Economic Empire building: The Centrality of Corruption

By James Petras

11/24/06 "Information Clearing House" -- -- Economic Empire building (EEB) is the driving force of the US economy and became more central over the past five years. More than ever before in US economic history, the principal US banks, oil companies, manufacturers, investment houses, pension and mutual funds all depend on exploiting overseas nations and peoples to secure high rates of profit. Increasingly the majority of banking and corporate profits accrue from overseas plunder.

As EEB becomes central to the viability of the entire US economy, competition with Europe and Asia for lucrative investment rates and economic resources intensifies. Because of heightened competition, and the crucial importance of overseas profits, corporate corruption has become a decisive factor in determining which imperial center’s MNCs and banks will capture lucrative profit-generating enterprises, resources and financial positions.

The centrality of corruption in imperial expansion and in securing privileged positions in the world market exemplifies the increasing importance of politics, in particular relations with states in the imperial re-division of the world. Globalization, so-called, is a euphemism for the increasing importance of competing empires intent on redividing the world. Corrupting overseas rulers is central to securing privileged access to lucrative resources, markets and enterprises.

The Centrality of Economic Empire Building Today everywhere you look, the central fact in the corporate and banking annual reports is the essential need for a strategy of overseas expansion in order to sustain profits. Citicorp, the largest banking enterprise in the world announced that a massive overseas expansion program to increase profits by 75% “US institutional and retail investors have headed offshore in search of higher profits”, writes the Financial Times (October 11, 2006 p. 24). For the year ending October 4, 2006, of the $124 Billion dollars entering all the US equity mutual funds, $110 billion dollars went into funds investing in overseas companies. For the first 8 months of 2006, 87% of total equity flows went offshore.

The drive for overseas profits is not a momentary preference but a secular shift. It will continue over the long term because of the higher rates of return overseas and the belief that the dollar will weaken because of high US fiscal and trade deficits. Oil and energy companies report record high profits. Exon Mobil recorded a 26% increase in 2006 over the previous year, most resulting from exploiting overseas sites. IBM has shifted a substantial part of its research and design centers from New York to China, while retaining financial control and strategic decision-making in the US. Over 60% of China’s exports are produced or subcontracted by US manufacturers. Ford and GM overseas profits, especially in Latin America and Asia compensate in small part for their multi-billion dollar losses in the US.

The victory of the US imperial state in the Cold War and the subsequent ascent of US client regimes in the former Soviet Union, Eastern Europe, the Baltic and Balkan states, as well as China and Indochina’s conversion to capitalism have doubled the number of workers in the capitalist world economy from 1.5 billion to 3 billion. The growth of a billion-member reserve army of displaced peasants, factory workers led to an unprecedented 40% decline in the capital - labor ratio. The massive growth of world wageworkers (especially in the ex-communist countries) has been fully exploited by the MNCs both in increasing profits overseas and as immigrants in the home market. Adam Smith assumed that the labor surpluses in the poor, newly capitalized countries would be absorbed and competition for workers would drive living standards up. The current tendency is for money wages to grow while social wages decline in the so-called ‘emerging countries’ and both money and social wages to decline in the imperial centers. As the number of occupations (even the highly skilled) are no longer safe from world competition even better paid workers face declining living standards.

The significant fact about the flow of US capital abroad is that it takes place despite a ‘rebound’ in the domestic economy. In other words, the improved performance of the US stock market and domestic economy has failed to reverse the overseas profit-driven expansion of the US Empire.

The principal new targets of MNC, banks, pension funds and institutional investors are the ‘BRIC’ countries – Brazil, Russia, India and China. Russia is favored for its massive oil and gas wealth, its market for transport and luxury goods, all of which yield high rates of profit. Brazil is an investor’s paradise for its world record interest rates, raw materials and low labor costs in manufacturing especially in the automobile sector. China attracts investors to its manufacturing sector and consumer market because of low labor costs. China also serves as an intermediary assembly and processing center for exports from other Asian countries prior to exports (via US and EU MNCs) to the West. India attracts capital to its centers for low cost IT outsourcing, services and related activities.

