Tag: multinational corporations

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Will AI make the world less equal?

With businesses increasing their use of AI, this is likely to have significant effects on employment. But how will this affect the distribution of income, both within countries and between countries?

In some ways, AI is likely to increase inequality within countries as it displaces low-skilled workers and enhances the productivity of higher-skilled workers. In other ways, it could reduce inequality by allowing lower-skilled workers to increase their productivity, while displacing some higher-skilled workers and managers through the increased adoption of automated processes.

The effect of AI on the distribution of income between countries will depend crucially on its accessibility. If it is widely available to low-income countries, it could significantly enhance the productivity of small businesses and workers in such countries and help to reduce the income gap with the richer world. If the gains in such countries, however, are largely experienced by multinational companies, whether in mines and plantations, or in labour-intensive industries, such as garment production, few of the gains may accrue to workers and global inequality may increase.

Redistribution within a country

The deployment of AI may result in labour displacement. AI is likely to replace both manual and white-collar jobs that involve straightforward and repetitive tasks. These include: routine clerical work, such as data entry, filing and scheduling; paralegal work, contract drafting and legal research; consulting, business research and market analysis; accounting and bookkeeping; financial trading; proofreading, copy mark-up and translation; graphic design; machine operation; warehouse work, where AI-enabled warehouse robots do many receiving, sorting, stacking, retrieval, carrying and loading tasks (e.g. Amazon’s Sequoia robotic system); basic coding or document sifting; market research and advertising design; call-centre work, such as enquiry handling, sales, telemarketing and customer service; hospitality reception; sales cashiers in supermarkets and stores; analysis of health data and diagnosis. Such jobs can all be performed by AI assistants, AI assisted robots or chat bots.

Women are likely to be disproportionately affected because they perform a higher share of the administrative and service roles most exposed to AI.

Workers displaced by AI may find that they can find employment only in lower-paid jobs. Examples include direct customer-facing roles, such as bar staff, shop assistants, hairdressers and nail and beauty consultants.

Such job displacement by AI is likely to redistribute income from relatively low-skilled labour to capital: a redistribution from wages to profits. This will tend to lead to greater inequality.

AI is also likely to lead to a redistribution of income towards certain types of high-skilled labour that are difficult to replace with AI but which could be enhanced by it. Take the case of skilled traders, such as plumbers, electricians and carpenters. They might be able to use AI in their work to enhance their productivity, through diagnosis, planning, problem-solving, measurement, etc. but the AI would not displace them. Instead, it could increase their incomes by allowing them to do their work more efficiently or effectively and thus increase their output per hour and enhance their hourly reward. Another example is architecture, where AI can automate repetitive tasks and open up new design possibilities, allowing architects to focus on creativity, flexibility, aesthetics, empathy with clients and ethical decision-making.

An important distinction is between disembodied and embodied AI investment. Disembodied AI investment could include AI ‘assistants’, such as ChatGPT and other software that can be used in existing jobs to enhance productivity. Such investment can usually be rolled out relatively quickly. Although the extra productivity may allow some reduction in the number of workers, disembodied AI investment is likely to be less disruptive than embodied AI investment. The latter includes robotics and automation, where workers are replaced by machines. This would require more investment and may be slower to be adopted.

Then there are jobs that will be created by AI. These include prompt engineers, who develop questions and prompt techniques to optimise AI output; health tech experts, who help organisations implement new medical AI products; AI educators, who train people in the uses of AI in the workplace; ethics advisors, who help companies ensure that their uses of AI are aligned with their values, responsibilities and goals; and cybersecurity experts who put systems in place to prevent AI stealing sensitive information. Such jobs may be relatively highly paid.

