Concentration of Capital Under the Pandemic

- Sandy E. Ramírez Gutiérrez -

The pandemic caused by the SARS-Cov-2 virus and the measures to contain its spread seem to have thrust capitalism into a new crisis since the financial collapse of 2008. Estimates by international bodies indicate that the world is going through the worst recession since the 1930s: the International Monetary Fund estimated that The Great Confinement will reduce global GDP by 3 per cent in 2020, the World Bank is more pessimistic and predicted a 5.2 per cent drop, and the Organization for Economic Cooperation and Development estimated a 6 per cent decline, if there is no resurgence of the pandemic. For these organizations and many analysts, the economic stagnation and inequality that will result from this crisis cannot be resolved without the active intervention of states, which must favour increased public spending to expand health systems, guarantee social programs and promote economic activity through credits and subsidies to companies, in a kind of refoundation of capitalism or, as some economists call it, a suspension of the laws of capitalism.[1]

However, the signs of recession were already appearing before the pandemic, as François Chesnais analyzes on the basis of the growth of productive capacity utilized.[2] Thus, the measures imposed by the health contingency, far from being the origin of the crisis, may be pushing rapidly to a restructuring of the world economy that does not "suspend" capitalism, but reinforces it through a new wave of centralization and concentration of capital based on the capacity to take advantage of changes resulting from the pandemic.

As far as global capital flows are concerned, the data on foreign direct investment (FDI) show a sharp fall but with heterogeneous results. The United Nations Conference on Trade and Development (UNCTAD) has estimated a reduction of about 40 per cent in FDI in 2020 compared to the level of 2019, and between 45 and 50 per cent in 2021, as a result of the confinement measures implemented virtually worldwide. This situation implies a demand and supply shock for transnational corporations, particularly for the most intensive industries in global supply chains, such as manufacturing and the extractive sector. According to the UNCTAD report, the 100 largest transnational corporations revised their expected profits downward in 2020, but the automotive sector and the extractive companies (mainly mining and oil) are the most affected, even as the pharmaceutical and large technological companies adjusted their forecasts upward.

It is also the technology companies that have become more internationalized and concentrated. The report indicates that between 2017 and 2019, technology corporations decreased in number while increasing their share of foreign sales in the top 100, thanks to two strategies. First, through the purchase of start-ups (relatively small companies, with a high technological component and strong growth potential) to access innovations and, second, through vertical integration, expanding the content for their platforms or entering segments of the market. Both trends have intensified during the pandemic. For example, in May 2020, large technology corporations announced 15 acquisitions, six more than in the same month in 2019. The second strategy is illustrated by the increased spending by Apple and Alphabet to provide broadcast services, develop video games, and produce television programs and movies.[3]

Meanwhile, cross-border mergers and acquisitions fell by more than 50 per cent in the first months of 2020 compared to the previous year, as many deals were delayed or cancelled. This drop may reflect not only the uncertainty of the economic landscape, but the reduction in financing for long-term projects in these sectors. The most affected sector was fossil fuels, with a contraction of 80 per cent, followed by transport with 70 per cent; the sector with the fewest cancellations was renewable energies. Some emblematic deals were cancelled, such as the acquisition of Deliveroo (United Kingdom) by Amazon (United States) and that of the state-owned aeronautics company Embraer (Brazil) by Boeing (United States).[4]

Bankruptcy

Another indicator that serves as a gauge of capital movement is bankruptcy filings. During the month of May, 722 businesses in the United States filed for Chapter 11 bankruptcy, 48 per cent more than in 2019.[5] In addition to retail chains, there is a growing list of shale oil and gas producers who, as well as facing falling demand, were unable to withstand the price war between Russia and Saudi Arabia in the first quarter of the year. Companies such as Extraction Oil & Gas, Whiting Petroleum, Chesapeake Energy and 16 other U.S. companies accumulated more than $10.5 billion in debt and had to apply for restructuring through the application of Chapter 11.[6]

Not only are unconventional oil and gas producers suffering the consequences of falling prices and demand, the big oil companies at the top of the international corporate ladder have announced cuts in employment or dividends: Royal Dutch Shell, the third largest corporation in the world according to Fortune, reduced dividend payments to its shareholders by 66 per cent for the first time since World War II and its profits fell 46 per cent in the first quarter; Britain's BP announced the layoff of 10,000 employees around the world in 2020, 15 per cent of its total staff; and ExxonMobil recorded a $610 million loss in the first quarter of the year, or 25 per cent less than in 2019. Despite these results and the plummeting oil prices, the big oil corporations are far from disappearing. Chevron, for example, announced a reduction in its budget for this year from $20 billion to $14 billion to safeguard shareholder dividends; ExxonMobil and BP also indicated that they would maintain dividends during the first quarter.

In contrast, the pandemic has accelerated the slide of large technology corporations into the centre of the economic dynamics. The S&P 500 index shows the stock market dynamism of the most important companies in the United States. Data as of June 16 indicate that more than 20 per cent of total capitalization is explained by five corporations: Microsoft, Apple, Amazon, Facebook and Alphabet. Amazon, the e-commerce giant, increased its revenues by 26.4 per cent in the first quarter of the year thanks to increased retail sales and its cloud processing and storage services (Amazon Web Services), despite growth in operating expenses and salaries. Microsoft, Alphabet and Facebook also recorded increased revenues in Q1 2020 due to increased demand for digital services (cloud storage, entertainment and video conferencing and video calling).[7] Undoubtedly, the risk of a resurgence of the pandemic could strengthen the dominant position of technology and digital companies as global consumers adopt e-commerce solutions.

Clearly, the crisis attributed to COVID-19 is not a general one: there are clear winners, such as the large technology corporations; and clear losers, such as the energy, transport and small business sectors. But it is also clear that there are winners among the losers, such as the large oil companies which, despite the setback, can benefit from the bankruptcy of their smaller competitors. As The Economist[8] points out, the big champions of the pandemic will be able, thanks to their liquidity and high profit margins, to increase their investments or absorb their competitors, which will configure an economy with larger, more technological and more internationalized corporations.

Sandy E. Ramírez Gutiérrez is a member of the Latin American Observatory of Geopolitics (OLAG) at the Institute of Economic Research at the National Autonomous University of Mexico (UNAM).

Note

(America Latina en Movimiento, July 22, 2020. Translated from original Spanish by TML.)

This article was published in

Volume 50 Number 33 - September 5, 2020

Article Link:
Concentration of Capital Under the Pandemic - Sandy E. Ramírez Gutiérrez

    

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