2018-11-20 23:25:18 UTC
Is having individual billionaires good or bad for a country's economy?
Economists differ over whether or not having a wealthy elite is good for
the general economy
Saturday 22 August 2015 18:18
Over the past few decades, wealth has become more concentrated in the
hands of a few global elite ( Paul Morigi/Getty Images for FORTUNE )
Over the past few decades, wealth has become more concentrated in the
hands of a few global elite. Billionaires like Microsoft founder Bill
Gates, Mexican business magnate Carlos Slim Helú and investing
phenomenon Warren Buffett play an outsized role in the global economy.
But what does that mean for everyone else? Is the concentration of
wealth in the hands of a select group a good thing or a bad thing for
the rest of us?
You might be used to hearing criticisms of inequality, but economists
actually debate this point. Some argue that inequality can propel
growth: They say that since the rich are able to save the most, they can
actually afford to finance more business activity, or that the kinds of
taxes and redistributive programs that are typically used to spread out
wealth are inefficient.
Other economists argue that inequality is a drag on growth. They say it
prevents the poor from acquiring the collateral necessary to take out
loans to start businesses, or get the education and training necessary
for a dynamic economy. Others say inequality leads to political
instability that can be economically damaging.
A new study that has been accepted by the Journal of Comparative
Economics helps resolve this debate. Using an inventive new way to
measure billionaire wealth, Sutirtha Bagchi of Villanova University and
Jan Svejnar of Columbia University find that it’s not the level of
inequality that matters for growth so much as the reason that inequality
happened in the first place.
Specifically, when billionaires get their wealth because of political
connections, that wealth inequality tends to drag on the broader
economy, the study finds. But when billionaires get their wealth through
the market — through business activities that are not related to the
government — it does not.
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This study is important in part because it’s one of the first to find a
way to study wealth inequality across a big group of countries. Strange
as it may seem, economists have a hard time studying wealth, defined as
all the assets someone owns minus their debt. A lot of countries around
the world don’t have good data on wealth, especially over a long period
of time. Usually, economists look at income instead, since it’s easier
to ask someone how much they earned last week than calculate their total
debt and assets.
The problem with this approach is that variations in income tend to be
much smaller than variations in wealth. Because wealth represents all of
someone’s income and inheritance built up over time, wealth inequality
is almost always a lot greater than income inequality.
In order to analyze wealth across a big group of countries, Bagchi and
Svejnar created a novel measure using a well-known source — the Forbes
magazine annual list of billionaires. In 1982, Forbes began curating a
list of the 400 richest Americans, and in 1987 it expanded this list to
global billionaires. The authors sum the wealth of all the billionaires
on the Forbes list in a given country, and then divide that total by a
country’s GDP, population or physical capital stock to normalize
billionaire wealth for the country’s size.
The researchers found that wealth inequality was growing over time:
Wealth inequality increased in 17 of the 23 countries they measured
between 1987 and 2002, and fell in only six, Bagchi says. They also
found that their measure of wealth inequality corresponded with a
negative effect on economic growth. In other words, the higher the
proportion of billionaire wealth in a country, the slower that country’s
growth. In contrast, they found that income inequality and poverty had
little effect on growth.
The most fascinating finding came from the next step in their research,
when they looked at the connection between wealth, growth and political
The researchers argue that past studies have looked at the level of
inequality in a country, but not why inequality occurs — whether it's a
product of structural inequality, like political power or racism, or
simply a product of some people or companies faring better than others
in the market. For example, Indonesia and the United Kingdom actually
score similarly on a common measure of inequality called the Gini
coefficient, say the authors. Yet clearly the political and business
environments in those countries are very different.
So Bagchi and Svejnar carefully went through the lists of all the Forbes
billionaires, and divided them into those who had acquired their wealth
due to political connections, and those who had not. This is kind of a
slippery slope — almost all billionaires have probably benefited from
government connections at one time or another. But the researchers used
a very conservative standard for classifying people as politically
connected, only assigning billionaires to this group when it was clear
that their wealth was a product of government connections. Just
benefiting from a government that was pro-business, like those in
Singapore and Hong Kong, wasn’t enough. Rather, the researchers were
looking for a situation like Indonesia under Suharto, where political
connections were usually needed to secure import licenses, or Russia in
the mid-1990s, when some state employees made fortunes overnight as the
state privatized assets.