What is striking about the ‘BRIC’ countries and their growing attraction for US and EU MNCs is their extremely poor rating with regard to corruption. There is a strong correlation between the ‘attractiveness’ of the ‘BRIC’ countries and the ease of doing business and having access to highly lucrative economic enterprises and sectors once the political leaders have been paid off.

Empire building is going far beyond the traditional conquest of raw material and cheap labor exploitation. The empire builders are shoving their way into the new, extremely lucrative finance, insurance and real estate (FIRE) sectors. The hottest field of investment in China and Russia is real estate, with prices increasing by 40% a year in most high growth metropolitan centers. Insurance and financial sectors in China and banking and finance in Brazil have returned billions of dollars over the past 4 years. US banking and MNCs have subcontracted billions in IT and service contracts to the new Indian business tycoons, who in turn subcontract to local employers.

Today, over fifty percent of the top 500 US MNCs earn over half their profits from overseas operations. A substantial minority earn over 75% of their profits from their overseas empires. This tendency will accentuate as US MNCs relocate almost all their operations, including manufacturing, design and execution. They will employ low tech and high tech employees in their pursuit for competitive advantages and high rates of profits.

The Centrality of Corruption

While orthodox, free market economists emphasize the role of innovation, managerial skills, leadership and organization in securing competitive advantages and increasing rates of profit (“market forces”), in real life these factors are frequently secondary to political factors, namely multiple forms of corruption in securing economic advantage. According to a six-country survey of 350 corporations published by the law firm, Control Risks and Simmons and Simmons, “a third of international companies think they failed to win new business over the past year because of bribery by their competitors” (Financial Times October 9, 2006 page 15). Moreover most MNC and banks engage in corrupt practices through intermediaries. If we include direct and indirect forms of corporate corruption then it turns out that in some countries 9 out of 10 corporations engage in corruption. According to the survey, “about three quarters of the companies, including 94% in Germany and 90% in Britain think businesses from their countries use agents to circumvent anti-corruption laws” (Financial Times October 9, 2006 page 15).

Market power is highly dependent on political relations with the state through a series of complex networks of ‘intermediaries’ who negotiate monetary and other payoffs in exchange for a range of highly profitable concessions. The MNCs are the basic unit of trade and investment in the world economy. In greasing the wheels of economic transactions through political corruption, they make a mockery of what orthodox economists tell us about global expansion.

Political corruption, not economic efficiency is the driving force of economic empire building. Its success is evident from the massive – trillion dollar – transfers of wealth, enterprises and resources from the state sector to US/EU MNCs which has taken place in Russia, Eastern Europe, the Balkans, Baltic countries and the Caucasus since the fall of communism. The scale and scoope of Western pillage of the East is unprecedented in recent world history. In their European conquests, neither Stalin nor Hitler took over and profited from so many enterprises as have the Western MNCs over the past two decades. What is worse, the initial pillage set in motion a political system embedded with kleptocratic ‘pro-Western’ ‘free market’. The latter constructed legislative frameworks, which facilitate high rates of return. For example, legislation on reductions of wages, pensions, job tenure, work place safety and health regulations, land use policies in the ex-communist countries were designed and enforced to maximize profits – and ‘attract’ US and EU MNCs. Pillage and political corruption has created a mass of low paid, precarious, underemployed and unemployed workers who are available for exploitation by overseas US corporations and their partners, the overseas institutional investors looking for high return.

Corruption is especially prevalent in several sectors of MNC overseas operations. Arms sales, involving billions annually, is rampant with corruption as the military-industrial firms bribe state officials to purchase US weaponry. Military purchases, most with no real security value, deplete local treasuries of funds, while raising profit margins for arms industries and the institutional investors who engage in overseas investments.

Oil and energy companies secured exploration rights via corruption, by buying out entire ministries in Russia, Nigeria, Angola, Bolivia and Venezuela in the 1990’s.

