NEW DELHI – For most critics of globalization, trade is the villain, responsible for deepening inequality and rising economic insecurity among workers. This is the logic driving support for US President Donald Trump’s escalating tariffs. Why, then, does the message resonate far beyond the United States, and even the advanced economies, to include workers in many of the developing countries that are typically portrayed as globalization’s main beneficiaries?

Free trade is hardly the only – or even primary – source of inequality and insecurity worldwide. Surprisingly, one enduring problem that provokes far less popular backlash is that finance continues to dominate the world economy, generating substantial instability and mounting risks like those that led to the 2008 global financial crisis.

Moreover, some countries continue to pursue fiscal austerity, instead of consolidating their budgets by, say, addressing large-scale tax avoidance and evasion by major companies and wealthy individuals. And labor-saving innovations continue to be developed and deployed, producing “technological unemployment” among some groups.

Some argue that free trade is being demonized simply because people do not understand what is in their own best interest. But that is both patronizing and simplistic. Even if free trade is ultimately broadly beneficial, the fact remains that as trade has become freer, inequality has worsened.

One major reason for this is that current global rules have enabled a few large firms to capture an ever-larger share of the value-added from trade. Specifically, the proliferation of global value chains has enabled powerful multinational firms to control the design, production, and distribution of traded goods and services, even as various segments are outsourced to smaller firms far from final markets.

These firms often benefit from intellectual-property monopolies, reinforced by free-trade agreements designed to strengthen corporate power. These enable them to collect massive economic rents, especially at the pre-production (including design) and post-production (marketing and branding) stages, where the most value-added and profit is generated.

Meanwhile, increasingly intense competition in the production phase drives down prices, so that the actual producers, whether employers or workers, receive diminishing shares of the value pie. The upshot of this system is that many developing countries that should have benefited from the globalization of value chains have remained confined to low-productivity activities that yield only limited economic value and do not even foster wider technological upgrading.

The forthcoming Trade and Development Report 2018 by the United Nations Conference on Trade and Development (UNCTAD) captures how top firms have steadily increased their share of total exports, and now dominate global trade. Ironically, this trend has intensified since the 2008 global financial crisis, which cast a spotlight on the disproportionate market power of the few and the outsize gains going to the top 1% of the income distribution.

UNCTAD’s research also shows that, for both developed and developing countries, integration into global value chains correlates with declining shares of domestic value-added in exports. The share of actual production in domestic value-added has also declined, as has the share of the remaining value-added accrued by labor. One potential driver of the latter trend is that, by drastically enlarging the global labor supply, the economic integration of countries with large populations like China and India has increased the bargaining power of capital relative to labor.

The only significant exception to these trends is China, which has designed industrial policies specifically to increase the share of domestic value-added and to improve workers’ conditions. Ironically, it is these measures, which have helped offset some of the negative effects of free trade, that Trump has condemned in his pursuit of policies that will do little to protect workers.

But the implications of allowing a few global corporations to wield such vast market power extend further. For one thing, such concentrated economic power makes it more difficult for countries to industrialize, because local companies cannot expect to compete with established multinationals. For another, it prevents developing countries from reaping the full benefits of rising commodity prices, though they gain no protection from price downturns. The ability of large corporations to underprice natural resources also encourages excessive extraction, pollution, and environmental degradation – outcomes that they disingenuously present as the “price of development.”

Consumers also suffer. Yes, major multinationals can offer low prices. But their massive market power leaves consumers at their mercy in every sphere, from manufacturing to financial services to digital technologies.

The more power these companies have, the more they can accrue, as they use their influence to shape regulatory systems, economic policies, and even tax regimes. The result is a weakened state that serves the interests of the few, rather than protecting the many. Those who claim that redistribution can adequately address this problem must address the fact that the “losers” of free trade have so far received little, if any, compensation.

Globalization’s detractors are right that free trade has created serious imbalances. But a trade war completely misses the point. The problem is not that free trade has led to too much global competition, but rather that it has enabled a few companies to secure monopolies or near-monopolies. This has given rise to massive inequalities, blatant rent-seeking, and predatory behavior. Only by addressing these trends can the benefits of trade be increased and equitably shared.