The researchers found that some countries had a much higher proportion
of billionaire wealth that was due to political connections than others
did. As the graph below, which ranks only countries that appeared in all
four of the Forbes billionaire lists they analyzed, shows, Colombia,
India, Australia and Indonesia ranked high on the list, while the U.S.
and U.K. ranked very low.
How much wealth comes from political connections?
A new measure of wealth inequality adds together the wealth of all the
billionaires in a country and divides that by the country’s GDP. The
figures below show what percentage of that wealth is due to political
Data is for countries with billionaires appearing in the Forbes magazine
annual list of billionaires in each of the years studied (1987, 1992,
Looking at all the data, the researchers found that Russia, Argentina,
Colombia, Malaysia, India, Australia, Indonesia, Thailand, South Korea
and Italy had relatively more politically connected wealth. Hong Kong,
the Netherlands, Singapore, Sweden, Switzerland and the U.K. all had
zero politically connected billionaires. The U.S. also had very low
levels of politically connected wealth inequality, falling just outside
the top 10 at number 11.
When the researchers compared these figures to economic growth, the
findings were clear: These politically connected billionaires weighed on
economic growth. In fact, wealth inequality that came from political
connections was responsible for nearly all the negative effect on
economic growth that the researchers had observed from wealth inequality
overall. Wealth inequality that wasn't due to political connections,
income inequality and poverty all had little effect on growth.
“The negative effects of wealth inequality are largely being driven by
politically connected wealth inequality. That seems to be the primary
channel that drives this relationship,” Bagchi said in an interview.
The researchers estimate that a 3.72 percent increase in the level of
wealth inequality would cost a country about half a percent of real GDP
per capita growth. That's a big impact, given that average GDP growth is
in the neighborhood of two percent per year, Bagchi said.
Why is politically connected wealth inequality so bad for a country? The
researchers suggest that when wealth and power becomes concentrated in
the hands of a few, those business and political elites often influence
government policy in a way that hurts the broader interest.
For example, politically connected business elites can charge consumers
higher prices for services, control access to bank loans and other
funding, and prevent outsiders from starting competing businesses. “One
of the things that shocked us is that once the billionaires had a
significant amount of wealth, they would often take steps to try to
limit the amount of competition,” Bagchi said.
Bagchi points to the example of Carlos Slim Helú, a Mexican billionaire
who started in telecommunications. Slim made his fortune when Mexico
privatized its telecom sector, and sold a chunk of it to Slim's company
at a cheap price. The Mexican government did this with the expectation
that Slim's Grupo Carso would reduce its prices and expand coverage,
says Bagchi. “That really didn’t pan out."
Today, prices for telecom services continue to be significantly higher
in Mexico than in other countries, and investment in the sector is
lower. And Slim has used the wealth he gained from telecom to expand
into other sectors of the economy.
Bagchi cites Russia's oligarchs as another example. Russia did not have
any billionaires on the Forbes list until the 1990s, when the country
began to privatize state-owned oil and gas companies. Certain government
employees “were in the right place at the right time, and they acquired
control of these natural resource companies at bargain-basement prices,”
For example, the study mentions Russian billionaire Mikhail Fridman, who
financed Boris Yeltsin’s re-election campaign in 1996 and was able to
buy state-owned oil and metals companies at very cheap prices, the Wall
Street Journal reported in 2001. Over the next 20 years, crony
capitalism made Russian society more unequal and reduced its economic
potential, Bagchi says.
According to Bagchi, one takeaway of the research is that developing
countries should limit how much businesses have to interact with the
state to get things done — those interactions rarely turn out well for
average people. The other lesson is that it's not just inequality, but
the source of inequality that really matters.
While the U.S. scored relatively well in this ranking, it's worth asking
how the connection between wealth and politics might have changed since
2002, the last year that the researchers studied. Post-financial crisis
bailouts and the rise of Super PACs that can raise unlimited money may
be creating a closer connection between the wealthy and the politically
powerful than ever — perhaps with negative implications for economic growth.
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