"Their economic power has never been greater."
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Professor Jayati Ghosh talks to Critical Takes about:
- How multinationals' growing profits rest on their influence over states (to 02:56).
- "Economies of arbitrage", the problem of zones for private capital and why China's model doesn't work elsewhere (to 12:00).
- Reforming taxation and freeing knowledge from corporate control (to 20:10).
- Reasons to be optimistic (to 22:14).
Here is a transcript, edited for clarity.
Diarmid:
Hello, this is Critical Takes on Corporate Power and I'm Diarmid O'Sullivan. Today I'm excited to be talking to one of the leading progressive thinkers on the world economy, Professor Jayati Ghosh.
Jayati Ghosh is Professor of Economics at the University of Massachusetts Amherst in the United States. She's authored or edited 20 books and more than 200 scholarly articles, she's advised governments and sat on the boards of international organizations, so she's better placed than anyone to talk about what the power of multinationals means for development.
Jayati, thanks very much for making time to talk.
Let's start with a general question. The world and the global economy are in a very volatile and uncertain state at the moment for reasons we all know. So focusing on the power of multinational corporations, what do you think are the trends and the factors we ought to be paying most attention to at the moment?
Jayati Ghosh:
Well, multinational corporations are now bigger than they ever have been. They're taking a greater share of corporate profits and corporate profits themselves are taking a much greater share of global income. So in a sense, their economic power has never been greater, but that's really because they are able to influence state power.
Diarmid:
If you look at the graph of corporate profits since about the 1970s, it's a sharp upward line. There's been a steady increase in profits as a share of the world economy.
Do you that that's sustainable if we look at trade uncertainties, for example, and the impact of the climate crisis? What do you think is the outlook for corporate profits and what does that uncertainty mean for corporate power?
Jayati Ghosh:
You know, the share of profits in total income doesn't really depend on the volume of profits [so] that share could well continue to increase, even if the world economy goes through rather rough times as we are already experiencing. Simply because it means that the rest of the world, the rest of us, suffer more.
But I think it is true that we are entering a period of turbulence and uncertainty in which you could get declines in the absolute values of both profits and [global] income in the near future. But the two are different things.
So the share of profits might continue to increase [but] we are not going to get more equitable distribution unless we make very drastic changes in regulations and in the ways in which we allow multinationals to behave.
Diarmid:
Let’s come back a little later on to the question of what those drastic changes would be.
Before then, I'd like to ask: the terms “economies of scale” and “economies of scope” are well known in economics. But you talk about a third term, which is economies of arbitrage. Could you talk us through what that concept means in relation to multinationals?
Jayati Ghosh:
Absolutely. Really what I'm saying is that increasingly, large corporations and multinational corporations in particular benefit from another kind of ability that others don't have, which is the ability to move their investments and their activities around through different regulatory regimes.
So what they're doing is something that is often called regulatory arbitrage. They are looking at different systems and different places and jurisdictions and choosing where to locate their activities to where they will get a better deal. And that regulatory arbitrage is something that is not available to other economic players.
It's not available to domestic companies because they can't move around in the same way, and it's not available to workers because it's harder and harder for them to migrate to different systems. So increasingly we find that multinational companies, and the large ones in particular, benefit from regulatory arbitrage. In other words, they get the economies of arbitrage, which are not available to others.
Diarmid:
And how do you think that picture changes, or doesn't change, as we move from the neoliberal era into whatever we're going to call this … interregnum, where you see the primacy of free market thinking giving way to this idea that states should actively create enabling conditions for private investment.
I mean, you're seeing that in the European Union with talk about European champions. You're seeing it in a very chaotic way in the US with Trump championing the interests of parts of US big business.
So how will the shape of that regulatory arbitrage change as multinationals increasingly enlist the support of states to prop up their profits?
