Trust in Markets and Antitrust in Media

Sergei Guriev

Sergei Guriev is Chief Economist at the European Bank for Reconstruction and Development.

LONDON – This year’s World Economic Forum Annual Meeting in Davos came at a moment of puzzlement for the world’s economic and financial elites. Although the global economy has lately been doing rather well, voters have been rebelling against them.

Despite much-publicized challenges and weak points, there has been plenty of good economic news in recent years. Globalization and technological progress have supported annual global per capita GDP growth of 2.5% since 2009 – lower than before the Great Recession, but still very high by historical standards. In the last 35 years, the share of the world’s population living in poverty has fallen from 40% to just 10%.

Perhaps the biggest grievance of the past year has been inequality. But, at the global level, inequality is falling. And while inequality has risen within some advanced economies, the increase has not been particularly dramatic, and it remains at reasonable levels.

But that is not what the average citizen sees. According to the European Bank for Reconstruction and Development’s new Transition Report, based on the 2015-2016 Life in Transition Survey produced by the World Bank and the EBRD (where I am Chief Economist), the perceived increase in inequality far exceeds the reality described by official data, typically based on household surveys.

In all but one of the 34 countries where households were surveyed, a majority of respondents reported that inequality has risen in just the last few years. Yet the official data show very small changes in the Gini coefficient (a standard measure of inequality) over this period, with most countries having experienced a decrease in inequality.

One might assume that, in a clash between data and perception, data always win. But, in this case, it may be the data that are wrong – or, more accurately, we may be using the wrong data. Unlike ordinary citizens, who see the homeless in the street and the billionaires in the news, the household surveys that underpin inequality measurements may be under-sampling those at the very top and the very bottom of the income distribution.

Another kind of data, gathered by the French economist Thomas Piketty, may provide a more accurate picture of inequality today: tax records. Those data indicate that income growth among the super-rich has lately far exceeded that of the rest of the population. Philippe Aghion of Harvard and the College de France and his co-authors have reinforced this finding, showing that, while inequality has not increased among the bottom 99% of rich-country populations, the top 1% has pulled away from the pack.

The concentration of wealth at the very top, point out Piketty and others, may be dangerous. If political institutions are weak, wealthy tycoons can use their money to “capture” government officials and tilt economic regulations in their own favor. With their newly acquired competitive advantages, they can accrue undue profits, reinvesting part of their haul in acquiring even more unfair rents. The concentration of wealth would become difficult to limit, and, over time, smaller entrepreneurs would be crowded out.

Of course, if a country’s political institutions are strong enough, not even the super-rich can distort the rules of the game. In that case, those who accrue the most wealth are the most talented and luckiest entrepreneurs, who reap their rewards for driving innovation and growth that benefit the entire economy.

Unfortunately, in many of the EBRD’s 36 member countries, political institutions are not all that strong. This is reflected in the fact that commodities and natural resources account for a majority of billionaires’ wealth in the EBRD countries, suggesting not just that resource rents are available, but also that those rents are being inadequately taxed.

There is a clear need to tackle the unfair political influence of the super-rich. Most directly, this means making political financing more transparent, with stricter and more effective regulations. But it also means addressing the use of media by oligarchs to manipulate politics to their own benefit.

As Luigi Zingales pointed out in 2012, oligarchs can use media ownership to solidify their political positions, which they can then exploit to secure rents from which they can fund media. Former Italian Prime Minister Silvio Berlusconi, Zingales argues, was masterful in this regard. But many oligarchs in the post-communist countries have done likewise.

Some oligarchs would argue that it is better that they own the media than that the government does; at least they can compete with other oligarchs. That is a red herring. Yes, ownership of media by a kleptocratic or authoritarian government is dangerous. But so is ownership of media by oligarchs who can collude with one another to protect their collective interests – interests that may differ sharply from those of the rest of society.

Media lie at the foundation of modern democratic societies. That is why ownership should be transparent, with, ideally, media owners prohibited from owning other assets. In short, media should be subject to the same kind of antitrust policy as, say, infrastructure industries.

Of course, such an antitrust policy would face fierce political resistance. And even if such a policy were implemented, tycoons would continue to work to influence the media through, say, mispriced advertising contracts. And, to some extent, some media might welcome oligarchic subsidies as a way to manage new challenges to traditional business models.

To address these problems requires, first and foremost, a strong independent regulator. At the same time, transparent and de-politicized public subsidies can help to support the social good of honest news media.

Implementing an effective media antitrust framework will not be easy. But it will still be easier than contending with an increasingly dissatisfied public losing faith in democracy and open markets.