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Finance & Development, March 1975
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Book notices

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1975
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Measuring the impact of the multinationals

United Nations Department of Economic and Social Affairs, Multinational Corporations in World Development, New York, N.Y., U.S.A., Praeger Publishers, 1974, xiv + 200 pp., $12.50; Wallace, Don, Jr. (editor) assisted by Helga Ruof-Koch, International Control of Investment: The Düsseldorf Conference on Multinational Corporations, New York, N. Y., U.S.A., Praeger Publishers, 1974, xxii + 181 pp., $19.50; Vaitsos, Constantine V., Inter-country Income Distribution and Transnational Enterprise, London, England, Oxford University Press, 1974, x+ 198 pp., $16.

The power concentrated in the hands of the multinational corporations, their actual or potential use of it, and their ability to shape demand patterns and values and to influence the lives of people and policies of governments have raised profound concern about the role of multinational corporations in world affairs.

The value-added of all multinational corporations was roughly $500 million in 1971, or about one fifth of world GNP (excluding centrally planned economies). The sales of foreign affiliates of multinational corporations reached approximately $330 billion in 1971, exceeding total exports of all market economies in the same year ($310 billion)—and these sales have been growing at a faster rate than the economies of the countries themselves.

So the problem is not a small or unimportant one.

What to do about it all? That is the issue.

The volume of material currently appearing on multinational corporations, both in book form and increasingly in the daily press, is great. These three volumes, all recent additions to the debate, are quite distinct in character. The first volume was prepared by the Department of Economic and Social Affairs of the UN Secretariat. It was compiled as a reference document for a “Group of Eminent Persons” designated by the United Nations, who were asked to prepare a report on “the role of multinational corporations on development and on international relations.” The reference document, published under the title Multinational Corporations in World Development, was to be combined with studies by the International Labor Organization, the United Nations Conference on Trade and Development, and other research on technology transfer and international taxation for the Group’s deliberations. Although published separately, it is a very readable reference work in its own right, and of very reasonable length (200 pages, of which 114 are text). Although the UN Group’s final report (published as The Impact of Multinational Corporations on the Development Process and on International Relations) dates this study, the final report is policy oriented, leaving Multinational Corporations in World Development still a very useful and informative reference book for the general reader.

A conference on International Control of Investment was held in Dusseldorf from January 5 to 6, 1973 by Georgetown University’s Institute for International and Foreign Trade Law. The papers presented at this conference have been compiled and edited by Don Wallace, Jr., Director of the Institute.

The basic issue examined at this Conference (subsequently also taken up by the UN) is whether there is need for a “GATT” (General Agreement on Tariffs and Trade) for investment. The idea of establishing some internationally agreed-upon standards for investment by private foreign enterprise is at least conceptually appealing. The problem was considered at the Conference both in terms of investment between developed countries (which accounts for three quarters of all private foreign investment), and between developed and developing countries. In general, participants in the Conference concluded that GATT-like rules were unnecessary in the former category and unfeasible in the latter.

A consensus did emerge that in specific technical areas (e.g., tax law, corporate tax, intercompany transfer pricing practices, and balance of payments matters) a harmonization of practice and policy would be beneficial to all trading countries.

Although Mr. Wallace has done a commendable job in organizing and summarizing the various discussions. International Control of Investment, like any transcript of a conference, suffers from the fact that contributions are of varying quality and do not build on one another. However, the book offers a fairly thorough discussion of one of the issues considered by the UN in its subsequent studies of multinational enterprises and it is in this sense a useful companion piece to these later works.

Intercountry Income Distribution and Transnational Enterprise, by Constantine Vaitsos, addresses the question of who gets the benefits—how the “pies” of real corporate earnings and costs in an economic sense is divided up—of an enterprise operating across national borders. There is little practical distinction between “transnational” as Mr. Vaitsos uses it and “multinational”; purists distinguish “transnational” corporations as owned and managed in several nations, whereas “multinational” may include companies operating in two countries and based primarily in one. The book, based on a Ph.D. dissertation submitted at Harvard, is concise and well footnoted, the notes explaining related points and comprising in themselves an excellent synopsis of contributions on the subject.

Vaitsos’ book is satisfying at two levels; in terms of fresh insights from the perspective of economic theory, and in terms of some very enlightening practical research.