LONDON – The global race to cut corporate tax rates accelerated in 2018. According to the OECD’s latest annual review of tax policies across developed economies, the average rate of taxation on corporate profits has fallen from 32.5% in 2000 to below 24% today.

This trend is understandable. With private-sector investment remaining stubbornly weak, governments are desperate to hold on to whatever piece of the pie they can. It is better to tax firms lightly and keep them in your jurisdiction than it is to forego that revenue entirely.

After all, other things being equal, firms that are considering building a new factory or other facility will be attracted to countries with a more preferable tax regime. Likewise, firms facing a higher corporate tax rate in one country may decide to move their operations elsewhere. Or, rather than transferring personnel and disrupting supply chains, they may find a way to register profits in a lower-tax jurisdiction – typically by moving some head office functions there.

To many economic liberals and traditional conservatives, such “tax competition” is a good thing, because it is assumed that lower taxes will unleash market forces, thereby fueling innovation and growth. Moreover, advocates of this view don’t think that governments should be taxing business in the first place. Because a tax on corporate profits reduces the amount of money that a firm has to invest or raise wages, they regard it as a levy on a firm’s employees rather than its owners.

But tax competition should concern economic liberals. Not only does it strengthen monopolistic trends and erode fair and transparent competition among firms; it also deprives governments of the money needed to sustain the public goods – education, health care, infrastructure, the rule of law – upon which firms rely. And there is little evidence that the corporate-tax burden actually does fall on employees rather than on capital. The nonpartisan US Congressional Budget Office and the Institute for Taxation and Economic Policy, among others, have demonstrated clearly that over 80% of the impact of corporate taxation falls on shareholders, not workers.

Still, market liberals would argue that corporate taxes “distort” behavior and hamper wealth creation. But this is simplistic, at best. For starters, tax competition among jurisdictions is quite different from competition among firms in the market. When governments try to attract investment with subsidies, tax holidays, special exemptions, and accelerated depreciation schedules, they create distortions that undermine comparative advantage. Firms will be more focused on wrangling the best financial incentives than on investing in areas with the highest potential productivity gains, and economic dynamism will suffer as a result.

Moreover, tax competition drives market concentration and monopolization, because it tilts the playing field in favor of incumbent multinational corporations, and against smaller potential competitors. Larger firms have the resources to exploit tax havens for profit-sharing and tax avoidance, whereas small- and medium-sized companies generally do not. It is little wonder that multinationals have managed to reduce their tax burdens at a much faster rate than smaller firms in recent years.

Tax competition encourages free-riding on public goods, while eroding governments’ capacity to provide such goods. Like individuals, firms are not wholly responsible for their own success. They would be nothing without access to a healthy, educated workforce, public infrastructure, and legal systems that enforce contracts, patents, and intellectual property.

In fact, government spending on public goods is probably more economically efficient than lower taxes. Corporations are already sitting on a sizeable cash surplus; but, rather than invest in workers, equipment, or research and development, they have been buying back their own shares. In the United States, this practice has accelerated since the enactment of corporate tax cuts in December 2017.

Finally, corporate profits sometimes stem from rent-seeking and other valueless activities that absolutely should be taxed. There is reason to doubt that a great deal of commercial activity – gambling, selling and advertising alcohol, financial speculation, and so forth – generates any net economic benefits at all. At best, many corporations are profiting from “distributional” activities that extract existing wealth from the economy. But even those that do create real value by providing new or improved goods and services still only benefit a subset of society. In any case, these firms should be taxed to pay for public goods.

Ultimately, governments will have to harmonize elements of their tax systems if they ever want to get ahead of these economically destructive trends. A deal between the European Union and the US could open the way for a broader international tax regime. But with transatlantic relations at their lowest point in decades, the prospect of that happening any time soon is remote. In the meantime, tax competition will continue to erode market competition, while denuding governments of the money needed to invest in the public goods needed to ensure firms’ profitability over the long term.

