Good billionaires, bad billionaires

Among the many books written about the global economy today, one of the most insightful is THE RISE and FALL of NATIONS: Forces of Change in the Post-Crisis World by Ruchir Sharma. The author is chief global strategist at one of the world’s largest banks. In his book Sharma narrows the thousands of factors that can shape a country’s fortunes to ten clear rules that draw on political headlines, black markets, the price of onions and billionaire rankings to spot political, economic, and social change in real time.

One of the most interesting chapter in the book is titled Good Billionaires, Bad Billionaires: Is inequality threatening growth? It is a very thought provoking chapter and Sharma’s definitions of “good billionaires” and “bad billionaires” are highly controversial. Here is how he defines these terms:

 “Though new faces the billionaires can be a favorable sign for the economy, this holds true only if they are good billionaires emerging outside what economists call “rent seeking industries.” 

These industries include construction, real estate, gambling, mining, steel, aluminium and other metals, oil, gas and other commodity industries that mainly involve digging natural resources out of the ground. The competition in these sectors is often focused on securing access to a greater share of the national wealth in natural resources, not on growing the wealth in fresh, innovative ways. Major players spend a lot of time trying to win over regulators and politicians to secure ownership of limited resources and the right to extract the maximum possible rent from that resources, by bribery if necessary. 

The “bad billionaire” calculation no doubt does a disservice to the many honest real estate and oil tycoons, but even in nations where these industries are clean, they tend to make weak contributions to steady economic growth, either because they are relatively unproductive or because they tie a nation’s growth to the volatile swings of commodity prices. 

The assumption is that the rest of the billionaires make a greater contribution, but I reserve the label “good billionaires” for tycoons’ industries that are known to make the most productive contributions to economic growth or that make popular consumer products like smartphones or cars. These “good industries” include technology, manufacturing, pharmaceuticals, telecoms and retail, e-commerce and entertainment, and they are least likely to generate popular national backlash against wealth creation. 

To be clear, I don’t see the results here as hard data, in the way, for example that credit or investment growth or current account numbers are hard data; reading the billionaire lists in a systematic way serves instead as a loose filter turning up a form of anecdotally telling evidence for whether nations are generating wealth mainly in clean industries that attract public admiration or in dirty industries most likely to stir popular anger.”

Sharma provides some insights on the negative effects of income inequality on an economy. He points out that is a bad sign if the billionaire class owns a bloated share of the economy, becomes an entrenched and inbred elite, and produces its wealth from politically connected industries. A healthy economy needs an evolving cast of productive tycoons, not a fixed cast of corrupt tycoons. Creative destruction drives strong growth in a capitalist society, and because “bad billionaires” have everything to gain from the status quo, they are enemies of wider prosperity and lightning rods for social movements pushing predictable demands for redistributing rather than growing the pie.

Politics and the economy

In his book, Sharma also provides some personal insights about the impact of politics on the prospects for the economy. There are times when a nation must be ready to back a reform government. 

Nations are more likely to accept change for the better when it is struggling to recover from a crisis. Sharma says: “ ...when a country’s back is against the wall, the general public and the political elites are most likely to accept tough economic reform . ..nations are most likely to change for the worse in boom times, when the populace is sinking into complacency, too busy enjoying its good fortune to understand that in a competitive global economy the need to reform is constant.”

 He said that successful leaders share two key attributes. The first is popular support from the masses; and, the second is a clear understanding of economic reform or at least a willingness to delegate power to experts who do get it. In contrast, populist demagogues who artfully combine populism and nationalism can be successful but tend to be a disaster for their countries.

Sharma warns us about the dangers of dictators. Because autocrats face few checks and balances and no opposition at the ballot box, they can veer off in the wrong direction with no one to tell them otherwise, and they can hang on to power indefinitely more often than not with bad results for the economy. Stale leaders tend to do  the most long term economic damage. Nations ruled by autocrats are also much more prone to long economic slumps. 

Sharma believes that the world economy follows the “circle of life’ – a cycle of crisis, reform, boom and decay. Very few developing economies manage to grow fast and long enough to enter the ranks of developed economies. Those who make the leap from developing to developed economy are called the “miracle” economies. 

Creative writing classes for kids/teens and adults

Young Writers’ Hangout for Kids & Teens on November 18, December 2 and December 9 (1:30-3pm/independent sessions). Turning Ideas Into Books  for Adults with Karina Bolasco on November 11, 2017 (1:30pm-4:30pm).  All sessions are at Fully Booked Bonifacio High Street.  For registration and fee details text 0917-6240196 or email [email protected].

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