The author (who testified at hearings organized for the UN report on the multinational corporations and also participated in the Düsseldorf Conference) reinterprets the product cycle theory as a theory of monopoly cycles. He also argues that capital as it is commonly employed in economic models is not a one-dimensional factor but subsumes many other variables. Thus the effect of a given capital investment on a local economy is not determinable from the capital—labor ratio alone but also depends on the way in which investment negotiations resolve related factors such as royalty and patent provisions, management clauses, transfer pricing policies, technology utilization, export restrictive clauses, and incentives and concessions. “A proper understanding of the behavior of transnational firms,” the author summarizes, “requires analysis that belong more to the theory of industrial organization than that of international capital markets.”

Vaitsos carefully analyzes the real costs and benefits of many of the negotiated aspects of capital investments. For this purpose, a special research team studied in great detail the records of the Customs and Foreign Trades Offices of Colombia, Chile, Peru, Ecuador, and Bolivia. Although the study’s conclusions are based largely on data from these countries (the author is presently a director of the Andean Common Market), the conclusions are of broad applicability.

Some of the research results are quite startling. In Colombia, for example, foreign pharmaceutical companies had been reporting returns on investment of 6.7 per cent (1968). After analyzing the value of royalty payments paid to the parent company and allowing for the overpricing of intermediate products, Vaitsos shows that the real effective profitability of these companies was not 6.7 per cent but 136.3 per cent. Similar (though less dramatic) results were obtained for other sectors and in other countries. Much of the real profitability of enterprises operating in these countries was “hidden” as a result of overstated transfer prices, and much of the real cost of these operations to the local economy was understated as a result of concessions granted by local governments at the time of investment.

These results indicate that developing countries must be able to accurately appraise the real costs and total benefits of investments by foreign enterprises. Mr. Vaitsos’ work should produce some tangible results: the team of co-researchers which assisted him is forming the core of teams in the various Andean Pact countries to closely analyze investments by multinational corporations in the future.

John W. Lowe

Barnet, Richard H. and Ronald E. Müller, Global Reach: The Power of the Multinational Corporations, New York, N. Y. U.S.A., Simon and Schuster, 1974, 508 pp., $11.95.

There is a widening controversy over the impact of multinationals on the world economy and the social responsibility of the modern transnational corporation. For the developing world, the central issue is whether, on balance, the multinational corporation is an engine of growth or a generator of technological dependence and a suppressor of national enterprise growth and development.

Global Reach is a powerful leavening to the loaf of literature on the positive contributions of multinational corporations to world development. Four major themes emerge in this critical appraisal of the trend in their activities: globalization, concentration, cross-subsidization, and destabilization. Each of these dimensions often has had profound effects on the developing world. Multinational firms have penetrated into the markets and economies of developing nations pre-empting local resources, and through global cross-subsidization of research, production, marketing, and financial functions, dominating the sectors they enter. High mobility of vast resources often has had distinctive destabilizing effects on host countries. (The recent withdrawal of U.S. based electronic firms in the face of world recession is a case in point.)

The authors conclude with two sets of interim remedial action—adequate corporate disclosure of the full range of their activities and the curbing of corporate power at all levels. In the long term they advocate “systemic solutions” based on countervailing public power. The 89 pages of notes on the text are an important adjunct to the book and well worth reading.

Jack Baranson

A going concern?

Harrison, A.J., The Economics of Transport Appraisal, New York, N. Y., U.S.A., John Wiley and Sons, 1974, 293 pp., $17.75 (hard-back).

This book, as the author states, is neither a theoretical treatment of cost-benefits analysis nor a manual concerned with its application. Rather, it is an interesting and intelligible guide to the economic, political, and social problems encountered in the appraisal of projects and policies in the field of transport. The lucidity of its argument together with its extensive and authoritative bibliography should make it a useful text for the student and practitioner alike.

A.J. Harrison, by revealing the weaknesses of cost-benefit analysis, also uncovers its strengths. He shows how its intelligent application can provide the policymaker with a powerful tool for decision making. He clearly recognizes that it will not solve all problems, but suggests that it can provide a framework for enforcing consistency and discipline in public policy.

The emphasis of the book and the examples used by the author are drawn from his experience in the United Kingdom. Thus, urban transport problems, environmental issues and the value of time all receive extensive treatment. Little is said about the less complicated but equally difficult problems encountered in the appraisal of transport projects in developing countries. A more international viewpoint would have added much to this already useful book.

