Globalization and Financialization

The discussion about public sector reform and the ever increasing role of the private sector in public service production has been going on since the 1980s, and scholars of different disciplines—including sociology, political science, urban studies, administrative sciences, and management sciences—have been writing about the effect of globalization on a variety of issues that relate to the changing role of governments and corporations.

Writings include the privatization of water services (e.g. Weizsäcker, Young, and Finger, 2005; Hall and Lobina, 2006; Hukka and Katko, 2003a), the rise of professionalism (e.g.

McDonald, 2005; Greenwood and Hinings, 1996), the rise of managerialism in public services (e.g. Pollitt, 1993), globalization in public administration (e.g. Farazmand, 1999), entrepreneurialism in the public sector (e.g. Harvey, 1989), glocalization of city management (Czarniawska, 2002a; 2002b), the rise of the global city (e.g. Castells, 1989;

Sassen, 2005) and the financialization of corporations (Tainio, 2003).

These writings have in common that they describe sub-processes of the globalization process and deal with outcomes created by policies associated with neoliberalism (Fourcade-Gourinchas and Babb, 2002). In this context, I understand neoliberalism as a set of economic and political principles that aims at reducing or keeping the state’s role to a minimum, promoting free market methods instead of state intervention, and opening overseas markets to global trade. Globalization is therefore to large extent a result of neoliberal policies and it can be defined as a process of continuing capital accumulation in modern capitalism. Besides neoliberal policies, globalization has intensified due to the collapse of the Soviet Union, the diminishing borders of capital transfer, the availability of modern technology (Farazmand, 1999; Giddens, 2000; Castells, 2000) and the opening of China starting in the 1980s (Harvey, 2005). Production and finance have become flexible and global, which makes the economy seem increasingly exogenous and uncontrollable (Piore and Sabel, 1984; Castells, 2000; Fourcade-Gourinchas and Babb, 2002). In an economy that is perceived as uncontrollable, capitalists are part of a reciprocal process where they are dominated by their environment but also shape it (Harvey, 1989).

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These macro-economic processes of globalization also spill over into the local governance level, where they become relevant for the provision of local services and create the ‘global village’ (Garcia-Zamor and Khator, 1994) through the process of

‘glocalization’ and entrepreneurialization (Harvey, 1989). That process had been observed, for example, by Finger and Allouche (2002) in their analysis of the role of multinational companies and the World Bank in the privatization of water services across the globe. Lending policies by international institutions such as the World Bank are decided on the macro-level but translate into the local level as they become adopted by local actors. For example, Morgan (2006) argues that the present ‘water welfarism’

(where private investments are mixed with public aid that is connected to loan-conditions) leads to commercialization, driven by the few large multinational water companies and international lending institutions such as the IMF (International Monetary Fund) and the World Bank. These public-private partnerships are mainly focused on developing countries and they have been increasing from almost zero in 1990 to close to 400 in 2000 (Finger and Allouche, 2002).

With the increasing flow of goods and capital across market economies, companies are competing on a global scale for the investor’s attention and capital. Capital has turned global, disconnecting it from territorial finance (Farazmand, 1999; Scholte, 1997). With this new wave of globalization, the 1990s were characterized by a ‘financialization’, i.e.

shareholder activism and the rising significance of shareholder value that forced managers to restructure their companies and put more (or primarily) emphasis on the return of investment (Tainio, 2003; Williams, 2000). A similar process took place in the public sector, where the state and its entities (such as municipalities) are increasingly required to exercise budgetary discipline and implement more effective systems for cost and resource control. In Finland, as in other member countries of the European Union, this process has been accelerated by the stability pact criteria upon the introduction of the EURO as common currency and by a general need for consolidating public sector finances. As a result, maintaining the financial balance of the public sector and its entities has become a priority for many governments, including Finland. As I will demonstrate during my analysis of the managerial logics of local government, maintaining the overall balance of the budget forces municipalities to put more emphasis on the return of investment of their own operations as well as on restructuring the municipal organizations in ways that create financial and structural benefits from a budgetary point of view.

Globalization and financialization has been facilitated by key events such as the collapse of the Soviet Union, or certain key innovations such as the Internet; but as a process, it requires and contains actors that try to affect their environment and the process according to their interests. Most research has focused on ‘the usual suspects,’ such as multinational corporations, international financial institutions (such as the World Bank or the IMF), and some key nations, including the US, France, and Great Britain. Some scholars argue that global corporations and investors represent an elite, powerful enough to cause the

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collapse of economic regions, stock indices, and currencies—and that they have proliferated and became influential forces on a global scale in affecting their environment (Dicken, 2003; Harvey, 2005). As an example of investor power and global trading and investment activity, the volume of financial transactions in international markets increased from $840 billion in 1983 to $40 trillion in 2001, although $800 billion would be sufficient to sustain international trade and productive investment flows (Dicken, 2003).

Financialization is relevant for water services and public services in general as the financial community increasingly targets water services as appropriate investments, and for which the exposure to global capitalism is only a recent experience. For example, the stock price of the five publicly traded water companies in the UK had approximately tripled during the years 1999 to 2001 before it returned to its previous level. The news agency Reuters reported on 18 September 2006, that “in the absence of a futures market in water, speculators have bought shares in utilities and water-related companies such as Waste Management, ITT Corp., American States Water and Suez, expecting them to profit from intensified efforts to tackle water scarcity.” Several stock exchanges have water investment indices by now and for example over the past ten years, the Media General water utilities index has outperformed the Dow Jones Utilities Index by double.

Investments have been placed directly into privately and publicly held water companies all over the world and become managed in investment funds that focus on the water industry and bet on the rising value of water as water shortages occur more often and infrastructure becomes outdated. In the UK where most water utilities are privatized, the financialization of water services is also demonstrated by the increasing number of investment bankers on the executive boards of UK water companies (Näsi and Windischhofer, 2005).

In particular, accounts like the abovementioned—about the interest of global capitalists in local water services—create serious concern and resistance among citizens and consumer interest groups, and often are in the focus of civic movements and corporate-watch sites against privatization and commercialization. Because of citizens’ concern about globalization and its outcomes, organized civic activism has been proliferating. Here, the Internet especially has enabled interest groups all over the world to connect and share their concerns, as, for example, expressed in the research and opinions published by organizations such as Globalternative.org, Corpwatch.org, Alliance for Democracy.org, Citizen.org, or The Democracy Center. However, I would like to point out that these organizations direct their attention mostly towards the private sector and international organizations that are associated with promoting neoliberal policies, such as the World Bank, the World Trade Organization, or the International Monetary Fund, while my investigation into the commercialization of water services in absence of ‘the usual suspects’ will demonstrate that the local government and its increasingly commercially-oriented conduct deserves a watchful eye as well.

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As discussed above and as shown in Figure 2-1 at the beginning of this chapter, globalization and financialization contribute to the commercialization and commodification of goods and services that were previously mainly social or public goods and services (such as water supply and sanitation) via entrepreneurialization and privatization/corporatization. Therefore, the following sub-chapter will review privatization and corporatization before turning to entrepreneurialization.