Globalisation, Good Governance, and Competitiveness

Like most knowledgeable and experienced economists, the faith of Augusto Lopez-Claros in the virtues of the capitalist economic system is tempered by caution. He refrains though from doomsday theories. Augusto has had a high flying international career leading to his current position as Chief Economist of the World Economic Forum and Director of the Global Competitiveness Programme. He is a one-man walking world economic reference staff, generous with his knowledge and ideas. "Military power and therefore defence expenditures have seen a major erosion of their power to basically give us anything of much enduring value," he said, in a recent meeting with him in the Netherlands. "In the context of democracy, calls for greater political accountability, and a public which cares more about job creation, social safety nets and the environment, having large military establishments is not particularly useful." His examples and details are a telltale of a society driving itself to the edge; to it he brings forth a compelling argument of hope - and along with it evidence - that we can still make a difference if we and our governments agree to change a few of our ways.

In this interview, Augusto digs wish fresh enthusiasm into the sham of our economic-centred world and looks at some approaches to address it.

INSPIRE:According to your presentation, the world pretty much knows the direction in which it should be heading: towards a much more uniform and globalised world, not in terms of culture but towards having a common outlook on some universal values. Apparently, we're not heading that way yet. What sort of mind frame or readiness do we need?

Augusto:What you see in the world today is two very interesting and at times opposing trends. On the one hand you have what I would call processes of integration: the coming together of nation states, peoples, and the business communities. This is fuelled by the process of globalisation itself - reductions in the costs of communications and transport, scientific and technological progress - which is basically creating the opportunities for much closer interactions between peoples than had been the case in former times. I'm not sure there's anything we can do about this actually because it's largely driven by the relentless progress of science and technology. The coming down of barriers - the growing interactions between the business communities, governments, peoples - I think is one of the most interesting trends of the past several decades. I think that it will continue, partly because it is driven by technological change but also because that's what we want. I would say that in principle this process is benign, it's good for prosperity, it's good for our ability to reduce poverty and to further the development process.At the same time we have another troubling trend. As humanity's problems have become more global in nature they can no longer be solved by national institutions, such as we have in different countries. You cannot solve the problem of global warming or nuclear proliferation or terrorism or drug trafficking outside of a context of very active cooperation between nation states. Unfortunately - and this is where I think we're loosing out, we're wasting valuable time -we have not responded collectively. The international community has not yet caught up with the idea that we need to develop these much stronger mechanisms to interact and cooperate. There's this gap between the world in which we live in, which is a world that desperately needs strengthened mechanisms of cooperation, and the problems that we face which are basically upon us, casting serious threats on our future.

INSPIRE:So, on the one hand we need governments to unite, to come together to look at things from this overall perspective rather than isolated regional and national angles. At the same time we're seeing a trend where companies and corporations are getting bigger than some governments, and definitely having more influence. How does this fit into that scheme where governments should be heading international cooperation but we actually have corporations being more powerful.

Augusto:Corporations - the larger transnationals - can sometimes wield more power and influence than the smaller countries, that's for sure. We do have the situation where the turnover of one of the large corporations can sometimes be several times larger than the GDP of a small African or Latin American state. However, even the largest companies still have to operate in the framework of the law in the largest markets. Think of, say, Microsoft. Its main market is not Uganda or Paraguay. Microsoft derives its profits by and large from operating and selling in the US market, in the European Union and in some of the larger Asian economies. I would say probably 80%--if not more--of its profits are actually generated in these markets. However, in these markets by far the most important player is still government. In the context of these larger markets the corporations still have to operate in the framework of the law, and are very closely regulated - sometimes strictly so. Of course, this doesn't prevent some of the transnationals from going to smaller countries and sometimes abusing their power, lobbying or corrupting politicians, for instance, to influence the legistative process to suit their interests. This happens, it has been well documented, and examples can be given. But I would say that that is more the exception than the rule and it is something that is increasingly coming under international scrutiny. A free press can play an important role in imposing on the business community higher standards of openness and transparency.You might have heard of this interesting NGO called Global Witness which has adopted as a goal to encourage the larger oil companies to disclose publicly, as a condition for being listed in the main stock exchanges, whether they have made "contributions" to senior politicians in developing countries to ensure the smooth running of their businesses, to secure exploration rights, and so on. It is a way of rewarding those companies that have nothing to hide and casting an unfavourable light on those that, because they have most likely been involved in bribery and other activities on the margins of the law , refuse to make such public disclosures. I think civil society can play a very useful role in identifying imaginative ways to create positive incentives in the business community to operate in a framework of respect for the law

INSPIRE:Woody Allen puts it well: "The lion and the calf shall lie down together but the calf won't get much sleep." What happens to the smaller countries that do not have that much power within this system to be able to flex authority over such powerful transnational corporations?