In other cases, the gains from AI in employment are likely to accrue mainly to the consumer, with probably little change in the incomes of the workers themselves. This is particularly the case in parts of the public sector where wages/salaries are only very loosely related to productivity and where a large part of the work involves providing a personal service. For example, health professionals’ productivity could be enhanced by AI, which could allow faster and more accurate diagnosis, more efficient monitoring and greater accuracy in surgery. The main gainers would be the patients, with probably little change in the incomes of the health professionals themselves. Teachers’ productivity could be improved by allowing more rapid and efficient marking, preparation of materials and record keeping, allowing more time to be spent with students. Again, the main gainers would be the students, with little change in teachers’ incomes. Other jobs in this category include social workers, therapists, solicitors and barristers, HR specialists, senior managers and musicians.

Thus there is likely to be a distribution away from lower-skilled workers to both capital and higher-skilled workers who can use AI, to people who work in new jobs created by AI and to the consumers of certain services.

AI will accelerate productivity growth and, with it, GDP growth, but will probably displace workers faster than new roles emerge. This is likely to increase inequality and be a major challenge for society. Can the labour market adapt? Could the effects be modified if people moved to a four- or three-day week? Will governments introduce statutory limits to weekly working hours? Will training and education adapt to the new demands of employers?

Redistribution between countries

AI threatens to widen the global rich–poor divide. It will give wealthier nations a productivity and innovation edge, which could displace low-skilled jobs in low-income nations. Labour-intensive production could be replaced by automated production, with the capital owned by the multinational companies of just a few countries, such as the USA and China, which between them account for 40% of global corporate AI R&D spending. For some companies, it would make sense to relocate production to rich countries, or certain wealthier developing countries, with better digital infrastructure, advanced data systems and more reliable power supply.

For other companies, however, production might still be based in low-income countries to take advantage of low-cost local materials. But there would still be a redistribution from wages in such countries to the profits of multinationals.

But it is not just in manufacturing where low-income countries are vulnerable to the integration of AI. Several countries, such as India, the Philippines, Mexico and Egypt have seen considerable investment in call centres and IT services for business process outsourcing and customer services. AI now poses a threat to employment in this industry as it has the potential to replace large numbers of workers.

AI-related job losses could exacerbate unemployment and deepen poverty in poorer countries, which, with limited resources, limited training and underdeveloped social protection systems, are less equipped to absorb economic and social shocks. This will further widen the global divide. In the case of embodied AI investment, it may only be possible in low-income countries through multinational investment and could displace many traditional jobs, with much of the benefit going in additional multinational profit.

But it is not all bad news for low-income countries. AI-driven innovations in healthcare, education, and agriculture, if adopted in poor countries, can make a significant contribution to raising living standards and can slow, or even reverse, the widening gap between rich and poor nations. Some of the greatest potential is in small-scale agriculture. Smallholders can boost crop yields though precision farming powered by AI; AI tools can help farmers buy seeds, fertilisers and animals and sell their produce at optimum times and prices; AI-enabled education tools can help farmers learn new techniques.

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Questions

  1. What types of job are most vulnerable to AI?
  2. How will AI change the comparative advantage of low-income countries and what effect will it be likely to have on the pattern of global trade?
  3. Assess alternative policies that governments in high-income countries can adopt to offset the growth in inequality caused by the increasing use of AI.
  4. What policies can governments in low-income countries or aid agencies adopt to offset the growth in inequality within low-income countries and between high- and low-income countries?
  5. How might the growth of AI affect your own approach to career development?
  6. Is AI likely to increase or decrease economic power? Explain.
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The G7 agrees on measures to stop corporate tax avoidance

At a meeting of the G7 finance ministers in London from 4–5 June, it was agreed to adopt a minimum corporate tax rate of 15% and to take measures to prevent multinational companies using tax havens to avoid paying taxes. It was also agreed that part of the taxes paid should go to the countries where sales are made and not just to those where the companies are based.

This agreement is the first step on the road to a comprehensive global agreement. The next step is a meeting of the finance ministers and central bank governors of the G20 countries in Venice from 9 to 10 July. The G7 ministers hope that their agreement will be adopted by this larger group, which includes other major economies such as Russia, China, India, Brazil, Australia, South Korea and South Africa.

