David Henderson

The Role of Business in the Modern World

It is now widely held, and endlessly reiterated on all sides, that globalisation, together with privatisation of state enterprises, has deprived national governments of their ability to determine policies and control events. This typically goes with a belief that the powers supposedly lost by governments have passed in large part to multinational enterprises (MNEs).

All too often, and inexcusably, evidence for this latter idea is offered in the form of figures comparing the turnover of big corporations with the GDP of economically small or modest-sized states. Such comparisons are wholly misleading. For one thing, the relevant measure of enterprise output, in this context, is not turnover but value added, which is the measure of a firm's contribution to world GDP. Value added is always below turnover, often substantially so. But the more fundamental objection is that such comparisons, now as in the past, have no bearing on the relative power disposed of by governments and businesses.

The idea that globalisation has greatly or even significantly reduced the power of governments to choose and act has little basis. Aside from such constraints on external economic policies as they have freely accepted and wish to maintain, national states today remain almost as free to act and take decisions as they were ten, twenty or thirty years ago. Even small states, provided they have effective governments, retain the power to run their affairs in relation to such matters as defence, foreign policy, constitutional arrangements, the electoral system and voting rights, residence, citizenship, the legal system, public provision for health, pensions and welfare, the status of the national language or languages, and also, with the reservation just made, external economic policies. Even in relation to determining taxation rates, the evidence clearly shows that governments retain substantial freedom of action: countries with relatively high rates have not been forced by globalisation to reduce them drastically. For the ten core OECD countries which had the highest ratios of tax revenues to GDP in 1992, the corresponding ratios for 2002 were lower in three cases, much the same in another three, and higher in the remaining four. Altogether, the notion that has been advanced by some political scientists, that today's more economically integrated world is one of 'post-sovereign governance,' is pure fantasy.

As to businesses, and especially the much-maligned MNEs, it is often argued, or just taken for granted, that one effect of both globalisation and privatisation, a disturbing one, has been to confer on them substantial new powers. There is no basis for this belief. It is true that in so far as governments act to extend the scope of markets, and to make them more open to competition, the area of operation of private businesses, and the opportunities that are open to them, are widened. This has indeed been the result of recent privatisations, as also of the further freeing of international trade and investment flows. But the purpose of such market-opening measures is not to make companies more powerful, nor is that their effect. When after 1960 it became possible to export iron ore from Australia, major opportunities opened up for new large-scale business ventures in Western Australia; but the firms that grasped these opportunities did not thereby acquire, and have not exercised, coercive or exploitative powers: they (or, in some cases, their successors) are simply free to engage in useful activities. The economic power of business is not measured, nor even indicated, by the share of GDP that originates in the private sector.

Generally speaking, the effect of liberalisation is in fact to curb the power of corporations, not to enhance it. Such economic power as businesses can exercise arises chiefly from the absence or weakness of effective competition from rivals. It is therefore eroded, rather than increased, in so far as markets are made freer and more competitive; and indeed, privatisation has had the effect of bringing to an end the monopoly power of the former public enterprises which themselves were businesses. Wider opportunities and stronger competitive pressures go together. Actions that provide for both give private businesses collectively a more extended sphere of action; but they also make the profits of individual companies more dependent on effective performance against rivals, rather than on any exercise of market power.