Anthony Churchill

For the common good

Morowetz, David, The Andean Group: A Case Study in Economic Integration Among Developing Countries, Cambridge, Mass., U.S.A., The MIT Press, 1974, 171 pp., $18.50.

Since its adoption in 1969, the Cartagena Agreement or Andean Pact has proved to be of particular interest because of its ambitious goals, its relatively innovative mechanisms, and the political determination shown by its six member countries in supporting a deeper and more dynamic integration scheme than the one offered by the Latin American Free Trade Association (LAFTA).

David Morowetz does not pretend to give us a global and comparative view of the background, institutions, and achievements of the Andean Integration Process. His idea is simple and yet more advanced. To the uninitiated who do not know what LAFTA has meant for many years, and the frustrations, studies, and debates that brought about the creation of the Andean Group, Mr. Morowetz offers little. What he attempts, with technical accuracy and discipline, is an analysis of “some important policy issues involved in economic integration among developing countries, and to examine the Andean Group, integration scheme… in the light both of this analysis and of the experience gained by other developing countries in the use of integration schemes.” He has therefore selected a number of subjects, which although somewhat disconnected, present specific problems for the future. Some of them are well-defined obstacles (difficult, badly planned or obsolete transportation and communication facilities); others are challenges to the governments which will have to choose between different options of a technical or politial nature. Unfortunately, the dynamism of the integration process militates against the study’s timeliness. Morowetz conducted his research in 1970-71, and was able to gather the experiences of only two years of the integration process. His work would have gained considerably if he had included debates, new decisions, and programs for the petrochemical and metalmechanic industries, and some more recent statistics.

Morowetz’s contribution is very valuable for the study and analysis of a process which, in its sixth year, is facing a crucial period, by preparing for the adoption of a common external tariff to be completely implemented by 1980. The experiences of the Andean Group may have a deep effect on the other Latin American countries and the whole integration process in the Hemisphere.

Mario Artaza

Japanese industrial relations

Okochi, Kazuo, Bernard Karsh, and Solomon B. Levine (editors). Workers and Employers in Japan: The Japanese Employment Relations System, University of Tokyo Press and Princeton University Press, Tokyo, Japan, and Princeton, New Jersey, U.S.A., 1973, xii + 538 pp., $20.

Lately, there have been quite a number of journalistic accounts of Japanese management or Japanese industrial relations. A recent issue of Newsweek magazine, for example, reported the bankruptcy of a medium-sized Japanese firm whose management did their level best to secure new jobs for their former employees. According to the report, an executive of the dying firm had been “on the phone from early morning to late afternoon for several weeks, and finally had lined up about 1,400 offers, plenty to go around” for his 400 employees. “The executive had not begun to look for a job for himself, and although he knew that at his age his prospects would be gloomy, he said: ‘I’ll worry about that later.’”

This is one aspect of the life-long employment-seniority system which still prevails in Japan, and is not at all surprising to Japanese. However, the system is neither particularly deeply rooted in the Japanese tradition of family life, nor is it static. The book. Workers and Employers in Japan, which is one of few systematic and comprehensive studies made in a foreign language on the evolution of industrial relations in Japan, clearly demonstrates that this life-long employment and seniority system is an historical product of Japanese industrialization and not a static remnant of any paternalistic feudalism. Life-long employment emerged after World War I, more than a half century after the Meiji Restoration which had marked the beginning of Japanese modernization. The system became fully established only through the rapid introduction of new production facilities centered in the large enterprises after World War I, and during the period of the post-World War I depression.

The system of seniority, on the other hand, was only introduced after 1940. Before then, the practice of wages increasing in accordance with age and length of service was not firmly established, even in large enterprises. Up until the mid-1920s, workers were highly mobile and received relatively high wages according to their skills. In this sense, the Japanese wage system then closely resembled the western model.

These detailed analyses of the historical evolution of Japanese industrial relations are excellently done, and should provide a proper perspective from which to view the peculiarities of the current Japanese system. The authors, as a matter of fact, are attempting to test what they call the “convergence” hypothesis, which states that technology, politics, economics, sociology, and psychology in the industrial society take on a common configuration that supports the continued spread of industrialization and permits it to increase in complexity. As the authors themselves admit, evidence is mixed in this regard. However, their analyses and findings not only indicate the dynamic nature of the system but also suggest that it has long been in a state of tension. Life-long employment and seniority systems were one of the major innovations in industrial relations during the decades following World War I, and there is little reason not to expect that new innovations will emerge in the near future. Japanese society, as well as its economy, is at a turning point and is desperately in need of such innovations.

