Opinion / Op-Ed Contributors

Billionaires don't necessarily boost growth

By Jan Svejnar (China Daily) Updated: 2015-07-24 07:50

The richest 1 percent will soon hold more than half of the world's wealth, and their share will continue to grow. This raises some key questions: Is a higher number of billionaires in a country a positive, as some might argue? Or is there evidence to suggest it is a negative? Leaving aside moral questions, do billionaires accelerate or slow down a country's economic growth?

If it turns out that having more billionaires does not favor higher GDP growth, then the policy suggestion to reduce wealth concentration at the top moves from a moral argument to one about economic growth and prosperity.

This is the set of questions that I, along with Sutirtha Bagchi of Villanova University, Pennsylvania, have examined. Using data on billionaires published by Forbes magazine, we applied econometric techniques and reached a conclusion that will perplex some and delight others: A greater presence of billionaires in a country actually slows down its economic growth.

Controlling other relevant factors, such as the country's level of income and education, we have shown that countries' economies could grow faster if less money was controlled by the uber-rich. This implies that economies could be more efficient if more money were allocated to others than those at the top of the income and wealth pyramid.

Other key factors to be considered are the sources and nature of inequality. Indonesia and the United Kingdom, for instance, have a similar value of the most widely used indicator of income inequality (the so-called Gini coefficient). But the two countries differ markedly on the role that political connections play in achieving economic success and, as a result, the distribution of income and wealth.

Broadly speaking, billionaires are of two types - those who would not have made it without political connections (that is, political cronies), and those who became billionaires because of their ingenuity, ability to innovate and willingness to take risks (that is, the politically unconnected).

These two types of billionaires may have very different effects on the economic performance of countries. Dividing the world's billionaires into these two categories, one must obviously take special care to assign the "politically connected" category of billionaires only to the most clear-cut cases, such as the oligarchs with connections with former Russian president Boris Yeltsin or the nouveaux riches in Indonesia connected to former president Suharto.

Others, such as those in the vein of Bill Gates and Warren Buffet, do indeed have extra political influence because of their wealth, but their political connections are not the source of their wealth.

We discovered that billionaires' wealth that comes through political connections has a strongly negative effect on economic growth. In contrast, the effect of politically unconnected billionaires' wealth on the overall economy is indistinguishable from zero. This means billionaire cronies constrain economic growth, while billionaires who aren't cronies generally don't do so.

Why are these findings important for the rest of us? They indicate that public policy toward income and wealth distribution needs to take into account the nature of wealth accumulation. They relate directly to the findings of economists like Joseph Stiglitz and Thomas Piketty. They have said that we live in a world where the rich will get richer faster, which has proved true, and that we ought to develop tax policies that prevent the poor from becoming ever poorer.

The implications for countries such as the United States where political cronyism plays only a minor role in wealth accumulation are no less spellbinding.

Americans, in particular, have been taught to think that billionaires have a positive effect on the economy. Why? Because they are "exceptional" people who have proved that they can accomplish great things.

The key finding that, on average, they have an insignificant effect on growth prospects, even in the case of the politically unconnected, represents a huge negative surprise for the boosters of the billionaire class.

The author is director of Center on Global Economic Governance at Columbia University./The Globalist

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