TWN Info Service on Finance and Development (May18/01)
28 May 2018
Third World Network

Time for multilateral trust buster, says UNCTAD
Published in SUNS #8688 dated 28 May 2018

Geneva, 25 May (Kanaga Raja) - Rising market concentration and corporate rentierism in core sectors of the global economy are a major driver of growing global income inequality, according to the UN Conference on Trade and Development (UNCTAD).

This is one of the key points highlighted by UNCTAD in its latest Policy Brief (No. 66, May 2018) titled "Corporate rent-seeking, market power and inequality: Time for a multilateral trust buster?".

UNCTAD explains that rent-seeking means "getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway".

According to UNCTAD, the combination of record high corporate profits in le ad economies, stagnant or falling investment rates in the real economy and income inequality that is higher than at any point after the Second World War suggests a world in which rent-seeking has become prevalent.

"This is not the kind of enabling environment needed to ensure the inclusive prosperity envisaged in the 2030 Agenda for Sustainable Development, in particular under Goal 10," it said.

Among UNCTAD's findings are that in 2009-2015, the surplus profits - due largely to rentierist profit strategies rather than productive investment - of the top 1 per cent of publicly listed firms in a new UNCTAD firm-level database for 56 developed, developing and transition economies represented 55 per cent of recorded operating profits.

Measures to curb abusive business practices should include a review of the United Nations Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices and of bilateral and mega-regional trade and investment agreements, said UNCTAD.

Highlighting recent trends in the evolution of non-financial corporate rent s and their core policy implications, the policy brief pointed out that gauging the size of corporate rents is challenging for both data-related and conceptual reasons .

Several recent contributions have shed light on increases in rentierism in recent decades, yet their focus has primarily been on financial rentier incomes, variously defined, in a few developed countries.

By contrast, said the paper, the UNCTAD estimate of the size of corporate rentier incomes focuses on non-financial sectors and widens the geographical cover age to include both developed and developing countries.

Explaining the methodology, UNCTAD said that for purposes of measurement, rents are approximated as persistent upward deviations from benchmark results that capture typical firm performances in given market conditions.

The aim is to measure the gap between actual profits and benchmark or typical profits. A positive gap means that some firms accumulate surplus or excess profits and, if this gap persists over time, the measure provides an indication of forces at work that may facilitate the transformation of temporary surplus profits in to redistributive rents.

Balance sheet data is drawn from a new UNCTAD database of the consolidated financial statements of publicly listed non-financial firms in 56 developed countries, developing countries and countries with economies in transition.

The relevant variable is the operating profits of the non-financial firms, and the period covered, 1995-2015, is divided into three sub-periods separated by two major financial crises, namely the dot-com bubble in 2000-2001 and the glob al financial crisis in 2008-2009.

According to the policy brief, the share of surplus in total operating prof its rose from 7 per cent in 1995-2000 to 20 per cent in 2001-2008 and 25 per cent in 2009-2015.

"This suggests a substantial increase in the ability of firms to generate and appropriate surplus profits since the early 2000s, with the global financial crisis somewhat curbing the pace towards corporate rentierism," it said.

However, these aggregate figures hide large and widening disparities between firms at the top and bottom of firm distribution.

In 2009-2015, surplus profits represented 49 per cent of the recorded opera ting profits of the top 10 per cent of firms ranked by surplus profits and 55 percent of those of the top 1 per cent of firms.

Furthermore, the top 1 per cent of firms generate a large part of their surplus profits in two types of sectors.

First, profits are generated in sectors that saw the large-scale privatization of the provision of public goods in the 1990s and 2000s, alongside subsidy schemes for private investors, such as the energy, utilities and telecommunications and health-care sectors.

Second, said UNCTAD, profits are generated in leading high-technology sectors such as technology equipment, pharmaceuticals and software and information technology services.

Some of these sectors, such as pharmaceuticals, have been characterized by high degrees of market concentration for decades, while others have produced superstar firms more recently.

The rise of surplus profits and their concentration at the top end of firm distribution mirrors the trend of growing market concentration in core sectors such as those mentioned above.

This has attracted renewed attention in recent years, primarily although not exclusively in studies of changing market structures in the United States, said UNCTAD.