Securing a toehold in any economic sector of China to exploit cheap labor requires the MNC to payoff a small army of government officials. This is more than compensated by the regime’s enforcement of a cheap labor regime, repression of labor discontent and the imposition of state-controlled pro-business ‘labor unions’.

MNC bribery takes many forms: direct monetary payoffs to political officials, positions in the enterprise for officials, family members, friends and/or cronies, paid excursions, partnerships, invitations to prestigious universities and scholarships for their children, etc. What is important is that bribery works for the MNCs, otherwise it would not be used so extensively and repeatedly..

On the other hand, MNC corruption more often than not has a prejudicial effect on the ‘host’ country. It reduces the legitimacy and trust of the regime in the eyes of its people. It transfers wealth from national-public use into private foreign gain. It weakens the public authorities’leverage over policy and increases the decision-making power of the MNCs. It transfers lucrative resources to foreign private hands. It widens and deepens internal class inequalities and undermines ‘good governance’. Finally it creates a ‘culture’ of corruption which siphons public resources from social services and productive investment to personal wealth.

Pervasive MNC corruption cannot take place without the knowledge of the imperial state. Despite anti-corruption legislation, corruption is endemic and becoming the norm in the expansion of competing MNCs and empires. More and more, corruption is seen by the corporate elite as the grease that keeps the wheels of ‘globalization’ rolling.

If the annexation of the former communist countries opened new opportunities for the imperial re-division of the world, and the pillage of post-communist countries opened vast new sources of capital accumulation, then on-going and deepening corruption has become the mechanism through which rival capitals compete for global dominance. Economic empire building cannot be seen strictly through the operation of ‘market forces’ – because market transactions are preceded by political corruption, are accompanied by political influence and followed by political realignments of power.

Conclusion Whoever speaks today of the world economy, by necessity must address the most salient aspect of that reality – the growth of economic empire building. The entire network of MNCs criss-crossing the globe and forging political and economic compacts with corrupt political leaders is the basis of contemporary economic empires.

The entire process of empire building began with the privatization of publicly owned property, resources, banks and productive enterprises. It continues with deregulation of financial markets. It is legitimized by the election (and re-election) of pliable client politicians. The result is the creation of vast labor reserves of cheap labor and the elimination of protective social and labor legislation. The entire ensemble is based on political corruption at every level, in each and every country, including the imperial home states.

Electoral politics, moralizing anti-corruption rhetoric, lectures on corporate ethics and responsibility notwithstanding, corruption flows across boundaries and up and down the social structure, subordinating nations and workers to the emerging economic empires.

English Laborites, German Christian Democrats, Chinese Communists, Brazilian Worker Party officials, US Republicans and Democrats – in appearance from disparate ideological traditions – are all tightly enmeshed with long-term, large-scale MNC expansion through corruption. They encourage their MNCs to secure markets and wealth through whatever means are necessary, including systematic corruption.

Despite tight labor markets, high profits, rising productivity and economic growth, living standards of workers in the West continue to decline, contrary to classical economic theory. This is in large part due to political intervention based on corrupt relations between corporate capital and the state, both in the imperial countries and overseas. Supply and demand of labor has had little effect on the price of labor because it has been superseded by the corrupt interventionist state, repressing labor, co-opting trade union bosses and setting wage targets below what a free labor movement would secure.

Corporate corruption is as integral a part of empire building as overseas investments, buyouts and market penetration. It is not an incidental, isolated factor having to do with a lack of corporate ethical codes. It is a systemic factor built into the very harsh competitive conditions of contemporary empire building. As markets are absorbed, as the surplus labor pools decline, as energy resources pass their peak, imperial competition will intensify and corruption deepens.

Patchwork reforms have not and will not work. The OECD’s anti-bribery convention came into force in 1999 and has had no impact. Over half of the MNCs claim to be “totally ignorant of their countries’ laws on foreign corruption, (Financial Times October 9, 2006 page 15). The other half simply “get round laws by using agents and intermediaries” (ibid). Only by overthrowing the empire building state and ending imperial competition and the re-division of the world can the foundation be created for a world without corruption, pillage and exploitation.