Chapter 2: Globalisation and the Internationalisation of Financial Reporting Standards
2.2 Defining globalisation, capitalism and neo-liberalism
The concept of globalisation emerged in the early 1990s after the collapse of the Eastern Bloc6 and the prevalent role of the US in the Cold War. The collapse of almost all the socialist regimes, and the former Eastern Bloc countries commitment to the Western capital market model, meant that the process of the internationalisation of capital became modified
5States can be subjective terms; there is no objective definition. In modern discourse advanced states are used to refer to countries that sustain relatively high rates of economic growth and have military might. Institutions, such as the IMF, develop certain criteria to evaluate the development of a country, like per capita income or gross domestic product (GDP). Other non-economic factors that are used to evaluate a county’s degree of development are given in the Human Development Index (HDI) (IMF, 2012).
6 The name applied to the former communist states of Eastern Europe and countries included in the Warsaw Pact (Hirsch et al., 2002, p.316).
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and economic and social structures became globalised (Kouroundis, 2007). While the discussion around globalisation is not exhaustive, the term is frequently used as a substitute for a critical investigation of complex issues, concealing the processes that characterise world interconnectedness (El-Ojeili & Hayden, 2006).
There have been various attempts to define globalisation that can be characterised as economically, socially or politically-centred. A broad conceptualisation of the term is provided by Mann (2001), who understands globalisation as the extension of social relations on a global scale. The most distinctive definition given by the advocates of globalisation is Giddens (1990, p. 64) description of globalisation as 'the intensification of worldwide social relations which link distant localities in such a way that local happenings are shaped by events occurring many miles away and vice versa’.7 Concurrent with the intensification of globalisation, a de-territorialisation and re-territorialisation of political and economic power takes place in the form of the creation of sub-national, regional and supranational economic zones, governance mechanisms and the cultural complexities of societies (Held et al., 1999).
Robertson (1992, p. 8) goes one step further and defines globalisation as a process that ‘refers both to the compression of the world and the intensification of consciousness of the world as a whole’, given that globalisation does not merely refer to the ‘objective process of increasing interconnectedness’ but also to subjective issues related, for example, to the density of the consciousness of the world as a single unit in terms of space. Basic constituents of globalisation theory relate density, velocity and diffusion (Held et al., 1999). The concept of globalisation has a spatial connotation, implying a process whereby there is a degree of interaction or interdependence between states and societies that extends worldwide (Harvey, 1989).
Studies on globalisation have considered at its manifestation in areas such as culture, politics, education, terrorism and religion. Although it is difficult to separate these dimensions, the present study aims to concentrate on the economic dimension of globalisation. The debates on economic globalisation often are bracketed with neo-liberalism, which is understood to be
7This is in line with McGrew and Held (2002, p. 1), who define globalisation as ‘the expanding scale, growing magnitude, speeding up and deepening impact of interregional flows and patterns of social interaction. It refers to a shift or transformation in the scale of human social organization that links distant communities and expands the reach of power relations across the world’s major regions and continents’.
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a new phase of capitalism defining the capitalist mode of production (CMP)8. These key concepts are briefly discussed and put into a historical context. This is important for an analysis of the central deliberations of economic globalisation and its impact on financial reporting in this and subsequent chapters.
Broadly defined, capitalism is a socio-economic system in which the means of production and distribution of commodities for exchange are privately-owned (Buick & Crump, 1986).9 The main characteristics of a capitalist system are the maintenance of ownership of the means of production, distribution and exchange of wealth by a minority, the capitalist class or the bourgeoisie and their appropriation of wealth direct from producers, the working class. The motive for producing goods is not society’s need, but capitalism’s drive to profit, capital accumulation and expansion. The expansion of the system and substantial growth in the productive forces, eventually leads to an over-accumulation of capital, caused by the falling tendency of the rate of profit, and this is at the root of crises and (geopolitical) conflicts (Callinicos, 2003).
Ideologically, neo-liberalism is a revivification of the laissez faire liberal economic ideology stage of capitalism10 that dominated before the Great Depression of the 1930s (Harman, 2008). As liberalism was gradually abandoned as an ideology and practice, monopoly capitalism and its product, imperialism ascended after the Second World War. Reflecting the reality of capitalism in the growth period after WWII (World War II), a new orthodoxy followed liberal economic models based on Keynesian ideas that revised neoclassical economics. State intervention was seen as a basis for the repair of profitability and
8 The mode of production is the approach to production in a given society. The CMP is different from all previous modes of production as it is characterised by the following elements: ‘a) appropriation of means of production from direct producers; b) inability of producers themselves to secure control of the means of production (sanctity of private property); and c) realisation of relations of distribution on the basis of products’
exchange value, expressed through money’ (Sakellaropoulos, 2009, p. 62).
9 Political economists, such as Adam Smith and David Ricardo attempted to explain the dynamics of the system and assumed that the ‘invisible’ hand of the pricing mechanism coordinates supply and demand in markets in a way that is automatically in the best interests of society. Karl Marx’s Capital: A Critique of Political Economy further developed previous analyses of the mechanism of commodity production. He observed that the capitalist mode of production emerges from a combination of productive relations and forces, along with mechanisms and laws of motion that derive from these productive forces and relations; the conflict of capital and labour (Marx, 1976). Contrary to mainstream economics, Marx argued that capitalist profit is generated by the worker’s surplus value, the ‘labour surplus’.
10 Supported by neoclassical economic theory, liberal ideology contended that free market economies operate efficiently, while any discrepancies emerge due to ‘unnatural monopolies’ that impede the free movement of prices and wages that coordinate supply and demand; state intervention is regarded as distorting the economy and is required only to defend private property and national defence.
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accumulation by providing the infrastructure for capitalist production. Keynesianism, as an economic practice, proved incapable of providing solutions to the serious economic crisis of both capital over-accumulation, due to the falling rate of profit and the structure of the capitalist system (Mavroudeas & Papadatos, 2012) that erupted in the mid-1970s. The period between the 1929 crisis and the crisis of 1973 marks the ‘monopoly’ stage of capitalist development.
After 1973, attempts to restructure the capitalist system and improve its profit and accumulation performance gave rise to neo-liberalism.11 Neo-liberalism should not be regarded as a stage of capitalism but rather as a trend of capitalist restructuring seeking to address the 1973 structural crisis. Neo-liberalism can be defined as a system of economic policies directed towards securing monetary and fiscal stability, legitimised by an ideology that maintains markets operate more efficiently when they are self-regulating (Callinicos, 2012). Neo-liberalism is based on neoclassical economic theory and encourages deregulation, privatisation and reductions in public expenditure on social services. This regime has not only allowed the ‘restoration of class power’, but has also led to the redistribution of wealth and income in favour of a ruling class minority (see Duménil & Lévy, 2004 cited in Callinicos, 2012, p. 17).