(Alula Berhe Kidani) - This article is based on several UNCTAD and other UN agencies both international
and regional as well as some expert’s contributions on the issue of the economy and austerity policies; but first the start is with the UNCTAD 2017 World Trade and Development Report.
Increasing financial openness led to a rapid build-up of international positions by these ever-larger financial players, exposing individual countries to forces beyond the control of national policymakers, thereby intensifying financial vulnerability and heightening systemic risk. At the time of the 2008 financial crisis, the combined weight of banks’ external assets and liabilities ranged from 100 per cent of GDP in Brazil, China and Turkey to more than 250 per cent of GDP in Chile and South Africa. In most developed countries, this indicator hovered between 300 per cent and 600 per cent of GDP. Such an environment reflected the expansion of cross-border capital flows and foreign exchange trading that vastly exceeded the requirements of trading in goods and services. It also led to greater banking concentration, with the total assets of the top five banks representing up to four times the GDP in some developed countries, and up to 130 per cent of GDP in some large developing countries.
Fiancialization was given a further boost by the capture of regulatory and policy agendas, particularly in the most important financial centers. Faith in the efficiency of the market contributed to the political momentum for aligning public sector spending and services more closely with those of private investors. This opened the door for the privatization of health care, higher education and pensions, and in the process, in many countries it burdened households with rising debts. As their status and political clout rose, financiers promoted a culture of entitlement that switched from justifying to celebrating extravagant remuneration and rent extraction.
As Keynes recognized from his experience in the run-up to the Great Depression of the early 1930s, the tendency towards a widening income gap due to the free play of market forces, combined with the higher savings propensity of the wealthier classes, has its limits in insufficient aggregate demand (under consumption) and excessive financial gambling that favors short-term speculative and rent-seeking activities over long term productive investment. Also, as envisioned later by Minsky, while these conditions can lead to periods of prosperity and (apparent) tranquility, an accelerating pace of financial innovation encourages even more reckless investment decisions. The result is an increasingly polarized and fragile global economic system, with stability feeding instability and instability leading to vulnerability and shocks.
This unfettered development of financial markets encouraged the extension of credit to poorer households, temporarily compensating for the stagnation and (relative) decline of labour incomes that accompanied the competitive pressures released by hyper globalization. Consequently, the level of consumption stabilized or even increased in many countries, but only because it was fuelled by rising household debt. At the same time, large financial and industrial conglomerates used their growing profits (derived, in part, from exploiting cross-border wage and corporate tax rate differentials) to borrow and speculate. Unsustainable debt-led growth in some countries and export-led successes in others led to widening global imbalances, adding new layers of vulnerability and risk to an inherently polarized and unstable system. Financial crises thus became more frequent and widespread. Many emerging market economies were the early victims, but these were warm-ups for the bigger showdown to come.
Two of the dominant socioeconomic trends of recent decades have been the massive explosion in public and private debt, and the rise of super-elites, loosely defined as the top one per cent. These trends are associated with the fiancialization of the economy and the widening ownership gap of financial assets, particularly short-term financial instruments. As such, inequality is hard-wired into the workings of hyper globalization.
Since the late 1970s, the gap between the top 10 per cent of income earners and the bottom 40 per cent widened in the run-up to 4 out of 5 observed financial crises, but also in 2 out of 3 post-crisis countries.
While the run-up to a crisis is driven by “the great escape” of top incomes especially favored by financial developments, the aftermath often results from stagnating or falling incomes at the bottom. When crises occur, macro financial dislocations, one-sided reliance on financial sector bailouts and monetary policy, with a consequent protracted weakness of aggregate demand and employment, tend to worsen income distribution and exacerbate tendencies towards instability.
Furthermore, as observed following major crisis episodes, such as the Asian crisis in 1997?1998 and the global financial crisis in 2008?2009, in the absence of international coordination, most countries will tend
to pursue austerity policies in an often failed attempt to induce investors to return to their pre-crisis modus operandi. Thus, while profits accrue to top income earners during financial booms, during the crises that follow, the burdens are almost always borne by public sectors and transmitted to domestic economies; the hardest hit are the most vulnerable sectors, while large financial and industrial conglomerates tend to be fist on the financial life boats.
Since the start of the hyper globalization era, fiancé has tended to generate huge private rewards absurdly disproportionate to its social returns. Less attention has been given to the ways in which non-financial corporations have also become adept at using rent-seeking strategies to bolster their profits and emerge as a pervasive source of rising inequality.
Rents may be broadly defined as income derived solely from the ownership and control of assets or from a dominant market position, rather than from innovative entrepreneurial activity or the productive deployment of a scarce resource. These are being captured by large corporations through a number of non-financial mechanisms, such as the systematic use of intellectual property rights (IPRs) to deter rivals. Others have been acquired through the predation of the public sector, including large-scale privatizations ? which merely shift resources from taxpayers to corporate managers and shareholders ? and the handout of subsidies to large corporations, often without tangible results in terms of improved economic efficiencies or income generation. Yet others have involved near fraudulent behaviour, including tax evasion and avoidance, and extensive market manipulation by the managers of leading corporations for their own enrichment.
Given the multiplicity of rent-seeking schemes and lax corporate reporting requirements globally, it is difficult to measure the size of corporate rents. One way of approximating their magnitude is by estimating, by sector, surplus or “excess” corporate profits that deviate from “typical” profits. On this measure, surplus profits have risen markedly over the past two decades, from 4 per cent of total profits in 1995?2000 to 23 per cent in 2009?2015. For the top 100 firms, this share increased from 16 to 40 per cent.
The data point to growing market power as a major driver of rent-seeking. A rising concentration trend, particularly in developed-country markets, has been observed with increasing alarm. Moreover, the contagion is spreading. On several measures – market capitalization, firms’ revenues and their (physical and other) assets – concentration is rising across the world economy, but in particular the top 100 firms. Market concentration and rent extraction can feed off one another, resulting in a “winner-takes-most competition” that has become a visible part of the corporate environment, at least in some developed economies. The resulting
intra-firm differences have contributed to growing inequality. In 2015, the average market capitalization of the top 100 firms was a staggering 7,000 times that of the average for the bottom 2,000 firms, whereas in 1995 it was just 31 times higher.
Significantly, while these firms were amassing ever greater control of markets, their employment share was not rising proportionately. On one measure, market concentration for the top 100 firms rose fourfold in terms of market capitalization, but less than doubled in terms of employment. This lends further support to the view that hyper globalization promotes “profits without prosperity”, and that asymmetric market power is a strong contributory factor to rising income inequality.