GENEVA – Since the Agrarian Revolution, technological progress has always fueled opposing forces of diffusion and concentration. Diffusion occurs as old powers and privileges corrode; concentration occurs as the power and reach of those who control new capabilities expands. The so-called Fourth Industrial Revolution will be no exception in this regard.

Already, the tension between diffusion and concentration is intensifying at all levels of the economy. Throughout the 1990s and early 2000s, trade grew twice as fast as GDP, lifting hundreds of millions out of poverty. Thanks to the globalization of capital and knowledge, countries were able to shift resources to more productive and higher-paying sectors. All of this contributed to the diffusion of market power.

But this diffusion occurred in parallel with an equally stark concentration. At the sectoral level, a couple of key industries – most notably, finance and information technology – secured a growing share of profits. In the United States, for example, the financial sector generates just 4% of employment, but accounts for more than 25% of corporate profits. And half of US companies that generate profits of 25% or more are tech firms.

The same has occurred at the organizational level. The most profitable 10% of US businesses are eight times more profitable than the average firm. In the 1990s, the multiple was only three.

Such concentration effects go a long way toward explaining rising economic inequality. Research by Cesar Hidalgo and his colleagues at MIT reveals that, in countries where sectoral concentration has declined in recent decades, such as South Korea, income inequality has fallen. In those where sectoral concentration has intensified, such as Norway, inequality has risen.

A similar trend can be seen at the organizational level. A recent study by Erling Bath, Alex Bryson, James Davis, and Richard Freeman showed that the diffusion of individual pay since the 1970s is associated with pay differences between, not within, companies. The Stanford economists Nicholas Bloom and David Price confirmed this finding, and argue that virtually the entire increase in income inequality in the US is rooted in the growing gap in average wages paid by firms.

Such outcomes are the result not just of inevitable structural shifts, but also of decisions about how to handle those shifts. In the late 1970s, as neoliberalism took hold, policymakers became less concerned about big firms converting profits into political influence, and instead worried that governments were protecting uncompetitive companies.

With this in mind, policymakers began to dismantle the economic rules and regulations that had been implemented after the Great Depression, and encouraged vertical and horizontal mergers. These decisions played a major role in enabling a new wave of globalization, which increasingly diffused growth and wealth across countries, but also laid the groundwork for the concentration of income and wealth within countries.

The growing “platform economy” is a case in point. In China, the e-commerce giant Alibaba is leading a massive effort to connect rural areas to national and global markets, including through its consumer-to-consumer platform Taobao. That effort entails substantial diffusion: in more than 1,000 rural Chinese communities – so-called “Taobao Villages” – over 10% of the population now makes a living by selling products on Taobao. But, as Alibaba helps to build an inclusive economy comprising millions of mini-multinationals, it is also expanding its own market power.

Policymakers now need a new approach that resists excessive concentration, which may create efficiency gains, but also allows firms to hoard profits and invest less. Of course, Joseph Schumpeter famously argued that one need not worry too much about monopoly rents, because competition would quickly erase the advantage. But corporate performance in recent decades paints a different picture: 80% of the firms that made a return of 25% or more in 2003 were still doing so ten years later. (In the 1990s, that share stood at about 50%.)

To counter such concentration, policymakers should, first, implement smarter competition laws that focus not only on market share or pricing power, but also on the many forms of rent extraction, from copyright and patent rules that allow incumbents to cash in on old discoveries to the misuse of network centrality. The question is not “how big is too big,” but how to differentiate between “good” and “bad” bigness. The answer hinges on the balance businesses strike between value capture and creation.

Moreover, policymakers need to make it easier for startups to scale up. A vibrant entrepreneurial ecosystem remains the most effective antidote to rent extraction. Digital ledger technologies, for instance, have the potential to curb the power of large oligopolies more effectively than heavy-handed policy interventions. Yet economies must not rely on markets alone to bring about the “churn” that capitalism so badly needs. Indeed, even as policymakers pay lip service to entrepreneurship, the number of startups has declined in many advanced economies.