Jayati Ghosh:
I think we have to rid ourselves of the notion that the neoliberal era involved less state activity. States were always involved, but the point is that states were there to protect private capital. When we talk about the withdrawal of the state, that's really the state withdrawing from their responsibilities to citizens and other stakeholders. But they never, ever gave up or reneged on their responsibility to large capital.
So it's not the case that moving away from the neoliberal era is going to necessarily give us a better deal because the states are continuing to protect and promote the interests of large capital.
And one of the big changes that has occurred over the last, let's say three decades, is that it's not just states per se, or nations per se, but it is in fact zones. Now what multinationals are looking for is not just the differences in regulations across different countries. They're looking at different regulatory zones, jurisdictions that provide laws and regulations and incentives and subsidies of different kinds.
So we find that the emergence of these zones, these specific jurisdictional and regulatory jurisdictions is something that is a prime mover for regulatory arbitrage. States are, first of all, creating more zones. Multinationals are pushing them to create more and more of these zones [which] then creates further pressure on other governments to respond accordingly.
Sometimes these zones themselves enlarge and really become the whole country, become the whole nation, in a way that doesn't necessarily promote the interests of the people or the citizens, but definitely promotes the interests of large capital. So what we’re moving to is a world where enterprises are not just multinational, they're multi-zonal. it's that which gives them that really specific extra advantage.
Diarmid:
Yes, I've done research in some African countries where you could see that governments would create, for instance, special economic zones. And it was clear, and, and this is something that you've talked about, that the model was China. But the Chinese model worked for very specific historic reasons which can't really be replicated.
So in a sense, they're trying to reproduce a model that worked for China a long time ago, but it doesn't really work anywhere else.
Jayati Ghosh:
Well, in fact in most places it works for the interests of capital. In China, what happened is that when these zones were first set up in the 1980s, they were designed as sites of experimentation where you would allow a few things to change, which would not be allowed in the rest of the economy.
And of course, the big major change that was allowed in four of the zones that were set up in that period was private property. Because remember at that point China was a completely communist economy. It did not recognize private property, so you couldn't actually own anything or retain those profits in the same way.
These zones began by allowing, enabling private property, and then they had different regulations across them. Shenzhen had slightly different regulations from Hainan which was more of a duty free area and so on. But once these proved successful, then they were allowed to extend into the rest of the economy.
And as you've seen, China now officially does recognize private property. Even so, there are specific zones that provide even more concessions to capital than the rest of the economy does, but the Chinese state has always been very careful to make sure that these aren't just enclaves, that they actually do have links to the hinterland [and] their dominant contribution is to the Chinese economy rather than the global economy.
Andd so that ability to control and regulate how the zones perform is a reflection of the bigger ability of the Chinese state to control the larger economy.
Whereas the special economic zones or free trade zones or duty free zones or all the other zones that we are setting up all over the world, they end up as enclaves. They end up as very specific locations that have much more interaction with the global economy and with private capital everywhere else than they have with the hinterland. And typically their relationship with the hinterland is one of exploitation.
You take land, you take cheap labour that often doesn't have the same rights as labour in the rest of the country. You get access to mineral resources, perhaps, you can avoid taxes or pay significantly lower taxes. You often get special subsidies and all of these are largely extractive vis-a-vis the host country.
Diarmid:
You said earlier that a zone can be an entire country, and I'm thinking of Ireland in particular, which obviously has attracted a great deal of investment from US multinationals by offering this low tax rate, which is essentially enabling the shifting of profits to Ireland from somewhere else. And also by soft peddling on EU regulations, for instance, on the digital economy.
So it seems that an entire country can be a zone. And the hinterland of Ireland in this respect is the EU. That’s a challenge for the EU, isn’t it?
Jayati Ghosh:
Absolutely. That's one of the reasons why systems of global taxation and tax corporation that seek to undermine all of those special zone status are being resisted by some countries.
But, you know, Ireland is an easy example to pick on. I think it's worth remembering that the biggest enabler of tax havens is the United Kingdom.
