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UNDP Administrator on Southern Business

2005-11-14

Below is a statement by Mr. Kemal Dervis, Administrator of the United Nations Development Programme (UNDP), on the occasion of the Financial Times and International Finance Corporation Conference: "Southern Multinationals: A Rising Force in the World Economy" (9 November 2005, Mumbai, India):

Honourable Ministers,
Distinguished guests,
Ladies and Gentlemen,

I would like to begin by thanking our hosts the Government of India, the Financial Times and the International Finance Corporation for organising what is an extremely timely conference which takes place in this most appropriate of locations: India, one of the fastest-growing, most dynamic economies in the world.

Before I start I would like to offer my sincere condolences to all those that have been affected by the South-Asia earthquake. I also would like to say that I share the pain of the families of the victims of the recent bombings in Delhi. Our common humanity is our most precious asset against both natural and manmade disasters. I do remember that the terrible earthquake my own country, Turkey, experienced in 1999, and the smaller earthquake later in Greece, created the opportunity - amongst all the suffering - for these two neighbours to help each other and build new ties. I see and appreciate that this is also happening today in South Asia.

It is a real honour to be here today, and to have this opportunity - following the address by the Honourable P. Chidambaram, Union Minister of Finance - to address such a distinguished audience on this important topic: the rise of southern multinationals in the global economy.

In today's world of deepening economic integration where the destinies of countries and peoples are inextricably linked, there is perhaps no greater challenge than how to manage globalization so that its benefits are more equitably shared and its costs more evenly distributed. As the UN Secretary-General Kofi Annan has said, "A world where - amid increasing global prosperity - millions still live in desperate conditions will not be a world at peace."

There is no doubt at all that the 19th and most of the 20th Century marked an increasing gap between the richest and the poorest countries in the world. Over the past two centuries countries that were relatively rich in 1800 have generally grown faster than those that were relatively poor, a growth pattern which resulted in a steady increase in the ratio of per capita GDP in rich countries to that of poor countries. In 1820, the ratio of GDP per capita of the richest to the poorest countries was around 3, but by 1973 it had more than tripled to about 10. The GDP of Western Europe, the United States and Japan was 45 times higher in 1973 than in 1820. Fortunately, this pattern of growth began to change around 1980, after which several of the fastest growing countries in the world have also been poor countries. Some countries of the South are growing significantly faster than the North in a sustained manner. As studies by the World Bank have shown, if one divides countries into income quintiles based on 1980 per capita GDP and plots subsequent population-weighted growth rates, growth in the poorest quintile averaged 4 percent per capita, while growth in the richest quintile, mostly OECD countries, was less than 2 percent in the period 1980-1998. The new strength of southern multinationals is part of this change and signals a very important occurrence: the emergence of new poles of innovation, financial capability, technological sophistication and management know-how in "Southern" countries.

Our hope should be that this development becomes the driver of a more balanced, more equitable globalization where in a few decades from now, today's distinction between the rich Northern "Centre" and the poor Southern "Periphery" will have disappeared or at least be greatly diminished.

Today, I would like to take this opportunity to offer my perspectives on globalization and on the key challenges that we all face, and discuss the role southern multinationals can play in addressing them.

I. Defining Globalization

Some analysts argue that the world economy was just as globalized at the end of the 19th century as it is today. It is true that if you look at some indicators, the world was already very globalized 100 years ago. The ratio of world trade to GDP, or the amount of foreign investment was very high, with the levels reached at the end of the 19th Century as high as or higher on some of these indicators than the levels attained in the 1990s. So in that sense there is some truth in the theory that globalization has existed before in some form.

But after the regression due to the two World Wars, as well as the inter-war depression and the protectionism associated with it, the pace of globalization again accelerated in the second half of the 20th Century, with an even faster impetus brought about with the end of the Cold War. Moreover, the nature of today's interdependence and interconnectedness has changed tremendously.

