Making the rich richer: How multinational companies create inequality
About one year ago, I had the privilege of meeting one of the top corporate executives in Bangladesh. Well-known as a corporate kingpin heading one of the top multinational companies (MNCs) in our country, he was happy to chat when we were introduced at a family event. We talked about his work, then mine at the International Monetary Fund in Washington. He asked me what I thought about the economic impact of MNCs in Bangladesh. I thought of saying that it was all good, and that MNCs are the future to long-term growth in Bangladesh—or something that sounds just as nice. But I ended up giving my honest opinion: that MNCs—the way they are operating today—are contributing to income inequality in Bangladesh. He was irritated. He immediately went on a rant about how MNCs were creating new jobs, bringing in foreign expertise and higher quality products, and making massive contributions to the GDP every year.
I tried to explain but he shook his head vehemently, refusing to accept my point of view and giving me that stereotypical "what do these kids know?" look. I wasn't surprised. Economists do have a way of getting on people's nerves; all the more so if you're at the younger end of the profession.
To be sure, even a student of Economics 101 can tell that a multinational firm, or Foreign Direct Investment (FDI) in general raises investment, increases employment, brings in new technology and jacks up economic growth. But the story hardly ends there: what share of the population are enjoying these gains from FDI?
For much of the last 10-15 years, about 50 MNCs have been operating in Bangladesh in different sectors such as telecom, financial services, durable and non-durable consumer goods, ceramics, advertising, garments, etc. Since most of these companies are not publicly listed, they do not have to publish annual reports so data on their annual wage expenses, profit growth, number of people employed remains unavailable.
That said, it isn't too wild a conjecture that these foreign firms do not employ even 0.5 percent of the country's total population in white-collar jobs in their corporate offices. And of course, it is common knowledge that MNCs tend to pay higher wages than their domestic counterparts. This is not unique to Bangladesh, and is seen all across the world: so much so that it is known as the "Multinational Wage Premium" in economic parlance.
Now consider blue-collar employees of these firms: those who are employed in low skill-intensive jobs in their manufacturing facilities. Even if their pay is higher relative to similar positions in domestic firms, the wage-premium is likely far lower than that of high skill-intensive jobs. So at the end of the day, only those few employed in corporate offices are really gaining from the multinational wage premium.
High-skilled workers will tell us they earned their premium. That's again partly true. Typically employees in MNCs tend to come from relatively privileged backgrounds whose families were wealthy enough to provide them strong educational foundations (good schooling eventually leading to a good university degree), which led to the "dream job" in the first place. How many MNC corporate employees come from low-income backgrounds, whose families were not able to pay for decent schooling and higher education? A safe guess would be: not many.
The background-factor aside, MNCs in Bangladesh operate in oligopolistic structures in different sectors. So then clearly the prices charged for their products can never be what economists term "perfectively competitive". In other words, these firms overprice their products since they have enough power in their respective industries to do so. While the lucky employees of these firms can pay for these products with their pay checks, the less privileged share of the population have undoubtedly taken a hit over the years. So then, there really should be no doubt that MNCs are making the rich richer.
Leaders from the multinational sector will remind us that this is a global phenomenon, not unique to Bangladesh. They might even claim that the pros outweigh the cons: how they can quantify such a claim is anybody's guess. In reality, there are two factors making the situation far more extreme in Bangladesh than in many other parts of the world.
Firstly, most MNCs operating in Bangladesh are not listed in the public stock market. Ironically, many of these same companies are listed in other countries (India and Pakistan for starters). By not getting listed, these firms are denying the ordinary citizens one of the most age-old methods of sharing profits equitably with society. Because if they did go public, the less-privileged would get a share of MNC-wealth through capital gains and annual dividends.
Secondly, the extent of an oligopolistic market structure is higher in Bangladesh than in more developed economies since they have many more MNCs operating in every sector. Naturally it is harder to be a price-setter when there are many firms operating in an industry.
So the way forward is clear: first, MNCs must go public. Only then will they alleviate some of the income disparity they are creating, while also help develop our financial markets. Second, authorities must entice more MNCs to enter Bangladesh so that our sectors become less oligopolistic, and closer to what could be termed as perfectly competitive. This will also force domestic firms to become more efficient and find ways to pay higher which will reduce the wage premium—the source of the inequality.
Sharjil Haque is a Doctoral student in Economics at the University of North Carolina, USA and former Research Analyst, International Monetary Fund, Washington DC.