The Corporate Top 1% Control Over 50% of International Trade (Pt 1/2)

Taking an ever rising share of global income, the real benefits of global trade go to the profits of the top 2,000 TNCs. The flip-side is falling wages and government revenues, says Richard Kozul-Wright discussing UNCTAD’s 2018 Trade and Development Report

The Corporate Top 1% Control Over 50% of International Trade (Pt 1/2)

Story Transcript

RICHARD KOZUL-WRIGHT: We know that debt fueled booms tend to end badly. We don’t know when they end, and we don’t exactly know how they end. But we do know that they’re not sustainable. And that, I think, should cause pause for very serious thought in terms of the stability and sustainability of the current global growth path. For us behind that is a series of policy measures that have come to dominate the post crisis period which have not produced inclusive and sustainable growth. That began with a major effort to save the banks after 2008, 2009. One can justify that, although there are issues about exactly how that was done. But that was far too quickly followed by a push for austerity.

We talked about that in last year’s Trade and Development Report, the toleration, as I said, of shadow banking, the encouragement of mega-mergers which have hit, again, historic highs in recent months, and the endless beating of the free trade drum has provided what we see as the economic beat for- and I will use the term from the Chicago economist Luigi Zingales, the “Medici vicious circle” in which growing economic power and rent-seeking behavior has reinforced and captured political power, reinforcing economic power.

I recall that being a controversial term, rent-seeking economy, in last year’s report. So I won’t go back to the TDR just to indicate the relevance of this. I’ll refer to the well-known Marxist economist, Martin Wolf of the Financial Times, who in an excellent piece on why so little has changed since the financial crash, fundamentally recognizes what he calls the growing vested interest in today’s rent extracting economy.

LYNN FRIES: It’s The Real News. I’m Lynn Fries.

That was a clip of Richard Kozul-Wright presenting the 2018 Trade and Development Report at the United Nations Conference on Trade and Development Board meeting. Both the report and the UN institution are better known by their acronyms, the TDR and UNCTAD, respectively. Joining us to talk about the 2018 TDR is Richard Kozul-Wright, who is the lead author and Director of the Division on Globalization and Development Strategies at UNCTAD. Thank you for joining us, Richard. Welcome.

RICHARD KOZUL-WRIGHT: Thank you, Lynn, for the invitation.

LYNN FRIES: Start by commenting briefly on the current growth path of the global economy presented in the report.

RICHARD KOZUL-WRIGHT: We talk a lot in the report about what the Chicago economist Luigi Zingales calls this “Medici vicious circle,” of this growing interaction between increased economic power and increased political power, and the way in which that has become a self-reinforcing part of a very vicious circle. I think most people recognize that feature increasingly as part of the trend in advanced economies. In one way or another, people associate the rise of what is referred to, probably inappropriately as populist politicians, the “Brexit experience” as somehow linked to the removal of trust from the political system, which is increasingly seen as favoring a smaller and smaller part of the population.

So we know that’s the case in the advanced economies and we’re seeing that now extended into the international realm. And so, the squeezing of government revenues and the squeezing of wages is a part of that story, not only in the advanced economies, but also in the in the developing economies too. And of course, one of the responses of that is for governments and people to at least try and maintain what has become their sense of an acceptable living standard has been to borrow. And as financial markets have become more deregulated, the ability to borrow has become easier. And we know from the predatory practices of financial institutions that that has its own very significant downside risks and consequences.

And so, you get these vicious circles evolving around growing market concentration, rent-seeking behavior, increasing indebtedness, increasing inequality, which have become now, as far as our analysis is concerned, hardwired into the workings of the global economy with consequences we’re seeing not only in advanced economies but also in developing economies too. And the recent bout of financial vulnerability that has emerged in countries like Argentina and Turkey and other economies is a further reflection of that kind of vicious circle that we think is intrinsic to the workings of hyper-globalization.

LYNN FRIES: In presenting the TDR at the UNCTAD Board meeting, you said that global trade is very much a big firm game. I’m going to play a clip of that for viewers.

RICHARD KOZUL-WRIGHT: We’ve talked a lot in previous reports about the way in which financialization and neoliberal policies are central to what we see as an unequal, highly indebted, unstable global context. Last year’s report put into the discussion another trend that we see as particularly significant, which is its growing concentration of corporate power, not only in the financial sector where the issue is very apparent, but across large swathes of the economy in both developed and developing countries. And that’s true of international trade, of course, because international trade is a big firm game. But to give you a figure, on average, one percent of the world’s firms account for something like 55 to 60 percent of international trade, and there is variation across that average figure, but it’s very much a big firm world.

LYNN FRIES: That point is rigorously substantiated in the Trade and Development Report, including data showing the profits of the top 2000 transnational corporations and the global labor share of income charted from a base year of 1995 through 2015. Talk to us about that chart.

RICHARD KOZUL-WRIGHT: It’s a striking chart. I think we’ve known for a long time that the share of global income going to wages, to labor incomes, has been declining for 20, 30 years and in some cases even more. I think what this chart demonstrates is that the real beneficiaries of that decline have been the very large corporations. It’s an almost inverse relationship between the declining share of labor overall and the rising share of global income taken by the top 2000 corporations. We know this problem, of course, from the story about the rise of the one percent in terms of household incomes. But this, I think, is a focus on the functional side of that story, which really does show the way in which large corporations have, based upon the kind of rules of the game around hyper-globalization, have been able to dominate the returns that we associate with hyper-globalization.

LYNN FRIES: Take us deeper into this analysis and the mechanisms involved. For example, talk about the role of global value chains in all this.