In the last fifty years, membership of the World Trade Organization has tripled and world merchandise exports have increased to levels far beyond those reached in the "first age of globalization" at the end of the 19th Century. The ratio of world trade to world GDP was 17 percent in 1900 compared with about 30percent in 2003. But it is not just a question of trade to GDP ratios; it is the nature of trade which has been transformed. In today's world, trade is increasingly based on globally integrated supply chains that span across countries, organized by the expansion of the presence of multinational corporations across both industrial and developing countries. According to UNCTAD's World Investment Reports, between 1993 and 2004 there was an over five-fold increase in the number of parent multinational corporations residing in developing countries, rising from 2,700 to 14,000. And in the same period, there was an increase of over 30 percent in the number of parent multinational corporations in industrial countries, from 33,500 to 45,000. In the last twenty years or so, the total assets of foreign affiliates of multinationals in the world have increased 18-fold; their employees have tripled in number; and their exports have quintupled. Today, the impact of integrated production structures in our everyday lives is all too clear. From a notebook computer to a bicycle, products can be co-designed by different teams across the globe. Components are likely to be produced in several countries, and by the time the product is available to the market it could have gone through multiple stages of this worldwide integrated supply process. Today, it is possible for more people to collaborate in production than has ever been the case in human history.

Commerce and financial services are also far more developed and deeply integrated than they have ever been. The most conspicuous aspect of this has been the integration of financial markets made possible, in part, by rapid advances in modern information technology. The average daily turnover in foreign exchange market transactions, globally, was a "mere" $200 billion in 1986. Today, that figure stands at well over $2 trillion. The daily value of financial derivatives transactions, invented in the late 1980s, has reached well over $1 trillion. There is today a real global financial market where billions of dollars can move in just a few seconds.

But in addition to the economic dimensions of globalization, "soft globalization," as characterized by the extraordinary exchange of ideas and culture and the integration of societies made possible by today's mass and frequent international travel and modern information and communications technology has truly revolutionized the way we interact and conduct business. In many ways we are all closer and more visible to each other and this visibility also makes inequality more intolerable. As Zbigniew Brzezinski wrote in 2004, "The contemporary world disorder stems more broadly from a new reality. The world is now awakened to the inequality in the human condition…spreading literacy and especially the impact of modern communications have produced an unprecedented level of political consciousness among the masses."

All in all, the globalization that characterizes the beginning of the 21st century is a very different phenomenon from what the world experienced a century ago. It is my view, therefore, that we are not dealing with globalization cycles, but with a fundamental and irreversible transformation in the nature of the world economy, and with it, in human society.

II. The rise of southern multinationals

At the same time that globalization in all its dimensions has accelerated, it is clear that its benefits have often been far from evenly distributed. The expansion of international trade and the diffusion of knowledge and technology has been a driver of increasing prosperity in large parts of the world. It is also the case, however, that globalization has brought with it a tendency towards "winner take all" markets, with economies of scale and conglomerations concentrating value, accumulation and profit at the centre, namely the North, whilst letting the periphery, the South, participate as producers and sub-contractors, but with low profit margins . Northern Multinationals were for a long time the sole generators of new technologies and therefore the beneficiaries of an ongoing sequence of temporary monopoly profits helping to perpetuate the income gap between the North and the South, despite increasing participation by the South in international trade and in the globally integrated production circuits.

Over the last two decades there has, however, been a shift in the balance of global economic relations. While the North traditionally appropriated the majority of the gains of globalization, the South now not only participates in the global economy but is beginning to break into domains long exclusively held by the North. With the emergence of a number of developing countries that have formed new growth poles and centres of knowledge creation and excellence in the world economy, the North is no longer the dominant location for manufacturing activity and trade, nor does it retain as much of the monopoly of profits associated with know-how and innovation.

Trade statistics show that today, the South is increasingly important as a producer, trader and consumer in global markets, currently accounting for some 30 percent of world trade. Over 40 percent of all goods exported by developing countries, including basic commodities and manufactures, are today directed to other developing countries. South-south trade is increasing at an annual rate of 11 percent - nearly twice as fast as total world trade. The composition of trade between developing countries has changed as well as these countries begin to export more manufactures than primary commodities, their traditional bread and butter. The share of manufactures in developing-country exports has climbed steadily, from 20 percent, $115 billion, in 1980 to nearly 70 percent, $1.3 trillion, in 2000.

