Globalization's Impact: The Breakdown Between National Accounts and National Power

The advent of big data has generated an offshoot which we might well call mega metrics. All of that information has prompted a furious race to make sense of it and in so doing to measure impacts and outcomes.

These attempts are both necessary and beneficial. The more we know about what works and what doesnt, the more efficiently we can craft solutions, allocate resources and realize improvements in the way people live.

But as with all good things, there is a downside, which is our predilection for misleading interpretations that either satisfy ideological leanings, reinforce preconceptions or substantiate individual and groups benefits at a loss to the larger whole.

Among the subjects most prone to this potential misinterpretation are national accounts, those economic assessments of relative growth, decline or standing. The challenge, as the following article explains, is that the growth of transnational corporations makes the identification of value generation more complicated. Sourcing, funding, production, transportation and the ultimate disposition of goods and services are hidden behind a welter of transfer pricing, export platform and cost accounting conventions.

As an example, China is now the world's largest exporter of electronics. But does that mean it is the world's leader in electronics? Or merely that global corporations find it convenient to manufacture and export from there? And to what degree is China capturing the value of what is trans-shipped from its ports, sometimes in whole and sometimes for final assembly elsewhere?

Much has been written about the relative decline of the US by various measures. But if much of the intellectual and financial capital which underpins the global economy is generated in the US, to what degree has it actually declined?

Solving these and related questions is going to be a significant challenge for economists, policy makers and business executives if effective growth is to be optimized. JL

Sean Starrs reports in Politico:

In the age of globalization, as the world’s largest transnational corporations now have vast operations across the globe, the equation between national accounts and national power begins to break down.

We’ve been obsessing over the decline or persistence of American power for more than three decades now. The latest example is a Gallup poll out Monday showing rising dissatisfaction with the United States’ standing in the world — but it all started with a wave of declinism in the 1980s, set off by the rise of Japan. Then the doom and gloom suddenly vanished amid the triumphalism of the 1990s, which transformed the United States into the world’s only superpower. After the Sept. 11 attacks and the invasion of Iraq, many thought “empire” was a better moniker, with the United States apparently able to reshape world order virtually at will. And then just a few years later — poof! — declinism returned with a vengeance, with American power supposedly crashing like the latest Hollywood reality queen. China supplanted Japan as a hegemon on the rise, and the biggest global financial crisis since 1929 — emanating from the United States itself — was allegedly the final nail in the coffin of the American century.

But really? Is it really possible for American power in the world to flip-flop so wildly over the decades? Surely, the economic underpinnings of national power run deeper than that? And throughout these waves of conventional wisdom over the decades, there have always been contrarians, including in the present. So how is it possible for commentators to look at the same data and come to completely opposite conclusions?

The answer is that people are debating the wrong data, especially today. The traditional way of conceptualizing national power is to look at so-called national accounts — most of all gross domestic product, but also balance of trade, national debt, world share of manufacturing, etc. — relative to other nations or the world. So when Japanese GDP was rising rapidly from the 1960s to the 1980s, people equated this with the rise of Japanese economic power. This made sense in the era before globalization, when production was largely contained within national borders and firms would export their goods and services to compete abroad. So when made-in-Japan radios began flooding the American market in the 1960s, this was reflected not only in increasing Japanese GDP and exports but also in the increasing capacity of Japanese firms like Sony to outcompete American firms like RCA.

 

But in the age of globalization, as the world’s largest transnational corporations now have vast operations across the globe, this equation between national accounts and national power begins to break down. China, for example, has been the world’s largest electronics exporter since 2004, and yet this does not at all mean that Chinese firms are world leaders in electronics. Even though China has a virtual monopoly on the export of iPhones, for instance, it is Apple that reaps the majority of profits from iPhone sales. More broadly, more than three-quarters of the top 200 exporting firms from China are actually foreign, not Chinese. This is totally different from the prior rise of Japan, propelled by Japanese firms producing in Japan and exporting abroad.
In the age of globalization, then, the rise of Chinese national accounts could actually reflect the power of foreign transnational corporations, and we cannot know simply by looking at national accounts. Another example is the Chinese auto market, which has exploded to become the largest national auto market in the world since 2009. But again, in the age of globalization, this does not at all mean that Chinese firms are world leaders in automobiles. In fact, Chinese firms can’t even compete within China, let alone abroad. There are more than 100 Chinese auto firms, and despite decades of state subsidies and protection, their combined market share in China is less than 30 percent. Foreign firms, dominated by General Motors and Volkswagen, make up the rest. This is totally different from the days when the Japanese and South Korean auto markets emerged, as the rise of their national markets reflected the rise of their national auto firms (Toyota, Honda, Hyundai, etc.), establishing a strong base from which to compete abroad. So we can no longer rely on national accounts to determine national power. Rather, we have to investigate these corporations themselves to encompass their transnational operations — for which national accounts (conceived in the 1920s) are wholly inadequate. Once we analyze the world’s top transnationals, a startling picture of economic power emerges. For one thing, national accounts seriously underestimate American power, and seriously overestimate Chinese power.