Global Economy in an Increasingly Tight Credit Embrace

Although we do not believe that the current fluctuations in capital markets can trigger a global crisis, one must be extremely cautious. Today’s world is so interconnected and networked that there are no local problems and local crises.

Written by: Dr. Žarko Primorac

After the abolition of the dollar’s convertibility in the early 1970s, the world economy, according to Peter Drucker, ‘split’ into the real economy, consisting of production, consumption, exports, imports, and the economy of symbols, which consists of money, credit, securities, options, and derivatives. Since then, the latter has been growing more dynamically than the real economy, and this gap is continuously deepening. To understand the nature of this discrepancy, we emphasize that annual global exports and imports represent just over ten trillion dollars, while the symbolic economy is expressed in hundreds of trillions of dollars. An inverted pyramid has been created where the sharp base represents the real economy, and its superstructure is an unwieldy mass of the economy of symbols. Thanks to this ‘distribution of mass’, the dynamics of the world economy are driven more by the symbolic economy than by movements in the real sector.

This brief overview of the situation introduces us to the theme of today’s column, which aims to show that financial corporations dominate the modern global economy and that they significantly influence other relations: political, economic, military, and social. This conclusion could be illustrated with numerous examples. Let us start with the most recent – Iraq, where a state of neither war nor peace persists, and no one sees an end to it. The war there began under the pretext of fighting terrorism, but the decision to enter the war was certainly influenced by the strategic interests of large corporations in the fields of energy, the military complex, and finance. Not far from this example is the potentially Iranian hotspot, where interests in the delivery of nuclear technology and equipment from other major countries complicate finding solutions for the dangerous ‘nuclearization’ of that country. There are many such examples in the world. It is essential that the political and strategic goals of large countries are entirely intertwined with economic interests, especially when it comes to ensuring dominance and control over energy sources. In this context, we mention Putin’s intention to return Russian energy potentials to state hands, managed by Gazprom, a giant energy company under the direct influence of the Russian government.

Large global corporations and their power are a real phenomenon of the modern world. Thanks to market deregulation and the development of modern technologies, the global economy is tending towards greater consolidation. Deregulation and information technology have enabled a massive concentration of assets, capital, technology, and the management of enormous giant organisms in real-time, regardless of their physical location. These processes, particularly the development of information technologies, have allowed the creation of global giants that often surpass the significance of the country from which they come. In this context, we note that Swiss companies, such as UBS, Nestlé, and others included in the Group of the 2,000 largest global companies, generate more revenue than the GDP of that country (the ratio of the revenues of the companies included in the Group of 2,000 to the GDP is 245 percent). A similar case is the Netherlands, where the ratio is 218 percent, then the United Kingdom – 112 percent, Finland – 102 percent, or Sweden – 96 percent.

The largest global companies are accelerating the process of growth and consolidation. Acquisitions, mergers, and other forms of consolidation are accelerating, thus increasing the dominance of the Group of 2,000. Just last year, this Group increased revenues by 10 percent, assets by 11, market capitalization by 16, and profit by a full 28 percent compared to the previous year. This is a continuation of the good business performance of the Group over the past few years, despite the impact of crises in the world: wars, energy sector crises, tsunamis, terrorism. It seems that crisis factors do not threaten the serious operations of large corporations. Moreover, based on the analysis of the impact of some crisis elements on the operations of large corporations, it could be concluded that crises increase their profit. This is at least the case with oil giants.

The geographical distribution of the Group of 2,000 is also very interesting. From North America come 762 corporations (USA 659, Canada 61, others 48), from Western Europe 527 (UK 130, France 66, Germany 57, Italy 42, Spain 36), from the Pacific region 565 (Japan 291, China 44, Australia 44), while transition countries have 38 companies, of which 20 come from Russia, four from Poland, two from Hungary, and one from the Czech Republic. In the geographical distribution of large corporations, the high dominance of North America, particularly the USA, is clearly visible. This is expressed not only in the number of involved corporations but also in their size, revenues, market value, and profits.

The banking industry and finance are leading in the Group of 2,000 with 310 various financial corporations and six million employees. This is followed by trade, with about 5.8 million employees, transport and communications with 3.3 million, and the oil industry with about 3.5 million. Banking is second on the list by sales value, immediately behind the oil industry, but is first in terms of profit, ahead of the oil industry. The total financial sector, which includes banking, insurance, and non-bank financial institutions, far exceeds all other sectors in terms of sales value, profits, profit margins, and other critical indicators.