RICHARD KOZUL-WRIGHT: A lot of international trade is now organized around global value chains. Global value chains are characterized by the dominance of what is in the literature referred to as the lead firm, which is responsible for organizing the chain across several different locations in most cases. And of course, there’s a certain kind of neutrality to the notion of a lead firm. It sounds rather banal. But behind the notion of the lead firm is this growing market concentration. And what we try and show in the report is the way in which the structure of these value chains under these increasingly powerful lead firms has ensured that the incomes that are generated through value chains essentially accrue to the owners of those firms and to headquarter functions, whether that’s marketing or research and development or branding and distributional activities. It’s not in the production stages of these value chains where the gains are being made.

And so, again, the notion of rent-seeking behavior within the context of global value chains surfaces as an important element of this world of growing market power, growing inequality that people have begun to struggle with, not only in developing countries but also of course in advanced economies too.

LYNN FRIES: One of the big sells in favor of a hyper-globalized world is that it’ll lead to greater investment. Over the years, the Trade and Development Report has provided a counter-narrative, presenting insufficient investment as a key feature intrinsic to hyper-globalization. In this year’s Trade and Development Report, you highlight mergers and acquisitions, M&A activity, of over two trillion dollars per year over the past two decades as a telling sign of this.

RICHARD KOZUL-WRIGHT: I mean, it’s again part of this kind of rigged game that we see in the global economy. Even as profits have risen, the hope that those profits could be used to reinvest in productive plant and equipment, human capital, has not materialized. And we’re familiar from the whole literature on shareholder value and the changing nature of corporate governance that making returns from existing assets has become part of the way in which corporations make their profits. And buying up existing corporations through mergers and acquisitions, giving further market power of course allows the perpetuation of rent-seeking strategies, seems to be a central part of this highly concentrated, highly rigged game that we associate with hyper-globalization.

LYNN FRIES: The report details how in many ways, intangible assets, those linked to intellectual property in one way or another, have become a pervasive source of rents and rent-seeking in the current structure of the global economy.

RICHARD KOZUL-WRIGHT: Well, intangible assets is becoming an increasingly important part of the 21st century digitalized information-intensive economy. So again, a feature that we try and focus in on in the report is the way in which intellectual property, the ownership of intellectual property, the rules that govern the use of intellectual property, has again worked very strongly in favor of large corporations who have the power and influence to ensure that intellectual property rules work in their favor. And you can see that clearly in the context of free trade agreements, where intellectual property rules have increasingly figured as an important component of this new generation of free trade agreements.

LYNN FRIES: Let’s turn now to how those profits from intellectual property are being reported in the global system. First, I’ll just flag for viewers that embedded in provisions in free trade agreements, multinational corporate owners of intellectual property rights get legal protections. And in the multilateral trade system, the Uruguay Round negotiated the creation of the World Trade Organization. And with the establishment of the WTO in 1995, the TRIPS Agreement was implemented that linked intellectual property rights to world trade.

RICHARD KOZUL-WRIGHT: The TRIPS Agreement was the start of that. In many respects, bilateral investment treaties and certain types of regional trade agreements have gone even further than the Uruguay round in cementing the dominance of corporate interests within the realm of intellectual property rules.

LYNN FRIES: And as we move into the digital era, it will be business as usual.

RICHARD KOZUL-WRIGHT: It’s worse than business as usual. It’s an attempt to further discipline the state in terms of the policy instruments and measures that they can use to successfully and strategically integrate into the global economy.

LYNN FRIES: To get back to the point about how profits from intellectual property rights are being reported in the global system, tell us about this chart.

RICHARD KOZUL-WRIGHT: It’s a fairly stunning chart that kind of shows that the income generated by large U.S. corporations is, on paper at least, far more significant in what are clearly tax havens; Bermuda, Ireland, the Netherlands, Switzerland, in comparison to the big markets, which if we were in a more normal economic environment, is where one would expect large international corporations to be making their money; China, Germany, Japan. The incomes generated there are dwarfed by these tax havens.

And it, of course, speaks to these larger problems, a growing recognition that the rules of the game in which economic and political power have become self-reinforcing, have been used to create all kinds of ways by corporations to avoid what should be a basic responsibility, namely paying the taxes required to keep government in a position to be able to deliver on the variety of services that are part of the normal day to day business of public policy. So this chart is a very visible indication of the way in which the rules of the game have been rigged in favor of rent-seeking behavior and concentrated economic power and influence.

LYNN FRIES: I see the TDR cites Congressional Research of the United States, which finds that the U.S. could be losing up to 90 billion dollars every year on the back of these intellectual property right profit shifting schemes alone.

RICHARD KOZUL-WRIGHT: And remember, this is in a world where corporate tax rates have been steadily declining. You know, there’s been a persistent 30 year downward trend in corporate tax rates. But despite that downward trend, corporations have still looked for ways to circumvent their responsibilities in terms of paying the revenues required for basic public services of one kind or another.

LYNN FRIES: So under the current system of global trade, workers and governments alike are at the wrong end of the stick.

RICHARD KOZUL-WRIGHT: Yeah. Wages are being squeezed on the one hand and government revenues are being squeezed on the other hand. And the kinds of the figures on the growing share of the profits of the top 2000 TNCs that we talked about earlier are precisely the flipside of that squeezing exercise.

LYNN FRIES: We’re going to break and be back with our guest for part two of this discussion on Power, Platforms and the Free Trade Delusion, UNCTAD’s 2018 Trade and Development Report. Richard Kozul-Wright, thank you.

RICHARD KOZUL-WRIGHT: Thank you, Lynn.

LYNN FRIES: And thank you for joining us on The Real News Network.