The second dimension of this structural change in the world economy is the emergence in the South of accumulation and profit centres able to take advantage of global markets similar to what has existed in the North for centuries. This rise of southern multinationals is a relatively recent phenomenon but it is gathering strength very rapidly. Even in Africa, still the poorest continent, developing country investors and operators in infrastructure account for 38 percent of funds invested in infrastructure between 1998 and 2003. They are also the largest in terms of investments per project, at $104 million, compared to $58 million from local investors and only $35 million from developed country firms.

In public-private infrastructure finance, corporations based in developing countries emerged as important sponsors, with projects accounting for 39 percent of such investment flows to developing countries in 1998-2003. And half the top 10 sponsors for projects implemented in 2001-04 are from emerging market countries such as India, Malaysia, Mexico, the Russian Federation and the United Arab Emirates. Larger and/or more developed developing countries are investing in their neighbours. From 2002 to 2003, foreign assets, foreign sales and foreign employment of developing countries' top 50 TNCs grew by 27.4 percent, 45.9 percent, and 50.9 percent respectively.

But whilst the growth of southern multinationals and the increase in South-South trade has been a strong positive force in the global economy, these overall trends still mask the fact that much of this growth is restricted to a small number of countries. More than two-thirds of South-South trade originates from and is destined to developing countries in Asia. The share of intra-developing country exports in Asia rose from 60 percent in 1990 to 66 percent in 2001, while the share of the other developing regions - Latin America, Africa and the Middle East - suffered a decline. And while developing country transnational corporations have also joined UNCTAD´s list of the world's 100 largest TNCs, a good part of their investment is still concentrated within their own sub regions. In particular, FDI within and between North-East and South-East Asia accounted for almost half of all investment inflows within these sub-regions during 2001-2002, up from 38 percent in 1999-2000.

III. Southern multinationals and inclusive globalization

The rise of southern multinationals will no doubt spread to a greater number of countries and it will lead to the emergence of a world economy where the North will no longer have a quasi-monopoly of oligopolistic profits. The high value-added activities of design, research, and the application of advanced technology which have until recently been concentrated in the North is spreading to the South. Today, for example, Brazil's successful airplane manufacturer Embraer, is competing with aircraft manufacturers from North America and Europe. Brazil, India and South Africa all have home-grown sophisticated pharmaceutical firms. The creation of these new poles of growth and profit in the South is changing the geography of world production, trade and wealth accumulation. The "centre" is becoming diversified even though this development is still far from acquiring universal reach. The "periphery" is breaking up, with Mumbai, Shanghai, Seoul, Istanbul, Sao Paolo and other cities becoming part of the economic "centre" of the world.

But this is not the end of the story. Some argue that the old geographical centre-periphery relationship is being replaced by a new sociological division, with the economic elites of the South joining the economic elites of the North forming a new global centre sharing wealth, lifestyle, mobility and power, while the sociological periphery remains disempowered, poor and alienated, whether around the big metropolises of the South, the remote rural areas in poor countries, or in the suburbs of Paris. When looking at global income distribution we see many developing countries reducing the average income gap that separates them from the richest economies in the world by growing much faster than the old northern centre. But the distribution of income within these countries is worsening, as is also the case within many of the most advanced economies.

The challenge facing us all is to help make the undeniable geographical spread of globalization into a process that also becomes truly inclusive in sociological terms. The islands of prosperity and financial strength in the South can spearhead a trend towards a more equitable and inclusive globalization if the tendency towards unequalizing growth within the emerging developing economies can be transformed into more inclusive development. At the same time, advanced countries themselves must also address the adjustment costs and distributional problems linked to labour-saving technical change, trade and outsourcing, and migration. Globalization and the diffusion of tremendously powerful technology have unleashed unprecedented growth in vast parts of the world. The potential exists for a global prosperity few could dream of a few decades ago. But I do not think things will simply work out automatically. Markets are wonderful engines of growth, but the invisible hand alone cannot be relied on to meet the challenges we face. I want here to quote Pascal Lamy, the new Director-General of the WTO. He refers to the need to complement the invisible hand of the global market place with a more "visible" dose of global governance. Referring to the feeling of dispossession which he says is spreading among the citizens of the planet, he sees this feeling increasing "the anxieties towards the future. The future becomes an anxiogenic figure because citizens are not convinced that there is a captain to pilot their plane…."