Later in July, the proposals will be put to a group of 139 countries and jurisdictions at a meeting co-ordinated by the OECD. It is hoped that this meeting will finalise an international agreement with precise details on corporate tax rules. It follows work by the OECD on reforming international taxation under its Framework on Base Erosion and Profit Shifting (BEPS).

These meetings follow growing concerns about the ability of multinational companies to avoid taxes by basing regional headquarters in low-tax countries, such as Luxembourg or Singapore, and declaring their profits there, despite having only a tiny proportion of their sales in these countries.

The desire to attract multinational profits has led to a prisoners’ dilemma situation, whereby countries have been competing against each other to offer lower taxes, even though it reduces global corporate tax revenues.

With many countries having seen a significant rise in government deficits as result of the COVID-19 pandemic and the support measures put in place, there has been a greater urgency to reach international agreement on corporate taxes. The G7 agreement, if implemented, will provide a significant increase in tax revenue.

Details of the G7 agreement

The agreement has two parts or ‘pillars’.

Pillar 1 allows countries to tax large multinationals earning global profits of more than 10% if these companies are not based there but earn revenues there. Countries will be given tax rights over at least 20% of the profits earned there which exceed the 10% margin. The level of profits determined for each country will be based on the proportion of revenues earned there.

Pillar 2 sets a minimum corporate tax rate of 15% for each of the seven countries, which call on other countries to adopt the same minimum. The hope is that the G20 countries will agree to this and then at the OECD meeting in July a global agreement will be reached. If a country chooses to charge a rate below 15%, then a top-up tax can be applied by the home country to bring the total rate up to the 15%.

It is possible that these proposals will be strengthened/amended at the G20 and OECD meetings. For example, the 15% minimum rate may be raised. Indeed, the USA had initially proposed a 25% rate and then 21%, and several EU countries such as France, have been pushing for a substantially higher rate.

Analysis

The agreement was hailed as ‘historic’ by Rishi Sunak, the UK Chancellor of the Exchequer. This is true in that it is the first time there has been an international agreement on minimum corporate tax rates and locating part of tax liability according to sales. What is more, the rules may be strengthened at the G20 and/or OECD meetings.

There have been various criticisms of the agreement, however. The first is that 15% is too low and is well below the rates charged in many countries. As far as the UK is concerned, the IPPR think tank estimates that the deal will raise £7.9bn whereas a 25% rate would raise £14.7bn.

Another criticism is that the reallocation of some tax liabilities to countries where sales are made rather than where profits are booked applies only to profits in excess of 10%. This would therefore not affect companies, such as Amazon, with a model of large-scale low-margin sales and hence profits of less than 10%.

Also there is the criticism that a 20% reallocation is too low and would thus provide too little tax revenue to poor countries which may record large sales but where little or no profits are booked.

The UK was one of the more reluctant countries to sign up to a deal that would have a significant impact on tax havens in various British overseas territories and crown dependencies, such as the British Virgin islands, Bermuda, the Cayman Islands, the Channel Islands and Isle of Man. The agreement also calls into question whether the announced UK freeports can go ahead. Although these are largely concerned with waiving tariffs and other taxes on raw materials and parts imported into the freeport, which are then made into finished or semi-finished products within the freeport for export, they are still seen by many as not in the spirit of the G7 agreement.

What is more, the UK has been pushing for financial services to be exempted from Pillar 1 of the deal, which would otherwise see taxes partly diverted from the UK to other countries where such firms do business. For example, HSBC generates more than half its income from China and Standard Chartered operates mostly in Asia and Africa.

Update: July 2021

The G7 plan was agreed by the finance ministers of the G20 countries on July 11 in Venice. By that point, 130 of the 139 countries which are part of the Inclusive Framework of the OECD and which represent more than 90% of global GDP, had signed up to the plan and it was expected that there would be a global agreement reached at the OECD meeting later in the month. The other nine countries were Ireland, Hungary and Estonia in the EU and Kenya, Nigeria, Peru, Sri Lanka, Barbados and Saint Vincent and the Grenadines. Several of these countries use low corporate taxes to encourage inward investment and are seen as tax havens.

