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The Global Market and Developing Nations

A Worldwide Market?

The degree and extent of poverty in the world holds many implications. When over a billion people are living on $1 a day or less and more than another billion are living on $1 to $2 a day, and while one fifth of the world garners 80 percent of its income, the situation can only be described as income inequality.

Here are the quintile averages for income across the world's population. In other words, these quintile classifications cut across all nations: The highest quintile includes the wealthiest people from all nations. (Note that these values, which are from the World Bank, are not quintile breaks, but rather the average income within each quintile.)

Table 19.5  Average Income per Quintile
 Average Income
Highest Quintile $25,000
Fourth Quintile 7,000
Third Quintile 3,000
Second Quintile 730
Lowest Quintile 365

The degree and extent of poverty in the world holds many implications. But rather than dwell on the moral aspects, which are as controversial as they are obvious, I want to point out the implications for the global market.

Quite bluntly, the industrialized nations of the world cannot sell goods and services to people who are living on less than $2 a day—those in the lowest and second quintiles. Many of these people go through their entire lives without riding in a car or using a telephone. How do you mass market merchandise to a population that has only 65 televisions per 1,000 people? How to you sell goods to people who don't have a home? How do you sell to people who spend all day trying to get enough food to live on? You cannot. The only goods that can be sold to people in the lowest two quintiles are those that can be distributed through relief agencies.

Even in the third quintile, where income takes a big jump over the lowest two, many people are doing without a refrigerator, let alone a car. Their average annual income of $3,000 is about $8.20 a day, which is what most working people in the highest quintile spend on commuting and lunch each day.

So the three lowest quintiles, by definition, account for about 3.7 billion of the world's 6.2 billion people. That is an immense potential market—if they had a decent level of income.

The fourth quintile is the first one where people normally have decent housing, refrigerators, and maybe even a car. They earn about $19 per day per person, so they have disposable income beyond that needed for the bare necessities. Yet they possess less than one-third the purchasing power of people in the top quintile.

By virtue of the fact that you're reading this, you are probably in the top income quintile. Most marketing efforts, as companies in industrialized nations normally define them, are directed to this segment of the world's population. This means that when people talk about “the global market,” they are generally omitting 60 to 80 percent of the world's population from their definition of “global.”

Indeed, the goal of a multinational corporation dealing with an LDC may not be developing the local market, but rather developing an inexpensive production site. You might think that would lead to the LDC becoming a viable market—after all, production means jobs, jobs mean income, and income means consumption—but sometimes that isn't the case.

Multinational Corporations and Globalization: The Pros and Cons

First, let's define these two terms. A multinational corporation (MNC) is a large company engaged in international production and, usually, sales. The largest MNCs—also known as MNEs, for multinational enterprises—have production sites in several or even dozens of nations. An MNC typically scans the whole world, or at least substantial regions of the world, for markets, production sites, and sources of raw materials.

Globalization essentially means free movement of goods, services, people, and capital across national borders. This creates global markets for goods, services, labor, and capital. However, the term globalization has also come to mean something more: economic and cultural hegemony on the part of industrial enterprises, such as MNCs, and industrialized nations, particularly the United States. Those who oppose globalization use the term to describe these negative phenomena and to raise the specter of a world controlled by a handful of MNCs.

I'm discussing MNCs and globalization together because they are related. An MNC benefits from free movement of goods, services, people, and capital across national borders, just as U.S. companies have benefited from that situation in North America. As a corporation, an MNC has one main objective—to make a profit—and the free movement of goods, services, workers, and capital enhances profitability. It does that by giving management freer access to the factors of production and the ability to make decisions based more purely on cost and revenue considerations.

Also, MNCs promote globalization by their very existence and business practices. When McDonald's introduces its “customer experience” and its menu, even in modified form, to another culture, it begins to change that culture. When Ford sets up an assembly plant in Brazil, it attracts workers from the countryside and changes their economic aspirations, for better or worse. Similarly, the agenda of the World Bank and the IMF generally favor freer trade—a force for globalization—but many developing nations find free trade to be a mixed blessing.

