The International Monetary Fund has warned that the market power exercised by a small number of global companies threatens to stifle innovation and make it harder for central banks to deal with recessions.
Adding its contribution to the growing public debate about the corporate power exercised by the US tech giants such as Google, Amazon, Apple and Facebook, the IMF said it would be concerned if there was any further increase in the clout of already dominant firms.
The IMF said there was a need for stronger competition policy to ensure that established firms did not block the entry of potential rivals and called for excess profits to be targeted by a tougher international tax regime.
Although the study contained in the IMF’s forthcoming World Economic Outlook (WEO) did not mention any company by name, it said the past two decades had seen the concentration of market power among a small number of productive and innovative firms.
Market concentrations tended to be higher in the US than in Europe, the IMF said, and in part reflected the growth of firms that exploited intangible assets.
“Over the past two decades, a generally moderate but broad-based rise in corporate market power has been observed across advanced economies, driven primarily by a small fraction of firms.”
The chapter from the WEO noted that the big-picture economic implications of the trend had so far been “rather modest” and that the impact of rising market power on innovation had so far been positive. But the IMF said impact would become “increasingly negative if the market power of high mark-up firms, in particular, were to continue to rise in the future.”
It added that “investment would weaken, innovation could slow, labour income shares would fall further, and monetary policymakers find it even more difficult to stabilise output in the event of major downturns.”
The tech giants have been accused of using takeovers and mergers as a way of removing competitors, and the IMF said its evidence showed that these had led to significantly higher mark ups.
“That said, whether the loss to consumers from such increases has been typically more than offset by gains from cost and price reductions due to economies of scale and scope, or by other efficiency gains, is an open question that warrants investigation.”
Recent academic research has shown that the traditional method of calculating growth – gross domestic product – has been underestimating the benefits to consumers from free services such as Facebook and from the development of smart phones.
The IMF said the possibility that successful firms would seek to block potential rivals meant there was a case for structural reforms to keep competition strong.
“Winner-takes-most outcomes and the associated increase in winners’ market power may be more likely when competition policy fails to adapt or becomes less stringent, for example, when it comes to merger enforcement or exclusionary conduct by dominant firms.
“Rising market power may further strengthen the case for corporate taxation reform, targeting the excess returns on capital generated by market power.”
In a separate WEO chapter, the IMF expressed strong criticism of Donald Trump’s protectionism and said the US should be removing trade barriers rather than erecting them.
Washington and Beijing are holding negotiations in an attempt to prevent an escalation in a US-Sino trade war triggered by Trump’s unhappiness about America’s bilateral trade deficit with China. The IMF said this was caused by factors other than tariffs and said protectionist policies would backfire.
“The integrated nature of the current trade system suggests that a sharp increase in tariffs would create significant spillovers, leaving the global economy worse off.”’
“Targeting particular bilateral trade balances will likely only lead to trade diversion and offsetting changes in trade balances with other partners. Second, multilateral reductions in tariffs and other non-tariff barriers will benefit trade and, over the longer term, improve macroeconomic outcomes.”
