In other words, if Sweden imports Toyota cars, the sale of those cars are subject to the same regulations as the sale of Volvo and Saab cars produced domestically.
o Reciprocity: If country A lowers tariffs against country B, country B must lower tariffs against country A.

***WTO/GATT Mandate***
- Increase free trade.

The Uruguay Round (UR)
- The UR resulted in the creation of the WTO (a formal organization of GATT) which could settle disputes and negotiate.
- The UR granted some policy space to the developing world to protect infant industries.

The Doha Development Round (DDR)
- Since tariff walls are so low today, the benefits of DOHA, especially for developing countries, become smaller and smaller.
- When you decrease tariff walls, your local industries have to compete with industries from abroad.
o In developing countries, infant industries are not as well developed and may fail because these industries are no longer protected.
o Developing nations contend that the smaller benefits accorded by DDR are not worth the sacrifices.
- Thus DDR is dead, for now…

Free Trade Areas
- Because DDR is dead, some countries have moved forward on their own and created Free Trade Areas (FTAs, RTAs)
- In FTAs, countries agree to pursue trade on a freer basis than prescribed by the WTO.
- Of course, the same policy space vs growth trade-offs need to be considered.
o This is a more important consideration for developing countries since the more industrialized party always reaps greater benefits.
o This trade-off may not always benefit poorer states.
- FTAs have become a force with the DOHA negotiations.

Market, what is it?
- The market is both a formal and informal institutional setting.
o Formal institutions include tariffs, laws, regulations, etc.
o Information institutions include norms and habits that make actors behave in certain ways.
- Formal institutional settings are politically constructed and maintained.
o Formal institutional settings regulate economic interactions.
o Formal institutional settings also constitute certain forms of economic interactions.
- Markets don’t happen; they are constructed.
o Adam Smith may not have agreed with the above statement.
o These changes have occurred primarily in the last 10-20 years.

Global Drivers of Institutional Change
- WTO: Once a country signs on to the WTO, they must adjust national laws and regulations to WTO rules.
- IMF, Poverty Reduction Strategies (PRS): PRS are required before securing a loan from the IMF.
- World Bank conditionalities
- UN: Countries and TNCs must uphold human rights and security.
- G7/8/20: This is a club with formal power that tries to establish non-contradictory economic policies.
- Regionalization (FTAs, RTAs, DTTs, etc.)

Encyclopaedia Britannica Revisited
- “Markets cater to national culture as much as national culture mutates to conform to the discipline of profit and loss.”
- But this only occurs after market access has been granted and formal institutions have been made compatible with the logic of globalization.

Conclusion
- Markets are not homogenized; institutions are homogenized.
- Institutional homogeneity is orchestrated by states as a result of global drivers of institutional change.
- States seek to support continued economic globalization up to a point.
- Current scenario: strong, diverse South + global recession + huge hegemonic problems + global financial crisis = ?