The key problem in talking about MNCs and globalization, aside from the emotions they stir up, is that they are both creatures of the industrialized world. That is an undeniable fact, whether you oppose or support MNCs and globalization. The poorest nations in the world are not launching MNCs. Given that economically powerful entities rarely aim to benefit the poor, those who oppose MNCs and globalization—regardless of how emotionally they state their case—do have a case.

The major points in the case against MNCs are …

  • They don't alleviate local poverty.
  • They give economic and political power to external, commercial interests.
  • They create economic instability when they become a major employer and then cut production or shut down operations.
  • They substitute local customs, values, and traditions with Western style materialism, consumer customs, values, and traditions.
  • They extract more economic benefit from local economies than they contribute.

On the other hand, supporters of MNCs argue that …

  • They provide employment that usually pays better than other available opportunities.
  • They stabilize and stimulate local economies, and raise standards of living. (Remember the multiplier effect?)
  • They promote positive values, such as nonviolent conflict resolution, diversity, and equality for women.
  • They promote efficient production and bring a broader range of products to the widest possible market.
  • They create an environment of nonviolence and international peace and economic cooperation.

As usual, each side has valid points. Moreover, each side can cite statistical and anecdotal evidence to support its case.

In any event, globalization has been a fact of international business life. However, the United States is now the world's sole “superpower” and its major producer and consumer of goods and services. America draws criticism (and sometimes violent responses) for its real and perceived economic power. From France's complaints about Euro Disney to radical Islam's characterization of the United States as “the Great Satan,” from lack of U.S. cooperation on international environmental agreements to its role in often negatively perceived, pro-growth institutions like the World Bank and the IMF, there are forces working against the United States and globalization.

Thus, the story of globalization and the role of MNCs in the world is still being written. MNCs and globalization can be forces for good or ill. Both could clearly help the world economy produce the greatest good for the greatest number of people. However, in practice, MNCs may have to go about their business a bit differently and globalization may need to be less imperialistic for that to occur.

Overcoming Barriers to Development

Regardless of how it happens or what form it takes, economic development and only economic development will alleviate poverty and raise standards of living. But there are many barriers to development that must be overcome. The success of the United States, Canada, Western Europe, Japan, and Australia has been difficult for other nations to duplicate.

Many observers in these democracies argue that establishing democratic governments and reducing corruption would set the LDCs on the path to economic achievement. Others believe that the right kind of foreign aid would do the trick. Still others believe that if these nations engaged in free trade and “took a seat at the table” with industrialized nations, they would prosper. While some of these measures would help, none of them alone would generate development.

EconoTalk

The Marshall Plan, named for Secretary of State George C. Marshall, who proposed it in 1947, provided up to $20 billion in aid (in late-1940s dollars) for relief and rebuilding. The condition was that European nations had to act together and cooperate economically. By 1953, the United States had contributed $13 billion and Europe was on its way to recovery.

The U.S. economy also benefited from the plan, because the money was used to buy productive capital and other goods from America. These were to be shipped to Europe on American merchant vessels. Without a doubt, the Marshall Plan was a success for all parties involved.

Democracy and reduced corruption might help in some cases, but movement to democratically elected governments (for instance, in South America) has not eliminated economic chaos. Western democracy means more than free elections. It means a free press to ensure greater governmental accountability and sound fiscal and monetary policies. A sound central bank is as important as an elected government.

Foreign aid can do wonders. It was the Marshall Plan, one of the largest foreign aid programs in history, that rebuilt Europe after World War II and helped Germany become an economic giant. Many people who denounce foreign aid forget this, yet it is often difficult to assess the benefits of foreign aid in LDCs. Some of the money almost certainly finds its way into the wrong pockets. That said, many economists believe that the wealthy creditor nations that have lent billions to developing nations should forgive much or even all of that debt in order to give these nations a fresh start.

Free trade doesn't necessarily help a country join the ranks of developed nations. Argentina tried it, and it failed badly. Most economists believe that developed nations should end protectionist practices that limit imports from developing nations. Textiles, as noted, are one area, and farm products are another.

Thus a mix of economic and political measures—ideally, tailored to the specific nation—is the recipe for economic development.

book cover

Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book direct from the publisher, visit the Penguin USA website or call 1-800-253-6476. You can also purchase this book at Amazon.com and Barnes & Noble.

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