Competition without competitors?

Coordinated policy actions are needed to tame dominant corporate power and rent-seeking

The Trade and Development Report 2017 by the United Nations Conference on Trade and Development (UNCTAD) highlights the extent of some of the most worrisome structural changes in the global political economy since the crisis, and should be read as a warning for policymakers and citizens alike. For some time now, there appears to be a narrative presenting stagnant or even falling living standards as the ‘new normal’ – referring to ‘increased global competition’ as the main culprit. Economists usually view increased competition as desirable, since it indicates a healthy state of rivalry amongst competing firms. The often idealised notion of ‘perfect competition’ refers to a market in which every firm acts as a price taker, meaning that consumer prices are low and resources allocated efficiently. The European Union (EU) has attempted to institutionalise this belief in the Single Market, putting competition policy above all other objectives.

Yet desirability of competition only holds if firms are competing on productivity performances, meaning a higher output under conditions of identical input prices of labour and capital. Despite the rhetoric of ‘increased global competition’, most recent empirical evidence, however, points to an alarming concentration of capital on a world-wide scale.

In 2011, a study conducted by ETH Zurich illustrated the dramatic concentration of economic power from even before the peak of the 2008-crisis. Analysing data from 2007, which included records of 30 million economic actors and 43,000 transnational firms, the researchers identified an entangled ‘super-entity’ of 147 firms (mostly financial intermediaries) that controlled 40% of total wealth, whilst the top 737 firms in total controlled over 80%. This was an early warning that our world economy has moved away from competitive markets towards some destructive form of rent-seeking.

The UNCTAD report provides further evidence of rent-seeking not only in the financial, but also in the non-financial sector. Rents, usually defined as income derived from mere ownership and control of assets and/or significant market power, exacerbate the problem of inequality, extract profits from the productive economy instead of contributing to it, and stand against any meritocratic understanding of society. Large corporations extract such rents through a variety of means, such as establishing barriers to entry through intellectual property rights (IPRs), reaping benefits of large scale privatisations, intensive regulatory lobbying, or through fraudulent behaviour such as tax evasion or market manipulation. The latter has been particularly destructive for developing countries, where tax practices by international corporations lead to tax revenue losses which are often estimated to be higher than USD 100 billion. Of course, some economists might argue, this can only happen through government interference in the play of free market forces. Yet, economists tend to neglect the deep social, political, and institutional embeddedness of markets. If public authorities leave it to private firms to rewrite the rules of the game, they will do so in their favour. The political power that inevitably comes with large economic power, cannot be assumed away, as many economists conveniently do.

In this regard, the Trade and Development Report provides figures which suggest there is a need to tame corporate power and rent-seeking behaviour. According to UNCTAD calculations, market capitalisation (the total market value of a firms, calculated as the share price multiplied by the number of shares outstanding in the firm) –  of the top 100 firms in 2015, was 7,000 times that of the average for the bottom 2,000 firms. 20 years ago in 1995, this number was just 31 times higher. The extent of surplus profits, defined as the deviation of excess corporate profits from typical annual profit in a given sector, increased for the top 100 firms from 16% of total profits in 1995-2000 to 40% in 2009-2015 on average, whilst overall surplus profits rose from 4% to 23%. Such figures could have been justified somehow, if employment, productivity, and innovation had increased proportionally. Yet, there is no indication of such improvements whatsoever. In fact, the anaemic and fragile recovery since the crisis rather suggests the opposite.

The damaging effects of abusing market power is not a new issues for policymakers, and large actors such as the EU proudly publicise fines against corporations who break their competition law. However, large fines do not change the underlying systemic problems. Even the most recent $2.7 billion fine against Google pails in the face of its parent company’s revenue (which in Q4 of 2016 alone was $26.06 billion). Fines and existing anti-trust regulations (including their insufficient enforcement) will not fix the system, as best illustrated by the experiences from the financial sector.

So, what needs to be done? I see three main areas of actions to be taken, all of which will be challenging, yet not impossible.

Recognising dysfunctional global economic policies

First, acknowledging the current state of affairs has arisen as a result of dysfunctional global economic policies since the 1980s would be a significant improvement. Too often, policymakers and academics still believe that deregulating markets will automatically increase competition. This is naïve. In fact, the attempt to strip down regulations will only exacerbate the problem if remaining barriers in the fight between giants and dwarfs are removed. Without protection, the latter have no chance to prosper in an environment in which the predatory power of capital prevents fair competition from the start (or where large firms simply acquire any successful smaller firm that could threaten its position). Furthermore, in several sectors, such as pharmaceuticals, transport or ICT, large up-front investments (sunk costs), economies of scale, and network effects naturally prevent competitors from entering the market. Hence, efforts to privatise such industries set the perfect ground for corporate rent-seeking.

Apart from above structural implications, it also appears that some firms that acquired monopolistic power in recent decades simply did so because of superior skills. Google’s algorithm would be an obvious example for this (though some might object that viable alternatives such as Ecosia are out there). If complaining about too little competition in some sectors or markets, the question needs to be asked whether breaking up monopolies would inevitably lead to beneficial effects for society. Would there be any positive outcome of breaking up Google or forcing people to use other search engines, just for the sake of “competition”? I do not think so. However, what I do think is that winding down their power in policymaking can and should be addressed. Closing tax loopholes, providing strong data security laws, and taxing excessive rents at rates close to 100% (beyond a certain percentage threshold of excess profits), would effectively address the problem of economic, and hence political power, as well as rent-seeking behaviour. Overall, therefore, a stronger balance is needed between exploiting/restoring innovative potentials of competition in markets, in which competition can and should be treated as a public good, and setting prudent regulations in others, in which oligopolistic structures inevitably emerge. This more pragmatic approach to regulation should be embedded in context of a democratic polity, broadly leading to what Colin Hay and Anthony Payne termed ‘Civic Capitalism’.

Revising trade agreements

Secondly, a revision to existing trade agreements is needed, most importantly with regards to IPRs and Investor-State Dispute Settlements (ISDS). Especially in trade agreements between developed countries with extensive legal systems, ISDS serve no purpose apart from handing over power to the corporate sector. Also, if trade itself becomes a euphemism for outsourcing production (through so called ‘regime shopping’), the advantages associated with ‘trade’ need to be confronted again. In the case of China, for instance, former UNCTAD chief economist Heiner Flassbeck estimates that between 60-70% of Chinese exports are exports from western firms that outsourced their production. This has nothing to do with trade anymore, but rather resembles some form of perverted self-service for privileged capital. Taking into consideration falling wage shares not only in developed, but also in developing countries (as recently shown by the IMF), it remains questionable, to what extent such foreign direct investment (FDI) contributes to significant improvements in living standards.

Co-ordinated international policy action

Finally, states and international institutions, such as the EU, United Nations (UN), or the Organisation for Economic Co-operation and Development (OECD), should start coordinating their actions to tame corporate power and rent-seeking. As suggested by UNCTAD in its report, this could include a new global competition observatory and financial register to increase transparency and enable a better monitoring at the international level of transfer pricing and tax evasion. Of course, collective action problems so far prevented much progress in this direction, yet with increased consolidation of corporate power and capital concentration at the top, it will become inevitable for states to cooperate. In times of austerity and drained public finances, further deteriorations of living standards will lead to even more radical and outright protests in developed countries, where trends to demagoguery and nationalism have become obvious. Increased levels of migration from the global South are likely to exacerbate the problem, whilst livelihoods of those left behind will deepen in despair and misery. In this current economic and social environment, winding down corporate and financial power should be at the top of the agenda, in order to brighten the dark clouds over western democracies and southern economic development.