Finally, policymakers must move beyond the neoliberal conceit that those who work hard and play by the rules are those who will rise. After all, the flipside of that perspective, which rests on a fundamental belief in the equalizing effect of the market, is what Michael Sandel calls our “meritocratic hubris”: the misguided idea that success (and failure) is up to us alone.

This implies that investments in education and skills training, while necessary, will not be sufficient to reduce inequality. Policies that tackle structural biases head-on – from minimum wages to, potentially, universal basic income schemes – are also needed.

Neoliberal economics has reached a breaking point, causing the traditional left-right political divide to be replaced by a different split: between those seeking forms of growth that are less inclined toward extreme concentration and those who want to end concentration by closing open markets and societies. Both sides challenge the old orthodoxies; but while one seeks to remove the “neo” from neoliberalism, the other seeks to dismantle liberalism altogether.

The neoliberal age had its day. It is time to define what comes next.

GENEVA – Since the 2008 financial crisis, policymakers and international institutions have regularly expressed concerns about widening income inequality and its unwelcome political consequences. More often than not, they attribute the problem to “exogenous” factors such as global trade and new technologies.

While policymakers have intensified their focus on trade and new technologies, they have missed an even more potent driver of inequality: the endemic rent-seeking that stems from market concentration, heightened corporate power, and regulatory capture.

Rent, broadly defined, is income derived solely from the ownership and control of an asset, rather than from innovative, entrepreneurial deployments of economic resources. When the British economist John Maynard Keynes anticipated the “euthanasia of the rentier” in his 1936 book The General Theory of Employment, Interest and Money, he was referring to a financial class that served no purpose other than to exploit scarce capital for its own benefit. But over the last three decades, financial rentiers have taken their revenge. Through private credit creation and financial alchemy, they have amassed huge gains that are wildly disproportionate to the social return of their activities.

Moreover, in our age of hyper-globalization, large non-financial corporations have also emerged as a rentier class. Owing to their substantial market power and lobbying prowess, they now regularly engage in the kind of rent-seeking activities that were once the exclusive preserve of the financial industry. As a result, large non-financial firms have become a pervasive source of rising income inequality.

Non-financial corporations have entered the rent-seeking game through a number of channels. They have systematically abused intellectual-property laws to achieve market domination, rather than to protect genuine innovations. They have looted public-sector resources through large-scale privatization schemes, and by securing public subsidies that rarely require them to deliver benefits to taxpayers. And they have engaged in far-reaching market manipulation, by turning themselves into debt collectors, using share buy-backs to boost executive remuneration, and so forth.

In addition to the sheer range of rent-seeking schemes operating today, lax corporate reporting requirements around the world make it difficult to estimate the scale of the problem. Much of the existing research focuses on the US economy, where some studies have measured the growth of dominant firms’ market power through the steep upward trend in mark-up pricing; and others have examined the role of proliferating information technologies in the accumulation of “surplus wealth.”

At the United Nations Conference on Trade and Development (UNCTAD), our research looks beyond the US economy, relying on a newly constructed database for publicly traded companies in 56 developed and developing countries. We used these data to estimate the extent to which large non-financial corporations’ profits exceeded typical annual sectoral profit performance since 1995. Surplus profits, we found, rose markedly over the past two decades, from 4% of total profits in 1995-2000 to 23% in 2009-2015. For the top 100 firms, that share increased from 16% to 40%, on average.

The same multi-country database also confirms that market concentration has risen significantly over the past two decades, particularly among the top 100 firms. In fact, large inter-firm disparities have become a key feature of the corporate rent-seeking age. In 2015, the top 100 firms had a combined market capitalization (the total value of a company’s outstanding shares) that was 7,000 times that of the bottom 2,000 firms. Twenty years ago, that multiple was just 31.

Making matters worse, this trend has not extended to employment. Between 1995 and 2015, the top 100 firms increased their market capitalization fourfold, but did not even double their share of employment. This implies that market concentration and corporate rent-extraction are feeding off one another. The result is a “winner-takes-most” market environment that strongly disadvantages start-ups, entrepreneurial innovation, and sustained creation of high-quality jobs.