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Questions

  1. How are multinationals currently able to avoid paying corporate taxes in many countries, even though their sales may be high there?
  2. If the deal is accepted at the OECD meeting in July, would it still be in the interests of low-tax countries to charge tax rates below the agreed minimum rate?
  3. Why was the UK reluctant to accept the 21% rate proposed by the Biden administration?
  4. Find out about the digital services tax that has been adopted by many countries, including EU countries and the UK, and why it will be abolished once a minimum corporate tax comes into force.
  5. Argue the case for and against taxing the whole of multinational profits in countries where they earn revenue in proportion to the company’s total global revenue. Would such a system benefit developing countries?
  6. Should financial services, such as those provided by City of London firms, be exempted from the deal?
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A changing supply chain

With globalisation, more and more businesses have found it beneficial to ‘go global’. There are many reasons why a firm might choose to expand its production or market to other countries and one particular advantage is cutting costs in the manufacturing of products.

Countries such as China and India have become leaders in production. Look at many of the items you own – I’m sure you’ll see a ‘Made in China’ or ‘Made in India’ amongst them. These fast emerging countries were highly sought after as places to produce due to much cheaper production costs. This advantage led to Western companies outsourcing much of their manufacturing base to China, as a means of retaining a competitive advantage.

However, the cost advantages that China boasted are now less significant and we may be about to see the emergence of a new manufacturing hub. Other countries that are further behind the BRICS in the development process now have cost advantages over places like China and so we may see another transfer of manufacturing to other parts of the world.

When splitting up a supply chain to gain cost advantages a key consideration is the extent to which you lose control. Communication and co-ordination issues can emerge when design takes place in one country; production in another and then the products are sold around the world. When cost differences are huge, these problems can be overlooked, as what they might cost you in terms of lost time etc. is easily made up by savings through cheaper labour.

However, when the cost advantages of production in China shrink, companies are still left with the problems of communication and co-ordination. These now represent more significant costs that could be reduced were production to revert to the country of design or if production were to be moved to an even cheaper country.

The following article from BBC News considers the issues surrounding the supply chain and how businesses may benefit from more collaboration.

Better collaboration lets businesses take back the supply chain BBC News, Alastair Sorbie (15/6/12)

Questions

  1. What are the arguments for becoming a multinational?
  2. Why do host countries, such as the BRICS accept inward investment? What do they gain from it?
  3. Explain how the product life cycle can affect the profitability of a MNC and how the company might respond.
  4. What are the disadvantages to a MNC from ‘going global’?
  5. What are the problems faced by developing countries acting as host nations?
  6. How has technology affected both big and small businesses?
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Avoiding the global taxman

Transfer pricing is a technique used by multinational companies to avoid tax liabilities in countries they regard as having high levels of taxation. The articles below from the Guardian give the results of an investigation by Guardian journalists into the elaborate structures that have been created by multinational companies in the banana industry to funnel their profits through tax havens like the Cayman Islands, Bermuda and the British Virgin Islands. In some cases they have paid an effective tax rate as low as 8% when the tax rate in their home country is 35%.

Revealed: how multinational companies avoid the taxman Guardian (6/11/07)
Bananas to UK via the Channel islands? It pays for tax reasons Guardian (6/11/07)
‘I get up at 4am, work to 6-7pm – it doesn’t feel like a life’ Guardian (6/11/07)

Questions

1. Define the term ‘transfer pricing’.
2. Explain how multinational banana companies use transfer pricing to reduce their tax liabilities.
3. “The trend in the last 30 years has been to shift the burden of tax away from companies on to the consumer and labour. Capital is increasingly going untaxed.” Discuss the advantages and disadvantages of this shift in the method of taxation.