15.1.2 Multinationals and the Push to Privatize

The growing global economic integration represented by the rise of the WTO and regional trading blocs opened new opportunities for multinational corporations to extend their reach and influence around the world. A multinational corporation, or MNC, is a corporate business entity that controls the production of goods and services in multiple countries. MNCs are not new. Some, like the British East India Company and the Hudson’s Bay Company, exerted great influence during Europe’s imperial expansion in the early modern and modern periods. But with globalization and improvements in transportation and communication technology, MNCs have thrived, especially since the 1950s. They have used their growing wealth to lobby governments to create conditions favorable to their operation, enabling them to become even more powerful.

Multinationals have also benefited greatly from the lowering of trading barriers around the world. These developments have encouraged major automobile manufacturers like Volkswagen, Toyota, Chevrolet, Kia, and Nissan to build and operate assembly plants in Mexico, for example, where workers are paid lower wages than they are in countries like Germany, Japan, South Korea, or the United States. This translates to significant cost savings and thus higher profits for them. And because Mexico is part of a free trade bloc with the United States and Canada, cars made there can be exported for sale in the United States or Canada without the need to pay tariffs.

Supporters of MNCs claim that the benefits for workers in this arrangement are also substantial. They get access to well-paying and reliable industrial jobs not available before, and their paychecks flow into the local community and contribute to a general rise in the standard of living. The companies themselves invest in local infrastructure like roads, powerlines, and factories, and their presence often helps expand support industries like restaurants that cater to workers and shipping companies that employ them to move their goods. Technology spillovers also occur when MNCs either help to develop necessary job skills in local workers or introduce new technologies that ultimately become available to domestic industries in the host country. Finally, MNCs that focus on retail and establish branches in other countries, such as Walmart, Aldi, Costco, Carrefour, Ikea, and many more, provide access to high-quality consumer goods like clothing, appliances, and electronics at competitive prices, raising the standard of living in the countries where they operate (Figure 15.6).

There are drawbacks, however. Critics of MNCs note that while workers may be paid more than they could earn working for local businesses, they are still paid far less than the multinational can afford. Workers are often prevented from forming unions and forced to work long hours in unsafe environments. Furthermore, many multinationals are based in developed countries, mostly in the West, and they tend to express the interests and cultural norms of those countries. This bias has sometimes led to accusations of neocolonialism (the use of economic, political, or cultural power by developed countries to influence or control less-developed countries), particularly for the way MNCs have helped accelerate the homogenization of cultures around the world by exporting not only goods from the West but also ideas and behaviors.

One such idea is that countries should encourage the privatization of public services like utilities, transportation systems, and postal services. Privatization means delegating these services to mostly private companies that operate to earn a profit rather than such services being delivered by arms of the government. Organizations like the World Bank and the International Monetary Fund (IMF) have pushed for privatization as a way to make these public services more efficient. The World Bank is an international organization that offers financing and support to developing countries seeking to improve their economies. Founded in 1944 to rebuild countries after World War II, it later shifted its focus to global development. The IMF, also created in 1944, promotes global monetary stability by helping countries improve their economies with fiscal plans and sometimes loans. In exchange, it requires countries to adopt plans that often include privatizing public services and paying off their debts.

In some places, this privatization process has been successful. For decades after independence, for instance, India employed a mixed-economy strategy, with a combination of free-market policies and heavy intervention by the government. The result, however, was that a large part of the public sector operated under cumbersome bureaucratic controls that critics complained slowed economic growth. Beginning in the 1990s, new leadership in India began pursuing economic liberalization by privatizing aspects of its large public sector including airlines, shipbuilding, telecommunications, electric power, and heavy industry. As expected, these efforts increased productivity and efficiency, but the public often was confronted by higher prices and loss of access to services.

The World Bank made similar efforts across Latin America. Some view privatization there as largely successful, noting that as the number of state-owned industries declined, the profitability and efficiency of the privatized companies increased. But sometimes, as in Bolivia, privatization came at considerable cost. In 1999, the Bechtel Corporation, a U.S.-based multinational, was awarded a contract by the Bolivian city of Cochabamba to improve the efficiency of the city’s water delivery system. By January 2000, however, water delivery in Cochabamba had actually become worse. Service rates increased even for people who did not receive any water at all. This result led to large and sometimes violent protests later known as the Cochabamba Water War. The Bolivian government sided with the protestors, expelled Bechtel, and passed the Bolivian Water Law in April 2000. Water in Bolivia was no longer privatized. In the aftermath of the protests, which drew international media attention, the World Bank promised to study and revise its procedures and recommendations.

Multinationals have been crucial in the emergence of modern China as an economic powerhouse. Starting in the 1970s under Deng Xiaoping, the country began to pursue a market-based growth strategy, adopting some of the tools of capitalist economies without ending its Communist system. These economic changes, sometimes called the “Opening of China,” vastly changed the country’s role in the world’s economy and improved a new generation’s prospects for a higher standard of living. Factories constructed for MNCs in coastal cities like Shanghai, Guangzhou, and Shenzhen were filled with workers from the Chinese countryside. Large ships stacked high with Chinese factory-made products crossed the Pacific and Indian Oceans and passed through the Suez and Panama Canals. With the world’s largest population, China holds its largest group of consumers. In 2001 it joined the WTO, and in 2010 it became the world’s second-largest economy, after the United States. As of 2022, China’s economy was predicted to become the world’s largest in 2030.