So you have Jersey, Guernsey, the Isle of Man, you have the Caribbean Crown Dependencies and Overseas Territories. And all of them have very different regulatory systems, not just tax systems but regulatory systems as well. So Great Britain is a pretty expert creator of zones, shall we say.
Diarmid:
Absolutely. I should say I'm a British citizen and also an Irish citizen, so I'm, you know, in both of these. It's interesting how even now, with a few exceptions, there's a sort of willed silence in British political discourse about the existence of this giant satellite network of territories, which are really satellites of the financial services industry of the UK. And there's a very large class of white-collar professionals in London who do very well out of servicing the capital flows through these places. So yeah, absolutely. It's still a major problem for the UK.
Let’s go back to this question [of how to], to deal with this regulatory arbitrage, this exploitation of differentials [and] lobbying of governments to create zones.
What are the solutions? What are the sorts of drastic changes that you think would be needed to curb or reverse some of this?
Jayati Ghosh:
In the ideal situation, we wouldn't have zones. In most cases they don't benefit the country concerned or the people of the country concerned. But until then, what do you do?
With regard to tax, there are now clear solutions. For example, treating a multinational as one company rather than a whole bunch of different companies according to which country or zone they're in.
At the moment, the international tax system is really archaic. It's something that was developed a hundred years ago when we didn't really have multinationals. We didn't have tax havens where individuals could stash away their wealth and so on.
What we need to do is to first of all say: you are a global company and so you have global profits, which are made all over the world, and so all countries get a chance to tax you their share of your global profits depending on a formula of say, sales and employment, which are proxies for your economic activities there.
If I am, let's say India and [my share of] the weighted average of sales and employment of let's say Apple is maybe 10 per cent, I'm going to take 10 per cent of your global profits and tax it at my domestic corporate income tax rate. At the moment, what can Apple do? It can shift its profit round to the lowest tax jurisdictions: Ireland, the Cayman Islands, and so on, so forth. And then say, sorry we made lots of revenue in your country, but in fact we don't really have profits in your country because we have to pay all of these different payments to our subsidiaries in Ireland and Cayman Islands and what have you.
If we say, well, we're just going to tax you on our share of your global profits, that incentive to shift just disappears. [And] you accompany that with a global minimum tax rate, which currently has actually been proposed by the OECD [at] 15 per cent.
We have said it should be much more, at least 21 per cent or 25 per cent. But if you combine it with a global minimum tax, then you would reduce the incentive for the different tax zones.
Diarmid:
Yes, and one of the real achievements of the tax justice movement, which listeners of Critical Takes will have heard about before, is the UN Tax Convention, which obviously you've been very involved with as a member of ICRICT.
[Note: the Independent Commission for the Reform of International Corporate Taxation]
And that has seems to have been a great success in the sense that it's moving ahead at the UN and that a tax convention does offer a space in which some of those wider reforms could be discussed and could be made into global norms.
How far do you think that relative success could be translated into other issues of corporate power? Something else you’ve talked about, for example, is the way that multinationals extract rent from ownership of assets. And as we know, that's increasingly intangible assets.
So beyond taxation, what do you think are the possibilities for reform? Is it a question of doing more at the UN or are there other channels we should be thinking about for addressing some of these other problems of arbitrage?
Jayati Ghosh:
Taxation is really only one of the elements of regulatory arbitrage … Another is clearly a question of recognising different assets. The degree to which we now see knowledge as an asset and a privatized and commercialized asset is extraordinary.
I'm of a generation where for half of my life, it really was not the situation that intellectual property could be seen as an asset in the same way that it is today. It's very much a creation of the last three decades. The TRIPS agreement and the subsequent enforcement of it and the extension of it to all these other trade agreements and so on. Everyone following a very strict US-style patent regime, which was not the case globally before that.