Consider, for example, the proliferation of wide-ranging patent-protection powers through bilateral and multilateral trade and investment agreements. These powers have been extended to new activities that were not previously considered areas of technological innovation, such as finance and business methods. As a result, the tech giants, in particular, have achieved a new level of regulatory capture, allowing them to limit free speech when it serves their interests, expand into non-high-tech markets, and shape emerging global policy agendas, such as financial inclusion and e-commerce.

It is not too late to check the trend toward rentier capitalism. The “endogenous” factors contributing to wide-scale regulatory capture and corporate rentierism can be addressed with stronger antitrust legislation, policies to empower organized labor, revisions to existing trade agreements, and better monitoring, at the international level, of transfer pricing and tax evasion. Some policymakers have already started to take action on these fronts. But success will require a more concerted effort. It is time to force big business back into the business of productive investment and job creation.

MUNICH – The digital economy is carving out new divides between capital and labor, by allowing one firm, or a small number of firms, to capture an increasingly large market share. With “superstar” companies operating globally, and dominating markets in multiple countries simultaneously, market concentration throughout the Group of 20 developed and major emerging economies has increased considerably in just the past 15 years.

To address this phenomenon, the G20 should create a World Competition Network to restore competition and address income inequality between capital and labor. As a larger share of total income shifts to capital across many G20 countries, the World Competition Network would seek to reverse the decline in labor’s share of GDP.

During the period after World War II, 70% of national GDP went to labor income, and the remaining 30% to capital income. John Maynard Keynes described the stability of the labor share as something of a “miracle.” But the rule has since broken down. Between the mid-1980’s and today, labor’s share of world GDP declined to 58%, while capital’s share rose to 42%.

Two forces in today’s digital economy are driving the global decline in labor’s share of total income. The first is digital technology itself, which is generally biased toward capital. Advances in robotics, artificial intelligence, and machine learning have accelerated the rate at which automation is displacing workers.

The second force is the digital economy’s “winner-takes-most” markets, which give dominant firms excessive power to raise prices without losing many customers. Today’s superstar companies owe their privileged position to digital technology’s network effects, whereby a product becomes even more desirable as more people use it. And although software platforms and online services can be costly to launch, expanding them is relatively inexpensive. Consequently, firms that are already established can keep growing with far fewer workers than they would have needed in the past.

These factors help to explain why the digital economy has given rise to large firms that have a reduced need for labor. And, once these firms are established and dominate their chosen market, the new economy allows them to pursue anti-competitive measures that prevent actual and potential rivals from challenging their position. And, as the economists David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen show, the US industries with the fastest-growing market concentration have also seen the largest drop in labor’s share of income.

This increased market concentration is widening the gap between the firms that own the robots (capital) and the workers whom the robots are replacing (labor). But confronting it will require us to reinvent antitrust for the digital age. As it stands, national competition authorities in G20 countries are inadequately equipped to regulate corporations that operate globally.

Moreover, the G20 cannot simply trust that global competition will correct on its own the tendency toward increased market concentration. As Andrew Bernard has shown for the United States and Thierry Mayer and Gianmarco Ottaviano have demonstrated for Europe, international trade favors large superstar firms. Indeed, globalization may provide advantages to the largest and most productive firms in each industry, causing them to expand – and forcing smaller and less productive firms to exit. As a result, industries become increasingly dominated by superstar firms with a low share of labor in value added.

The US is a case in point. It is host to many of today’s superstar firms, and yet US antitrust regulators have not been able to restrain those firms’ market power. As the G20 looks for ways to address the problem of market concentration, it should take lessons from the US experience, and look for ways to improve upon the US’s failures.

Rather than starting from scratch, we will need to build on national-level competition authorities’ institutional knowledge, and include experienced personnel in the process. The European Competition Network can serve as a blueprint for a G20-level network.

The objective of a world competition network is to build an effective legal framework to enforce competition law against companies engaging in cross-border business practices that restrict competition. The network may coordinate investigations and enforcement decisions and develop new guidelines for how to monitor market power and collusive practices in a digital economy.

