Do Multinational Corporations Hurt Poor Countries?

By Bhagwati, Jagdish | The American Enterprise, June 2004 | Go to article overview

Do Multinational Corporations Hurt Poor Countries?


Bhagwati, Jagdish, The American Enterprise


There is a fierce debate today between those who consider globalization to be a malign influence on poor nations and those who find it a positive force. This debate focuses not just on trade, but also on multinational corporations. The hard evidence strongly suggests that the positive view is more realistic. There are many reasons to believe that multinationals in particular do good, not harm, in the developing world.

If any conviction strongly unites the critics of multinationals today, it is that they exploit workers in poor countries. Ire has been aroused by the assumption that rich, deep-pocketed corporations pay "unfair" or "inadequate" wages overseas. More generally, companies are condemned for violating "labor rights."

The typical critique asserts that if a Liz Claiborne jacket sells for $190 in New York, while the female worker abroad who sews it gets only 60 cents an hour, that is obviously exploitation. But there is no necessary relationship between the price of a specific product and the wage paid by a company. For starters, for every jacket that sells, there may be nine that do not. So the effective price of a jacket one must consider is a tenth of the sold jacket: $19, not $190. And distribution costs and tariff duties on apparel almost double the price of a jacket between the time it arrives at the dock or airport in New York and finds its way to a Lord & Taylor display.

It is often assumed that multinationals earn huge monopoly profits while paying their workers minimal wages, and that these firms should therefore share their "excess" profit with their workers. But nearly all multinationals such as Liz Claiborne and Nike operate in fiercely competitive environments. A recent study of the profits performance of 214 companies in the 1999 Fortune Global 500 list showed a rather sorry achievement--about 8.3 percent profit on foreign assets. Where are the huge spoils to be shared with workers?

Let's look at the facts on wage payments. Good empirical studies have been conducted in Bangladesh, Mexico, Shanghai, Indonesia, Vietnam, and elsewhere. And these studies find that multinationals actually pay what economists call a "wage premium," that is, an average wage that exceeds the going rate in the area where they are located. Affiliates of some U.S. multinationals pay a premium over local wages that ranges from 40 to 100 percent.

In one careful and convincing study, the economist Paul Glewwe, using Vietnamese household data for 1997-98, was able to isolate the incomes of workers employed in foreign-owned firms, joint ventures, and Vietnamese-owned enterprises. About half the Vietnamese workers in the study worked in the foreign textile or leather firms that are so often criticized. Contrary to the steady refrain from the critics, Glewwe found that workers in foreign-owned enterprises generally make almost twice the salary of the average worker employed at a Vietnamese company.

   As Glewwe points out:

   The data also show that people who obtained employment
   in foreign-owned enterprises and joint ventures in Vietnam
   in the 1990s experienced increases in household
   income (as measured by per capita consumption expenditures)
   that exceeded the average increases for all Vietnamese
   households. This appears to contradict the claims
   that foreign-owned enterprises in poor countries such as
   Vietnam are "sweatshops." On the other hand, it is clear
   that the wages paid by these enterprises ... are a fraction of
   wages paid in the U.S. and other wealthy countries. Yet
   Vietnam is so poor that it is better for a Vietnamese person
   to obtain this kind of employment than almost any other
   kind available in Vietnam.

But there remains the accusation that global corporations violate labor rights. Many damning charges are made, and anti-globalization activists are not beyond trumpeting the occasional lie, much like the corporations, politicians, and bureaucrats they excoriate. …

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