Do Civil and Political Repression Really Boost Foreign Direct Investments?

By Harms, Philipp; Ursprung, Heinrich W. | Economic Inquiry, October 2002 | Go to article overview

Do Civil and Political Repression Really Boost Foreign Direct Investments?


Harms, Philipp, Ursprung, Heinrich W., Economic Inquiry


I. INTRODUCTION

The globalization of the economy is an issue that continues to attract a great deal of attention in the political arena. The exchange of opinion unfortunately often does not follow civilized patterns but is articulated in street riots. The third ministerial conference of the World Trade Organization (WTO) in November-December 1999, for example, gave rise to the now-legendary Battle of Seattle, and the 55th Annual Meeting of the International Monetary Fund (IMF) and the World Bank Group (WB), which took place in September 2000 in Prague, was also accompanied by violent demonstrations.

The arguments of the demonstrating opponents of economic globalization, peaceful or violent, appear to follow a standard pattern. One of the groups demonstrating in Prague, for example, described its objectives as follows:

We will be exposing the links between the IMF/WB, the WTO and transnational corporations and the ways how they work to maximize private profits and limit the power of people to protect the environment, determine their economic destiny, and safeguard their human rights. ... Our goal is to give the proper name to what the policies of the IMF/WB really cause in the South as well as in the Central and Eastern Europe. We will be demanding an immediate suspension of these practices leading to environmental destruction, growing social inequality and poverty and curtailing of people's rights. (1)

In short, globalization is interpreted as a devious maneuver undertaken by multinational firms that, on the one hand, relocate production to undermine the tax and regulation policies of democratic nation states and, on the other hand, exploit the politically and economically repressed workers in third-world autocracies: "Essentially, the WTO, and the 'new' Global Economy, hurt the environment, exploit workers, and disregard civil society's concerns. The only beneficiaries of globalisation are the largest, richest, multinational corporations." (2)

It would be wrong to denigrate these statements as mere battle cries of street fighters because similar patterns of argumentation can be found in the extensive popular literature on globalization. The reproach that multinational enterprises have a special liking for autocratic countries in which workers are not allowed to organize themselves (with the result that the wage rates do not reflect their productivity) can be found, for example, in William Greider's 1998 bestseller One World, Ready or Not: The Manic Logic of Global Capitalism. Greider (1998, 38), in particular, argues against the hypothesis that foreign direct investment (FDI) may have a liberalizing effect in these countries:

The promise of a democratic evolution requires skepticism if the theory is being promoted by economic players who actually benefit from the opposite condition--the enterprises doing business in low-cost labor markets where the absence of democratic rights makes it much easier to suppress wages. A corporation that has made strategic investments based on the cost advantages offered by repressive societies can hardly be expected to advocate their abolition.

Greider understands, of course, that FDI decisions are influenced by balancing labor cost advantages against losses of labor productivity. However, he writes in this context:

The general presumption that low-cost workers in backward countries were crudely unproductive was simply not true. In fact, dollar for dollar, the cheaper workers often represented a better buy for employers than the more skillful workers who were replaced. Their productivity was lower but it also improved rapidly-much faster than their wages. In order to attract foreign capital, their governments often made certain this was the case. (Greider, 1998, 74)

Greider's statements echo a line of argument that has a long tradition in the political-economic literature analyzing the effect of democracy on economic growth.

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Do Civil and Political Repression Really Boost Foreign Direct Investments?
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