So one [thing] we have to do is to actually reform our intellectual property regimes and make them more realistic, make them more along the lines that we've had globally for the last two millennia. I don't think we should say we never had any invention or innovation until the TRIPS regime became so tight, so the idea that we need very strict patent laws, very strict intellectual property laws to get any extension of knowledge is to my mind ridiculous.
Knowledge is actually something that increases when it's shared rather than when it's restricted. And most knowledge should be in the public domain. So we must have much looser intellectual property rights, much more ability for people to access that knowledge.
That’s not just something we need because it's essentially just, it's something we need because that's the only way we will confront global health challenges, planetary challenges. The basic knowledge that we need, the technologies we need to deal with the climate challenge are held privately in concentrated form and not shared, which is absolutely crazy when you think about it.
That's really why we are not getting enough climate investment in the developing world. It's finance, but it's technology as well. So for all these reasons, we really have to dramatically change our approach to knowledge. And I will resist in calling knowledge only intellectual property. I think that's a terrible desecration.
Diarmid:
Yes. We’ve turned the commons into private assets.
Jayati Ghosh:
So that's another angle, but there is a whole range of other regulatory freedoms that these zones provide, and remember that [these] are freedoms for private capital, but the are unfreedoms for the rest of us.
So very strict controls on what labour can do, but no controls on what capital can do. You get barely any protection of workers and very minimal labour laws. In fact, in many of the zones, they offer no labour laws at all. Including for deaths while on work and on safety and so on and so forth.
In the zones we often get the allowing of all kinds of activities which are controlled for good reason, for environmental purposes for example. The mining of cryptocurrency is something that is heavily encouraged in a lot of these zones …
And cryptocurrency itself I personally think should be banned. It has no purpose. It serves no social function other than secrecy. And secrecy is not necessarily a desirable function for capital.
So the idea that we have zones that enable and encourage cryptocurrency mining, it's an ecologically damaging thing. The kind of power and water use is equivalent to the total annual use of some relatively medium sized countries.
We really have to rethink allowing those kinds of activities in some of the zones. In some of the charter cities I mentioned, like the one in St. John's Bay, Roatan, Honduras, which is currently being contested, they're allowing new medical research which is at the very fringes and maybe crossing the border of minimal bioethics in terms of the kinds of cloning that are permitted [and] the search for medicines or therapeutic devices to enable not just longer but forever life.
So I think there is a whole range of things that zones do, and they're getting more and more extreme in the kinds of freedom they provide to private capital. As I said, the obverse of that is the unfreedom of all the other stakeholders, of people of nature, of the planet.
Diarmid:
Do you feel optimistic about the prospects for taking on some of these issues and turning them around as indeed has started to happen on the issue of taxation?
Jayati Ghosh:
You know, in today's world it's very hard to feel completely optimistic because there's so much bad stuff happening all around, which we don't even need to talk about. I think, however, that if you look back through history, if you take a slightly longer view, you will see that these really bad periods also bring out different possibilities.
And sometimes it takes even worse situations. I hope it doesn't come to that. I hope it doesn't come to actual wars and things like that, but it takes really bad situations for people to realize that, oh my God, they have to do something and they have to get together. They have to cooperate and they have to push back against very dark forces.
Humanity has done it in the past. We did it after the Second World War, which was also a period of really great uncertainty and confusion and distrust. Unless you think that we won't step back from the brink, you know, we are at the edge of the precipice and we are going to jump off it ... I don't think we are. I think humanity will step back from the brink. So I guess that is what is my source of optimism.
Diarmid:
That's very encouraging. Another interviewee* said that pessimism could be a kind of privilege, that people really at the brunt of these problems don't have the luxury of pessimism because they're stuck in the middle of them. So that's a really interesting observation.
This has been a fantastically rich and stimulating set of ideas and a somewhat encouraging note at the end. So thank you very much for making time to talk.
Jayati Ghosh:
Thank you, Diarmid. It was fun.
* Chenai Mukumba of Tax Justice Network Africa, who also talks about the UN tax convention and what it means for African countries. Listen here.
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