Eisuke Sakakibara

“A much less cheerful subject”

Hicks, John, The Crisis in Keynesian Economics, Oxford, England, Basil Blackwell, 1974, vii + 85 pp., $5.95.

The foundations of Keynesian economics have increasingly come under scrutiny in the light of the recent economic experience of most industrialized countries. Professor John Hicks has written a useful little book, which re-examines, in three lectures, the main assumptions upon which Keynes’ General Theory is based. The analysis is directed toward explaining why Keynesian-inspired policies appear to be aggravating inflation rather than producing the real economic progress or growth that we have come to expect over the past 25 years. The conclusion which Mr. Hicks draws is that Keynesian economics, when reformulated in the light of modern experience, “is a much less cheerful subject than it appeared to be at first, in its glad dawn of 1936.”

The first of the lectures contains a reappraisal of Keynesian multiplier theory. Hicks takes pains to point out that the Tightness of the Keynesian contention, which holds that real economic expansion can be engineered through an increase in aggregate demand, depends fundamentally upon the availability of stocks of materials that can be drawn down without disrupting other economic activities. In this regard Hicks usefully distinguishes between “fix price” markets, in which prices are set by producers with some degree of insulation from pressures of demand and supply; and “flex price” or speculative markets, in which prices are determined (even in the short run) by the forces of supply and demand. Employing this distinction Hicks argues convincingly against the impression one so easily gets from the General Theory that the only obstacle to expansion is the scarcity of labor.

In the second lecture Hicks re-examines the basic assumptions of Keynesian monetary theory, suggesting that a theory of money which is to apply to postwar inflationary conditions can hardly be centered on the speculative motive in the same manner as that dictated by conditions in 1936. Instead, he argues in favor of a more generalized balance-sheet-approach to the theory of money. Hicks suggests that the power of the banking system is certain to be considerable in an “overdraft economy” where firms are largely reliant upon the banks for their liquidity. Correspondingly he stresses that the conclusion drawn by many of Keynes’ followers regarding the relative importance of monetary policy rests fundamentally on the assumptions of a sizable speculative demand for money and of a business sector that relies for its liquidity on the actual possession of liquid assets rather than on the banks.

In the final lecture Hicks focuses his attention on postwar wage inflation, suggesting that it “is in the field of wages that Keynesianism in practice has most grievously disappointed the hopes which it aroused.” The thrust of Hicks’ argument is that the attempt to maintain the economy continuously at full employment has given rise to demand-induced labor scarcities in cycle-sensitive industries, which have, in turn, had the effect of unsettling the wage structure. Once the wage structure is called into question, strong social pressure inevitably mounts for raising wages irrespective of whether or not there continues to be labor scarcity.

The main weakness of Professor Hicks’ lectures is the tendency to generalize and relate recent British economic experience to other industrialized countries without any attempt at empirical justification. Many of Hicks’ interpretations of recent British economic history are themselves suppported by rather unconvincing and casual empiricism. Nevertheless, Professor Hicks has lucidly pinpointed the main shortcomings of the Keynesian General Theory model and has advanced a number of interesting hypotheses that merit further empirical investigation.

Desmond Lachman

Always a side issue

Goulet, Denis (Foreword by Paulo Freire), A New Moral Order: Studies in Development Ethics and Liberation Theology, New York, N.Y., U.S.A., Orbis Books, 1974, 142 pp., $3.95 (paperback).

For many persons in Latin America who are committed to social and economic change, the word development has become a derogatory term. When they want to label an individual as someone who does not understand the root problems of their country or region, they call him a “desarrollista,” a developmentalist.

While such an attitude may be unfair to broadly conceived and well-executed development schemes, it does indicate a dissatisfaction with programs based on the view that the problems of the developing nations are strictly economic, such as transfer between countries of industrial technology. These programs, it is argued by those desiring social and economic change, neglect the human side of development as well as the historical economic roots of the problems common to the poorer nations. What is needed, they emphasize, is not so much development within traditional structure—economic, political, or social—but a total “liberation” of man from all oppressive forces hindering human growth.

“Liberation theology” refers to a process of reflecting on the root causes of a country’s human problems in the light of biblical urgings for justice. It calls for the liberation of man from all structures of oppression, whether internal psychological ones, like selfishness, or external political or economic structures, which are often defined in Marxian terms.