The dominance of the financial sector is even more visible in the group of the 100 largest corporations. In this group, the financial sector is represented by 51 corporations, followed by the oil industry with 13, telecoms with 8, and pharmaceuticals with 6 corporations, while others are dispersed across various sectors. On this list, the pronounced dominance of American corporations is also visible. As many as 31 come from the USA, followed by 10 from Germany, eight each from France and the UK, seven from Japan, and six Chinese corporations. An interesting analysis of the profitability of the largest global corporations shows that the oil industry in 2006 was leading, as three well-known names from that sector are on the list: Exxon, whose annual profit amounted to 39.5 billion dollars, followed by Royal Dutch with 25.442 billion and BP with 22.286 billion. It is worth noting that the past two years have been crisis years in the oil sector. Thanks to the war in Iraq and the overall crisis in the Middle East, as well as terrorism and tsunamis, oil prices have fluctuated in high ranges. At certain times, it seemed, and the situation is not much different today, that they would reach 100 dollars per barrel. Furthermore, or thanks to this very instability, oil conglomerates are achieving record profits. Only Exxon’s annual profit is greater than the total gross domestic product of Croatia.

Banking and the financial industry are not lagging behind in terms of profitability either. On the list of the 50 leading corporations by profit, banking and finance occupy a total of 20 places, or 40 percent of the total analyzed number. It should be added that banking profits in the last year, as well as in the previous year, grew the fastest. Thus, JP Morgan’s profit increased by 89.9 percent, Mitsubishi Financial Group’s by 129.3 percent, Santander Bank’s by 67 percent, Deutsche Bank’s by 48.8 percent, and Commerzbank’s by 99 percent. If we were to try to draw some general conclusions from this brief analysis of the largest global corporations, especially those 100 leading giants, we could confidently state the following: by activities, the financial sector dominates, and by geographical distribution, the USA. When it comes to the dominance of the USA, the situation is clear: it is the largest and most powerful economy in the world, whose strategic interests cover the globe, except perhaps for some exceptions in the areas of China and Russia. Strategic political interests are complementary to economic ones and complement each other very well. Therefore, there is no doubt that economic interests, or the interests of large corporations, significantly influence the political moves of the President and the Government of the USA.

The dominance of the financial sector is certainly caused by other factors as well. Modern development, especially deregulation and technological advancement, has contributed to the dimensions and importance of the modern financial sector. Technologies have developed that have enabled a tremendous expansion of financial products and financial derivatives. We are in a situation where new financial products ‘threaten’ even traditional banking. Alternative forms of savings, funds, insurance, leasing, options, derivatives, and other instruments increase and multiply the ‘credit embrace’ in which the modern economy and the modern world exist. The tremendous development of innovative instruments allows for high profits but also multiplies risks. Since the financial gap (popularly, bubble) between the real and symbolic economy is widening, public and business interest is focused on risks. Therefore, a simple question arises: can the bubble burst and lead to a global crisis of significant dimensions? There is no doubt that under certain circumstances, a more serious crisis can occur regardless of the advancement of risk assessment and protection technology. The imbalance is of a fundamental nature, as the disproportion between the limited real sector and the hypertrophied financial sector is very deep. To make matters worse, this gap is deepening every day. In addition, global problems, such as potential climate change, ecology, wars, nuclear danger, and terrorism, also affect overall world stability, and thus financial stability.

Triggers for a more serious global crisis can also be problems in individual countries, which do not necessarily have to be of global proportions. Simply put, market shocks in a significant country cannot remain contained within its borders in a globalized economy. Currently, markets are restless due to problems in mortgage lending in the USA. The consequence is a decline in financial markets worldwide. Although we do not believe that the current fluctuations in capital markets could trigger a global crisis, one must be extremely cautious. Today’s world is so interconnected and networked that there are no local problems and local crises. Any significant local crisis can escalate into a major fire. In concluding this text, we would once again emphasize that large global corporations, especially financial ones, determine essential global processes. They are the greatest economic power of today, and thanks to technological advancement, which is largely in their hands, and accelerated consolidation, there is little chance that anything significant will change in the near future.