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24 Oct 2023

Olivier De Schutter, UN Special Rapporteur on extreme poverty and human rights

Reclaiming states’ economic sovereignty: the crux of the new treaty on business and human rights

As the delegates negotiating a new instrument on business and human rights gather in Geneva for a ninth round of discussions, we are witnessing a strange turnaround. When this ambitious negotiation started in 2014, at the initiative of Ecuador, many Western countries perceived it with suspicion: wasn’t this, they asked, a plot directed against the major corporations that dominate the global economy, many of which are based in the Global North – an attempt, perhaps, to awaken the ghosts of the New International Economic Order? Now, the opposite question is asked: isn’t the treaty an attempt to impose on developing countries’ norms which originate in the affluent West? Might this yet be another attempt for OECD countries to reaffirm their control of globalisation, and to deny Global South countries their economic sovereignty?

The reality is the draft instrument is neither a conspiracy from the North to maintain its dominance, nor an attempt from the South to challenge it. Both groups of countries have good reasons to support the treaty process, although these reasons are different for each. Rich countries have an interest in seeking to counter the blackmailing of corporations which routinely threaten to outsource production to locations where human rights are regularly flouted with impunity. Developing nations have an interest in ensuring transnational corporations will not coerce them into granting investors exorbitant privileges, which largely annul any benefit host countries might have expected from the arrival of investors.

All governments, in fact, have a common interest in reclaiming control of globalisation: the urgency is to tame the new leviathans, the corporate groups integrated at transnational level, that 40 years of globalisation have allowed to emerge – undermining the sovereignty of all states.

Economic globalisation has been remarkably accelerated over the past 40 years. The volume of exports in constant prices increased five-fold between 1975 and 2015, much faster than the rise in the global GDP. The growth of foreign direct investment was more impressive still: FDI flows increased from US$205b in 1990 to US$1,295b in 2022 - a six-fold increase over a period of just over 30 years.

Economic globalisation has made people, on average, richer. But the gains are very unequally spread, as shown by Branko Milanovic in his study of two decades of globalisation, between the fall of the Berlin Wall and the great financial crisis. And globalisation has led, especially, to an unprecedented concentration of economic power in the hands of a relatively small number of very large corporate groups, the so-called “lead companies” controlling global supply chains.

This is now undermining the economic sovereignty of all nations. Foreign investment, according to the dominant narrative, was meant to benefit the local economy by accelerating technology transfers, by creating jobs, by improving access to global networks of production and distribution, and by favouring the emergence, within the host State, of supply chains to serve the needs of the investor. Moreover, by taxing the profits made by the foreign investor, public revenue would increase. This is how investment liberalisation was sold.

In practice however, the hoped-for linkages to the host economy are largely nullified by the very strategies countries put in place to favour investment. As they compete with one another to attract investors, capital-receiving countries provide “tax holidays”, and they show a greater tolerance for transfer pricing and other schemes transnational corporations rely on to reduce their tax liability. These countries rush to enter into investment treaties which bar them from imposing “performance standards” on foreign investors, such as ensuring they reinvest part of their profits in the local economy, they recruit domestic workers, or they source their supplies from local contractors. And they agree to extended protections of intellectual property rights which are obstacles to the very technology transfers they aspire to.

Such extended privileges granted to investors not only significantly diminish the benefits to the host country; they also fail to actually increase the levels of investment, because almost all countries end up providing a comparable standard of protection.

Inter-jurisdictional competition to attract investors becomes a game in which all countries end up losing: the more investors can choose to build production plants where environmental regulations are lax or underenforced, to put workers to work where wages are low and unions weak, or to declare profits where the corporate income taxes are low or non-existent, the less states can, in fact, ensure the public interest, rather than the increase in profits for shareholders, takes priority.

In this area, moreover, bigness becomes self-reinforcing. Large multinational groups enjoy superior brand recognition, and they are best at achieving economies of scale. They can therefore sell at a more competitive price, driving out their local (and smaller-sized) competitors. Large buyers can also obtain from the sellers lower prices, and force upon them concessions which reflect their dominant buyer power, such as discounts from the market price that reflect the savings made by the seller due to increased production.

The United Nations Conference for Trade and Development (UNCTAD) warned in 2017 that “increasing market concentration in leading sectors of the global economy and the growing market and lobbying powers of dominant corporations are creating a new form of global rentier capitalism to the detriment of balanced and inclusive growth for the many”. For the top 100 firms, 40% of the profits made today are the result of “rents”, a percentage that had already increased from 16% in the years 1995-2000, to 30% in the years 2001-2008. This trend is largely attributable to stronger market concentration: 10% of the world’s publicly listed companies capture 80% of the profits.

The largest corporations, moreover, have become particularly apt at translating their economic dominance into political influence, allowing them to shape the competitive environment to their advantage. What emerges, UNCTAD writes, is “a vicious cycle of under-regulation and regulatory capture, on the one hand, and further rampant growth of corporate market power on the other”. The Italian-born economist Luigi Zingales refers to this as the “vicious cycle of the Medici”: money is used to influence politics, and political influence is used to make money.

The worst forms of abuse by transnational corporations are attributable to their ability to undermine the attempts of states to control them more effectively. A 2016 survey undertaken by the ILO and the joint Ethical Trading Initiatives covering 1,454 suppliers across 87 countries found, for instance, that 39% of suppliers accept orders below the costs of production, and only 25% of buyers were willing to increase prices to accommodate minimum wage increases. Such practices undermine the ability for unions in all countries to negotiate for decent wages, as well as the ability for all states to protect workers’ rights: only the shareholders gain. This is why, in the report on a human rights approach to wages I presented to the General Assembly, I argued that corporate actors should be prohibited from following cost minimisation strategies that can lead to violations of the right to a living wage or of the right to a fair remuneration. The sourcing practices of buyers, I insisted, should not result in encouraging suppliers to pay wages below what allows the worker and his or her family members to achieve an adequate standard of living, or to rely on bonded labour.

This is the new challenge to their sovereignty all states are now facing: the largest corporations have become leviathans that, in practice, are in a position to avoid being effectively tamed by any single state. A global treaty on business and human rights through which states would mutually agree to impose of these corporations to ensure compliance with human rights, labour rights and environmental rights in global supply chains is our best chance of stemming these worrying trends.

If the corporations controlling global supply chains are imposed a due diligence obligation to ensure their suppliers do not violate human rights, globalisation will be put, at last, at the service of human development. It will better serve the local communities where suppliers are based, and it will largely avoid the perverse effects of inter-jurisdictional competition which capital-receiving countries enter into to attract investors. Some countries still seem to believe they can improve their cost-competitiveness in a globalised economy by allowing their natural resources to be exploited for the almost exclusive benefit of shareholders of large companies, and by allowing their workers to be exploited by being paid poverty wages; yet, while such forms of extractivism can contribute to GDP growth, this is neither economic sovereignty, nor can it be called development.

I urge the negotiators gathering in Geneva to reclaim their control of the process of globalisation: by putting the public interest above that of the largest corporations’ shareholders, it is their own economic sovereignty they are protecting.

by Olivier De Schutter, United Nations Special Rapporteur on extreme poverty and human rights.

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