Many economists, churchmen, philosophers, and politicians in Latin America and elsewhere have fashioned theories of economic growth which take into account the concern for total development. Denis Goulet’s book is an overview of some major approaches.

Basic to Mr. Goulet’s thinking is the fact that while all development programs have some implicit ethic or value judgment in them, “very few scholars have made the value-laden ethical question posed by development the central object of their study.” He feels that the ethical question has been raised in disciplines such as anthropology or sociology, and sometimes in economics itself—but always as a side issue. Goulet is convinced that a moral science, an ethics of development, has to be created to handle these difficult questions.

In another book, The Cruel Choice: A New Concept in the Theory of Development, published by Athenaeum, Goulet attempted his own approach. His recent book, which had its origin in a series of lectures given at Drew University, New Jersey, outlines the theories of those whom Goulet feels have come closest to the formation of an ethics of development.

Looming largely in his analysis is the French economic philosopher, Louise-Joseph Lebrét, who in 1941 founded “Economy and Humanism, “da center for the exploration of the value questions in development. Also given much prominence in his analysis are those Latin Americans, like Gustavo Gutierrez and Orlando Fals-Borda, who along with others have been termed “liberation theologians.”

A Naw Moral Order has much value as an introduction to the convictions of many persons in the Third World and as a medium for raising the very questions about which Goulet and many others are concerned.

Donald J. Casey

Hewson, John and Eisuke Sakakibara, The Euro-currency Markets and their Implications Lexington, Massachusetts, U.S.A., Lexington Books, 1975, xx + 171 pp.

The establishment of the Euro-currency markets in the early 1960s marked the transition of the world economy from a controlled to a relatively free regime. While the private sector has adapted readily to the new system, the official sector has not. The authors, both economists with the Fund (although the book was written privately), contend that the key to the reform of the international monetary system is the recognition by the authorities that the creation of a more stable and flexible regime involves increasing international interdependence.

The book includes two theoretical models-one representing a “controlled” and one a “free” system—and a comparison of their implications, followed by an empirical case study of the German experience. The discussions on monetary reform in the light of the new free regime are reviewed, and attempts are made to indicate directions for the development of a new system. The final chapters consider the background of the Euro-currency markets, and their role in financing the current oil crisis. The ultimate emphasis is on the need for international coordination.

Other Books Received

Tritten, Kurt, European Banks: A Comparative Analysis of the Leading European Banks, Bern, Switzerland, Verlag Paul Haupt, 1974, 79 pp-, SwF/DM 24.80 (paperback).

Kristensen, Thorkil, Development in Rich and Poor Countries: A General Theory with Statistical Analyses, New York, N. Y„ U.S.A., Praeger Publishers, 1974, xvii + 164 pp., $15.

Sellekaerts, Willy (editor). International Trade and Finance: Essays in Honour of Jan Tinbergen, White Plains, New York, U.S.A., International Arts and Sciences Press, 1974, viii + 292 pp., $20.

Bittermann, Henry J., The Refunding of International Debt, Durham, North Carolina, U.S.A., Duke University Press, xii + 252 pp., $11.75.

Laidler, D. and D. Purdy (editors). Inflation and Labour Markets, Toronto, Ontario, Canada, University of Toronto Press, 1974, 258 pp., $15.

Parkin, Michael, Incomes Policy and Inflation, Toronto, Ontario, Canada, University of Toronto Press, 1974, vi + 283 pp., $10.

Howe, James W., The U.S. and the Developing World: Agenda for Action 1974, New York. N.Y., U.S.A., Praeger Publishers, 1974, viii + 208 pp., $3.95.

Marczewski, Jan, Crisis in Socialist Planning: Eastern Europe and the U.S.S.R., New York, N.Y., U.S.A., Praeger Publishers, 1974, xii + 245 pp., $18.50.

van Brabant, J.M.P., Essays on Planning, Trade and Integration in Eastern Europe, Rotterdam, the Netherlands, Rotterdam University Press. 1974, ix + 310 pp.

Camps, Miriam, The Management of Interdependence: A Preliminary View, New York, N.Y., U.S.A., Council on Foreign Relations, Inc., 1974, 104 pp., $2.50.

Tingsabadh, Chitti, David E. Allan, Mary E. Hiscock, Derek Roebuck, Credit and Security in Thailand; The Legal Problems of Development Finance, New York, N.Y., U.S.A., Crane, Russak & Company, Inc., 1974, viii+ 154 pp.,$12.25.

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