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Why big companies may pose a threat to democracy and economic prosperity

LiveMint logoLiveMint 11-08-2017 Tadit Kundu

Firms are seen as entities trying to maximize profits by managing resources efficiently. This benign definition might not hold for big companies, whose revenues rival that of governments, argues Luigi Zingales, professor of finance at the Chicago Booth School of Business. Big firms can unleash a vicious circle where money is used to gain political power and political power is used to make more money by subverting regulations or “rules of the game”. Even intra-industry competition might not be enough to prevent such practices. The growing financial muscle of big firms, the decline of anti-business ideology in politics, rising corporate censorship in media etc. have made this problem more acute in recent times, according to the author.

Also Read: Towards a Political Theory of the Firm

The relationship between the Indian state and the private corporate sector needs to be re-examined in the light of the debt hangover the Indian economy faces today, argues a recent Economic and Political Weekly research paper by Rohit Azad, an assistant professor of economics at Jawaharlal Nehru University and his co-authors. The authors argue that bank-financed infrastructure projects played a key role in fuelling growth in India’s boom phase. The drive was led by state-owned banks, especially in the post-2008 phase, suggesting that the state rather than the market was behind the credit push. Such a policy created a sort of “riskless capitalism” and encouraged firms to indulge in reckless investments. The end result has been a pile up of bad loans and a demand for state subsidies to indebted banks and companies. The authors question the strategy of letting banks rather than development finance institutions finance long-gestation projects in India. They also ask whether it would have been better for the state to itself undertake such investments rather than subsidizing private firms to do so.

Also Read: Riskless Capitalism’ in India

Digitization is often blamed for loss of revenues in the entertainment industry. But despite the disruption, the spread of internet and digitization have made creation and distribution of artistic content cheaper and easier, thereby ushering in a “golden age” for music, movies, books and television, according to Joel Waldfogel, professor at the University of Minnesota. Digitization may have impacted the revenues of established studios and music labels owing to piracy. But it has also led to increased production of movies and music owing to falling costs of equipment such as cameras and recording media. Quality too has not deteriorated in the digitization age, according to analysis of ratings from sources such as Rotten Tomatoes, Metacritic and IMDb. New avenues to distribute content, such as Netflix and Amazon, could encourage production of more diverse content, targeting niche markets.

Also Read: How Digitization Has Created a Golden Age of Music, Movies, Books, and Television

Households’ perception of inflation might often be removed from reality, according to research by Alberto Cavallo, professor at the Sloan School of Management at MIT, and others. On conducting a series of survey experiments, the researchers found that people tend to rely on their personal experience and memory of price paid at store to form their inflation expectations, often ignoring official statistics even when available. The tendency to rely on one’s own memory was stronger in Argentina, a high-inflation economy, compared to USA, a country with lower inflation. This is understandable given that people in high inflation countries are more likely to have an opinion on the subject matter. Moreover, respondents in Argentina tended to overestimate actual inflation, especially in the prices of items that they seldom bought. The authors argue that central bankers should communicate more effectively to shape people’s inflation expectations, given the implications on economy-wide consumption and saving.

Also Read: Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments

Developing countries should invest more in social infrastructure such as schools rather than physical infrastructure such as roads, if they intend to maximize long-run growth prospects, according to an article by Manoj Atolia, professor of economics at Florida State University, and others. While investment in physical infrastructure raises the productivity of private firms relatively quickly, investment in schools raises workers’ productivity in the long run. Despite such obvious payoffs, developing countries tend to invest relatively less in schools. The main reason is the difference in gestation period for the two types of investment. While investment in schools could take 24 years to yield returns, investment in roads leads to higher economic growth for the next 15 years, according to authors’ estimates. This trade-off between the short run and the long run contributes to the bias towards roads, in particular when “government concerns about debt sustainability and policymakers’ myopia are taken into consideration”, the authors write.

Also Read: Investing in public infrastructure: Roads versus schools

Economics Digest runs weekly, and features interesting reads from the world of economics.

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