Monday, 27 January 2014

Rent seeking

This article was published in The Malta Independent on Sunday - 26th January 2013


Prof Joseph Stiglitz
Nobel Laurate economist Prof Joseph Stiglitz’s latest publication ‘The Price of Inequality’ has brought growing social inequality on to the agenda of the 44th World Economic Forum presently going at Davos, Switzerland. 

According to an analysis report prepared by Oxfam for the Davos meeting, the 85 richest people on the planet have accumulated as much wealth between them as the bottom half of the world’s population. The tiny elite of multibillionaires, who could fit into a double-decker bus, have piled up fortunes equivalent to the wealth of the world’s poorest 3.5bn people.   Oxfam condemned the “pernicious” impact of the steadily growing gap between a small group of the super-rich and hundreds of millions of their fellow citizens, arguing it could trigger social unrest.

Stiglitz passionately describes how unrestrained power and rampant greed are writing an epitaph for the American dream. The promise of the US as the land of opportunity has been shattered by the modern tyrants, who make up the 1%, while sections of the 99% across the globe are beginning to vent their rage. The anger, seen in Occupy Wall Street and Spain's los indignados, is given shape, fluency, substance and authority by Stiglitz. He does so not in the name of revolution but in order that capitalism be snatched back from free market fundamentalism and put to the service of the many, not the few.

Stiglitz’s arguments apply mostly to the US.  There is no doubt that in particular countries globalisation has helped to reduce poverty.  China and Brazil are typical examples where governments have spread the benefits of globalisation to benefit the bottom layers helping to extract millions out of poverty.   There is an argument to be made that rather than fighting globalisation per se, Occupy movements and Oxfam should be fighting the social policies, or lack of them, in particular countries, the US in particular.

Even with liberal Obama in the White House, the social inequality in the US has continued to accentuate, showing that politicians seem powerless to reverse the trend in spite of good intentions. The reason may be found in the ability of the top 1% to use their huge economic power to consolidate their ‘rent seeking’ abilities.

For roughly 30 years after the second world war, the US top 1% had a steady share of the US cake. In the five years to 2007, however, the top 1% seized more than 65% of the gain in US national income. In 2010, their share was 93%. This did not create greater prosperity for all. On the contrary, much of this gain was "rent seeking", not creating new wealth but taking it from others. The inequality gap is becoming a chasm. Stiglitz demonstrates how, in the US, those born poor will stay poor; yet nearly seven in 10 Americans still mistakenly believe in the American dream.

Rent seeking comes in different forms but the ultimate aim is the same:  tilting the playing ground in favour of the top 1%. Lower tax rates for capital gains as against earned revenues; tax loop holes such as allowing non-repatriated corporate profits go untaxed; monopolies or market distorting incentives working against the consumer; preference to reduce tax rates at the upper margin rather than distribute wealth through social programmes or investment in infrastructure; explicit and implicit state guarantees like ‘too big to fail’ tolerance for large financial institutions; these  are all living examples and results of rent seeking lobbying.

This is leading to accumulation of huge cash and liquidity reserves by the largest corporates who rather than invest for organic job creating economic growth, prefer to use the cash for job destructing mergers and acquisitions or share buy backs and dividends that benefit the rich.

Thanks to the social benefit net largely put together by Labour governments of the seventies and which the PN governments of the nineties were obliged to respect and extend under the inspiration of the great mentor the late Fr. Peter Serracino Inglott, in Malta we do not suffer from such grave inequality problems.  The size of the country is what it is.  Here the rich and the poor unavoidably rub shoulders.  Inequality cannot be allowed to grow as much as in large countries where the 1% can live secluded and blind to the needs of the 99%.   God bless Malta!


Hats off to Judge J.R. Micallef for coming out with two judgements for the long outstanding court cases related to National Bank of Malta saga.   In so far as this Judge is concerned, accusations of undue delay in giving judgements are out of order as since the cases came under his tutelage he advanced them after many other Judges, for one reason or another, washed their hands off them. 

As a taxpayer I continue to oppose any out of court settlement.  Only a court judgement in its final format will come with conviction that government has acted in the interest of general taxpayers.

But I smile when I hear the expectations of  ex-NBM shareholders following the judgement which confirmed that their rights under Section 37 of the Constitution were prejudiced when “the method how their shares were taken over infringed the basic elements of this article”.

One can agree that the method used was deficient and that due process was not respected.   But translating this into fair compensation, something the Judge still has to do, cannot be as straight forward as some zealots have recently expressed, because:

1.       Commercial compensation could only apply to those shareholders who did not sign over their shares to government or who can prove the transfer they signed was legally invalid.   The zealots do not mention another case decided concurrently by the same Judge, that threw out a case where four shareholders who signed over their shares without compensation tried to argue for invalidity of the transfer.   Whilst arguments and circumstances may differ from shareholder to shareholder there is no doubt that the onus of proof to nullify a signed share transfer has been set very high by the Courts.  Careful reading of this second judgement, which is conveniently never referred to by the zealots, disproves and buries the myth that then Prime Minister Mintoff had actually threatened shareholders with lifting of their limited liability to force them in signing over their shares.


2.       Commercial compensation has to be based primarily on the value of the shares at the time they were taken over.  Judge Micallef in the second sentence upheld and respected the Judgement passed by the Court’s Second Hall in 1973 when authorising transfer of shares held by minors, which was based on the opinion that at the time the shares had no commercial value.

Reading the two judgements together the impression I form is that compensation is only due to those who did not sign their shares or who can successfully prove in court that the transfer was invalid for reasons at law, and that given that at the point of takeover the shares had no commercial value, any compensation has to be based on moral considerations.

I continue to respect the due process of law but not the process of rent-seeking.

1 comment:

  1. According to official statistics in Malta if one divides the population equally in ten groups according to their income, between 2005 and 2010 only the top 10% have seen their share of national equivalised income increase. The rest have seen a decline, particularly the lower 20% of the population and the upper middle class. Whilst many factors may be at play (further trade and financial liberalization with EU membership, the declining role of unions, wage moderation, the changing structure of the economy towards services, euro area membership, lack of competition in the banking sector, changes in taxation, international competitive pressures and a myriad of other factors) the coincidence with EU membership should be one factor to study. It is a known fact that trade liberalization and especially financial liberalization can lead to inequality. Economists argue that as long as markets function properly the gains from such liberalization exceed the losses and a redistribution of the income gains to those who lose out would make everyone better off. But there are two main assumptions here – (i) that markets function properly and (ii) that redistribution takes place. In the real world both assumptions fail to hold. Just look at the current crisis in Europe. We have gone at great lengths to protect the interests of creditors versus the debtors. Putting it in plain language we have gone to great lengths to protect the interests of the banks (especallyt the too big to fail ones) and have made much less effort to address the issue of mass unemployment in Europe. This is not to say that both interests are mutually exclusive. But certainly the effort was not symmetrical and as a result Europe is still reeling from the financial crisis. And the massive unemployment figures are clearly the elephant in the room we often fail to see, or rather do not want to see.