This "pilot" that Pascal Lamy and many of us in international institutions refer to is not, of course, a world government. Nation states remain strong and legitimate and will continue to be the crucial constituent elements of the international community. What is needed, however, is a much more advanced and transparent form of international cooperation. Global markets and global business must be embedded in global institutions and a global policy space that provide a sense of direction and that can manage risks and imbalances. The broad multilateral system, with the United Nations providing the overarching framework, and I very much include here the WTO, must try to provide this "missing pilot" that Pascal Lamy refers to, not in the form of a huge centralizing bureaucracy, but rather as a carrier of common values and a rules-based system.

Building this more inclusive globalization is in everyone's interest. Business cannot survive if society fails. Trade negotiations will not succeed if today's level of anxiety about our global future persists. In many ways, society is the most important business of business. Weak states and ineffective regulations, poor tax structures and the prevalence of a very large underground economy, social unrest and violent conflict, and general under-development in terms of education and health conditions all impact upon business. Innovative approaches that serve both corporate interests and society's interests are today increasingly being recognised by the private sector as an intrinsic part of doing business, not an optional extra.

Based on this recognition, many leading southern multinationals have a stake in the social, environmental and governance themes being addressed by the Global Compact, the UN's voluntary initiative aimed at advancing responsible corporate citizenship. Half of the Global Compact's 2,300 participating companies are based in developing countries, with strong engagement by companies in Argentina, Brazil, China, Egypt, India, Singapore and South Africa, amongst others. Some of the most innovative examples of corporate responsibility are actually being done by southern multinationals in areas such as provision of affordable housing and electricity, and HIV/AIDS awareness training. Global Compact participants such as CEMEX in Mexico, Eskom in South Africa and India's own Tata Steel are working to keep environmental and social standards at the forefront of their business operations, to the benefit of both business and local communities.

Private business and the United Nations have thus started to work together with a focus on development and human empowerment around the world. Our overlapping objectives are clear: combating corruption, building the rule of law so that private initiative can flourish, preventing conflict and safeguarding the environment.

Within my own organization, the United Nations Development Programme (UNDP), we understand the importance of working with business to meet these shared goals. UNDP is well-placed to facilitate this through our own Special Unit for South-South Cooperation which works to promote South-South trade and investment for development. Since 2002, the Unit has been working to prepare a full-scale South-South Trade Forum (SSTF) that would involve all developing regions, as well as other supporting partners, and the first South-South Trade Forum is due to take place in Beijing in May 2006.

Conclusion

From a human development perspective, global economic integration and greater openness in trade is not an end in itself: it is a means to reducing poverty and achieving concrete improvements in the lives of people. Five years ago, all UN Member States agreed in the Millennium Declaration that the central challenge facing the world is to ensure that globalization becomes a positive force for all the world's people. World leaders recognised that only through broad and sustained efforts to create a shared future, based upon our common humanity in all its diversity, can globalization be made inclusive and equitable, and, therefore, legitimate in the eyes of the worlds citizens. Emanating from the Declaration, the world has agreed on concrete, measurable, time-bound objectives - the Millennium Development Goals - which aim to halve extreme poverty and hunger, ensure all children get a primary school education, reduce child and maternal mortality rates and ultimately build a more prosperous and just world for all its citizens.

Given the scale of the challenge we face, there has never been a more critical time for the private sector, together with government, civil society and others to work together to build a better globalization for all.

Southern multinationals are broadening the geographical base of globalization and creating a new dynamic of potential inclusiveness that may be capable of fundamentally changing the unequal nature of the world economy. Southern multinationals cannot, however, do this alone. Their energies, initiatives and strength must be accompanied by public policies, public-private partnerships and approaches to global governance that keep the goal of poverty reduction and inclusiveness firmly at the centre of our attention.

Many thanks for giving me the opportunity to help launch this conference today.