In the past, the G20 has focused on ensuring that multinational firms are not able to take advantage of jurisdictional differences to avoid paying taxes. But the G20 now needs to expand its scope, by recognizing that digital technologies are creating market outcomes that, if unchecked by a new World Competition Network, will continue to favor multinational firms at the expense of workers.

PARIS – The European Union’s regulatory bodies seem to be particularly hostile to Google. In June 2017, the European Commission fined the company €2.42 billion ($2.75 billion) for breaching EU antitrust rules, after concluding that, “Google has abused its market dominance as a search engine by giving an illegal advantage to another Google product, its comparison shopping service.”

Then, last month, the Commission went after Google again, fining it €4.34 billion ($4.94 billion) for “illegal practices regarding Android mobile devices.” Google had made agreements with mobile-device manufacturers and network operators “to pre-install the Google Search app and browser app (Chrome).” Moreover, it seems that the European Parliament and several EU member states would like to dismantle Google by separating its search engine from other possible revenue sources.

There is no doubt that Google holds a unique position on the Internet. In terms of search activity, it has commanded around 90% of the market for over a decade, leading many soi-disant defenders of competition to denounce it for “abusing” its “dominant position.” But most of these attacks are driven by a mix of misconceptions and questionable claims of harm by Google’s competitors.

Google’s critics would define a monopoly as any firm that has a 100% market share, or at least a share large enough to make credible competition seem impossible. Traditional economic theory holds that a monopoly can take advantage of consumers by imposing higher prices than would otherwise be possible under conditions of “pure and perfect competition.” By this simple reasoning, legislators and judges must rein in monopolistic “despoilers” by imposing heavy fines, or by breaking them up, as has happened many times throughout history.

But to follow to this line of thinking, one must ignore a fundamental distinction between two kinds of monopolies: those that emerge from the free operation of the market; and those that are a result of state coercion. Traditionally, “pure and perfect competition” is taken to mean that many firms are producing the same good with the same techniques. But this definition takes a static approach, measuring market outcomes at a single point in time, even though the economy itself is dynamic.

Consider the case of a firm that is launching an innovative product. By definition, its market share will be 100%, at least for a while. The firm owes its “dominant position” to merit, and to the fact that consumers appreciate its product.

As this scenario demonstrates, competition should not be defined by some arbitrary number of producers, but by whether other firms are free to enter the market. Ultimately, market entry is the key prerequisite of innovation. If the state imposes constraints on that freedom in such a way as to establish or maintain a single private or public producer’s market dominance, then it has created a harmful monopoly, by severely limiting opportunities for innovation.

In the case of Google, no one has prevented others from entering the Internet-search market. Google thus owes its reputation in this area to talent and ingenuity. When it entered the market, it was not the first search engine, and any firm around the world had the freedom to pursue the same opportunity. Google prevailed because it provided a better service than anyone else, and it did so early.

Google should not be punished for this success. In the absence of state coercion, the word “dominant” has no purchase, and the complaints of Google’s potential competitors have no legitimacy. They should have acted when they had the chance. Today, Google makes freely available important services such as email, translation, video hosting, and more. It is able to do this because it makes profits on other activities, namely online advertising connected to its search service. By dismantling Google, one risks undercutting its means of survival, and imposing high costs on consumers.

Let us return to the EU’s recent actions. The Commission levied its June 2017 fine because Google prioritized its own “comparative shopping service” over those of its competitors. And yet, anyone who uses Google and its various services does so freely, not because Google is somehow forcing them. They could just as well use other services, so their decision to use Google must mean that Google provides the service most useful to them.

Likewise, Google did not use coercion in the case for which it was fined in July 2018. It entered into voluntary contracts with device manufacturers, who agreed to pre-install some of its services. There was no “abuse” of its “powerful market position.” There was only innovation in the context of free contracts and free markets.

In fact, if there has been any “abuse” of one’s “dominant position,” it has been committed by the EU. Through coercion, the state is constraining individuals and firms from making their own decisions in the market, and innovative firms are being punished as a result.