Augusto: I think that the smaller countries can derive strength from cooperation with each other. I am very much in favour of a number of initiatives that have begun to emerge in different parts of the world; groups of countries are gathering in regional networks to begin to develop common approaches to problem solving; initially many of these efforts have been focused in the area of international trade but the scope for a broadening to other areas is large. Twelve of the 20 richest countries in the world are members of the European Union. At the heart of the European experiment of economic integration is the recognition of common interests, the elimination of barriers, the creation of an enlarged economic space with the same rules, the same institutions, and in which the factors of production are free to move without hindrance. We desperately need to apply this model in other parts of he world. Does Africa need to have more than 40 different currencies? Do these countries need to restrict their trade with each other? One of the reasons why foreign investment to Africa has been so tiny is because the continent is segmented into a patchwork of different national regimes and the continent as a whole is not benefiting from the economies of scale associated with large markets with similar rules. We must learn from the experience of other countries and imitate those elements of their development strategies which have proved unambiguously successful.

INSPIRE:I'll go into one of the reports you published recently. Based on the Global Competitiveness Report of the World Economic Forum, are you beginning to see strong interconnectedness between competitiveness of countries and their actions towards environmental sustainability?

Augusto:What we have seen in the last two or three decades is a kind of gradual shift in the importance of certain factors for competitiveness and for growth. There used to be a time, in the 1970s, when good economic management was essentially understood to mean managing your public finances well and having low and stable rates of inflation. Perhaps this was not surprising as the whole world was coming out of a long period of financial instability, when even the US had suffered from double digit inflation. Gradually, however, policy makers understood that growth and prosperity would not be sustainable without a certain degree of financial discipline and a commitment to sound management of the public resources. Having made important progress in this area the focus has shifted to other areas, which are now recognized as being central to the development process. Now we recognize the critical role of education and building up the skills of the labor force. Transparency and honesty in the administration of resources is seen as critical to ensure that the fruits of economic growth are more equitably divided. You see more and more emphasis being placed on property rights, on the importance of an independent judiciary and in empowering women to participate in all areas of the life of the nation.Sustainability is an element of this. It means you are building your institutions with a view for the longer term. You don't do policy simply in terms of the next twelve months or, to use the technical jargon, the "political cycle". When you decide to allocate resources out of your budget to improve the educational system, to improve the country's infrastructure or to boost the quality of public health you're essentially making an investment in the future of your country. The Nordic countries, for instance, are running budget surpluses because they've realised that they have an ageing population and only by saving now are future governments going to be able to fulfil their financial obligations to future generations in the area of pensions, health, social benefits and so on. You see then their policies are being framed in a longer term perspective, with due concern for the kind of society they want 15-, 20-years hence. This is excellent. It means that a generation is assuming responsibility for the welfare and the wellbeing of the next generation. The Finns and the Swedes and the Danes would like their children to enjoy at least as good a standard of living as the present generation. This is very much at the heart of the concept of sustainability. We see more and more of this in many different parts of the world, the sense that we need to take care of our environment and that we cannot simply live for the present.I don't want to say that this has completely permeated the global economy, that every government policy is being designed in this kind of long term framework. That would not be correct. But we're moving in that direction, there's a greater and greater concern for the wellbeing of future generations. I think that all this talk of the last twenty years about sustainability of the environment, whether in the context of conferences or the activities of many organizations of civil society is beginning to pay off. It has sensitized leaders to these ideas and has given them an air of well-deserved intellectual respectibility.

INSPIRE:The economic lens through which we look at our world today - growth, GDP ... Are we in trouble?

Augusto:There're some reasons as to why we look at these indicators. First of all, they're quantifiable, they're tangible. To frame a debate about policy in the context of a particular country there needs to be some agreed upon measure of progress, so we'd know whether we're actually moving forward with respect to a certain kind of benchmark or parameter. This is not to say that an indicator such as GDP is necessarily a good way to capture human welfare. In fact, there's a very interesting debate on how you measure human welfare. The UNDP has come up with the Human Development Index, which is an alternative to GDP. It brings in GDP but it also looks at other indicators like adult life expectancy, infant mortality and so on. It's a way of trying to capture broader aspects of well being, beyond the simple production of goods and services, a rather crude way to synthesize a complex concept. I think that the whole science of how to assess human progress in a meaningful way is still in its infancy. We understand, at a very basic level, that sustainability is important, that we must care for the environment, that respect for human rights is critically important, that women must be brought into the development process as dynamic promoters of social transformation rather than mere passive recipientes of help. But we have not yet succeeding in imbedding these concepts into the day-to-day policy debate of nations, where policies are shaped and outcomes are measured. The time, no doubt, will come.

A full article on Augusto's Global Competitiveness Report and his keynote from the last Annual Conference can both be downloaded from the members-only area of the EBBF website.