It noted that the top 1 per cent of firms ranked by surplus profits have strengthened their market dominance according to different performance criteria such as revenues, physical assets, other assets and, to a lesser extent and pace, employment.

Their share of revenues, for example, has doubled since 1995-2000, and reached 24 per cent in 2009-2015.

In addition to organic corporate growth, the high pace of market concentration seems to have also been driven by mergers and acquisitions.

In 1995-2000, the top 1 per cent of firms owned 18 per cent of net assets from mergers and acquisitions; by 2009-2015, this figure had risen to 29 per cent.

By contrast, said UNCTAD, while market concentration has also risen with regard to employment, this increase is less pronounced and has flattened considerably since the 2000s.

"The widening gap between indicators of market concentration with regard to, on the one hand, revenues and assets and, on the other hand, employment, lends further support to the view that asymmetric market power is a strong contributory factor to rising income inequality," the UNCTAD paper pointed out.

It noted that some analysts have stated that rising market power and winner-takes-most outcomes are primarily a technological phenomenon.

In this view, new high-technology sectors produce superstar firms due to economies of scale, for example, in online services and software platforms, and the network effects of information-intensive goods and services make it difficult for newcomers to compete.

New technologies can undoubtedly play a role in raising barriers to entry, yet this explanation overlooks the interaction between technological and institution al or regulatory avenues to bolstering market power, said the policy brief.

"Superstar firms benefiting from initial technological barriers to entry ca n use this advantage to further expand their market power in other ways, for example, through the aggressive use of intellectual property rights and pricing strategies or manipulations that make new entries non-viable or by systematically buying high-technology start-ups with new ideas and using their growing lobbying power to prevent regulatory authorities from intervening."

Generally, if growing market concentration, whether or not it originates in technological features, is left unattended, this raises the possibility of a "Medici vicious circle, in which money is used to gain political power and political power is then used to make more money".

The recent proliferation of a range of financial and non-financial corporate rent-seeking strategies - such as the strategic use of intellectual property rights; the raiding of public sectors through ineffective subsidy schemes, dubious privatization schemes and abusive tax-related practices; and systematic stock market manipulation to inflate chief executive officer remuneration - suggests that such a vicious cycle is well under way, said UNCTAD.

Rent-seeking means "getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway".

According to UNCTAD, the combination of record high corporate profits in le ad economies, stagnant or falling investment rates in the real economy and income inequality that is higher than at any point after the Second World War suggests a world in which rent-seeking has become prevalent.

This situation has triggered a growing policy debate on the need to tighten anti-trust legislation and enforcement, in particular in the United States and the European Union, which host most corporate headquarters, it said.

To be effective, said UNCTAD, anti-trust regulation needs to shift from an arrow focus on consumer welfare to a more comprehensive approach that considers market dominance and corporate abuses.

In the meantime, competition policies and measures aimed at curtailing restrictive business practices may be designed with an explicit distributional objective and greater protection against regulatory capture, it suggested.

Developing countries mostly do not have such regulatory systems and are often the most exposed to the risks of competitive abuse in the absence of effective regulation.

In this context, much of the regulatory structure dismantled in the last decades needs to be restored and updated.

Given the global reach of multinational companies, close cooperation between lead economies that host the headquarters of most of these companies is essential for effective and coordinated reforms of anti-trust legislation, regulation and enforcement.

According to the policy brief, there may be considerable political obstacle s, yet efforts should ideally focus on a multilateral trust-busting framework.

A starting point could be the United Nations Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices adopted by the General Assembly in 1980.

These principles consider the interests of developing countries with regard to price fixing, collusion, transfer pricing, predatory behaviour towards competitors and the abuse of a dominant position.

In addition, said UNCTAD, stricter enforcement of existing national disclosure and reporting requirements for large corporations may be useful.

A global competition observatory could facilitate the task of systematic information gathering on the wide variety of existing regulatory frameworks, as a first step towards coordinated international best practice guidelines and policies and the monitoring of global market concentration trends and patterns.

UNCTAD also said that "restrictions on the sharing of knowledge and intellectual property rights, negotiated at the bilateral and regional levels to be more constraining than multilateral agreements, need to be revisited."

Bilateral and regional trade and investment agreements that facilitate abusive business practices should also be considered for reform, it concluded.