Regulating Self-Interest under Globalization: Balancing Market Power with Institutions
37 Pages Posted: 11 Aug 2013 Last revised: 29 Aug 2013
Date Written: August 9, 2013
I construct a two-country multisectoral model of capital accumulation, endogenous technological change, trade, and foreign direct investment, whose steady states explain the main features of globalization: (a) increased economic participation of transnational corporation (TNC) profits, (b) coexisting development, underdevelopment and miracle growth, (c) increased inequality in leading countries, and (d) increased capital accumulation, lowering interest rates along the globalization transition. In addition, applying results in tax competition, including tax havens and the political process, I explain how higher TNC profits lead to (e) more conservative policies and lower taxes; weakening institutions vis a vis the increased level of market power under globalization. Finally, analyzing the transition dynamics shows (f) global investment has two characteristic modes, FDI expansion and economy-wide growth.
An outline of the history of market power in the US provides a context for understanding the impact of this increased market power under globalization. We show that industrial market power has been the norm in the US economy at least since the Second Industrial Revolution, and that economic competition has been insufficient to regulate market power. Labor market and other institutions were essential components for balancing market power and attaining prosperity.
I thus use the tools of economic growth to analyze our contemporary dynamic setting in its historical context. This allows me to argue that global welfare requires global institutions, such as international agreements, that can regulate market power, redistribute income, and eliminate the tax havens that distort production towards an excessive internationalization. One possible beginning is to harmonize TNC taxes across countries.
Keywords: Globalization, Market Power, Institutions, Growth, Development, Underdevelopment
JEL Classification: F60, O10, O43, P10, H00
Suggested Citation: Suggested Citation