Billionaires part 2: The Bad

By | August 29, 2016

Too many billionaires? That can be bad: Ruchir Sharma is an investment strategist for Morgan Stanley who focuses on emerging markets. He uses a 10 point system to evaluate the investment-worthiness of countries, and the billionaire index is one of them. He makes a simple but logical macro-economic argument against having a large % of a country’s wealth tied up in two few hands.  Sharma’s Rise and Fall of Nations here (affiliate link).

Too often, this billionaire class are a stagnant elite – stifling innovation, perpetuating the status quo, and breeding populist resentment. Sound like a country you know? If you are a wealthy elite, the selfish refrain might be: “Life is good. Why rock the boat when there is no competition?”  It sounds medieval or dynastic – but frankly, still exists in most of the world.

And there are “bad” billionaires. Beyond the obvious stereotype of a third-world dictator who is plundering his (usually men) country’s natural resources for selfish profit, there are other kinds. Those who set up monopolies. Those who merely gift their wealth generation-to-generation without putting it to productive use. Those who just sit on their money – not making productive use of the capital.

1) Rent seekers. This is a strange phrase which sounds like something out of craigslist, but the economic concept is simple – getting an economic gain without producing any “reciprocating” value or wealth for society. This is often done by lobbying the government for tax breaks, legal maneuvering, or worse, straight corruption. B.A.D.

For me, the easiest examples are dictators who steal shamelessly from their country’s coffers while their country’s people suffer (think: Zimbabwe’s Mugabe). Also, the few dozen Russian oligarchs who went from $0 to billionaires as they snatched up rights to most of Russia’s wealth during the flawed liberalization of the ex-Soviet Union. “Nearly 70% of Russian billionaire wealth comes from politically connected industries, by far the largest share in the world.” (pg. 114)

Corruption-prone industries. Some industries have been “long-associated with corruption” where there is enormous rent-seeking behavior, where a few people – by luck, by government connections, or by violence – are able to get rich with limited benefit to workers, the environment, or society. Sharma notes that corruption-prone industries include, “construction, real estate, gaming, mining, steel, aluminum and other metals, oil, gas, and commodity industries that mainly involve digging natural resources out of the ground.” (pg 110) You get the point. Bad billionaires will spend more effort on winning over politicians, and tweaking the regulations to favor their monopolies than serving customers.  It’s lazy capital – not earned.

Peter Thiel – billionaire himself – notes that in the global Fortune list of people with $10+ billion, there are twice as many people from mining resources than technology, implying a lack of real wealth creation because “commodities are inelastic goods, and farmers make a fortune when there is a famine.”  (Strong Economist rebuttal to Thiel here arguing that enormous technology and innovation is need for commodity industries in mature markets; think Schlumberger etc. . .)

Note from comments: “You did not include banking, insurance, arms manufacturing, and government.” (hat tip: Toby)

2) Inherited wealth. When you see the list of billionaires – you will often see several 2nd, 3rd, 4th generational names of the wealthy elite. “Yes, their grandfather made his wealth, but what have they done?” Are they just collecting dividends? 

So what do emerging market billionaires look like? This table comes from Sharma’s The Rise and Fall of Nations here (affiliate link), where he looks at A) Billionaire wealth as a % of total economy B) Bad Billionaires c) Inherited Wealth.

  • A: India, Mexico, and Taiwan have a lot of their wealthy tied up in a few billionaires
  • B: India, Mexico, Poland, and Russia have a lot of billionaires from industries typically associated with corruption
  • C: Brazil, India, Indonesia, South Korea, Taiwan, and Turkey have a lot of “old” money being passed down

Consultantsmind - Emerging Markets Billionaires

Free market without lazy capital. In the end, each of these countries have a mix of good / bad / inherited billionaires. Not all billionaires who inherit wealth are bad (e.g., Hyundai continues to invest in good cars, IKEA still does great things with affordable, stylish, affordable furniture). Yet, Sharma’s main thesis still holds true. A progressive economy where new competitors can BECOME wealthy by creating new value  through technology and business models  (vs. stealing rents) indicates a more vibrant, resilient, and healthy society. Probably makes for a good and more stable investment too.

It’s an argument for free-market capitalism with an eye towards limiting lazy capital (digging oil out of the ground or inheriting it from your mom). It’s an argument to competition and technology – developing new products and services that improve the world. In the GDP = C+I+G+NX formula, let’s focus on the I (Investing) in the future. . . not C (Consuming) stuff now.

Things don’t matter.  This is a bit of a more philosophical point. We are all going to be on the earth for 80-100 years. Fin. What you do with your wealth is a matter of stewardship. It’s not the money, but what you do with it. From the last post about good billionaires. . .here is a Richard Branson quote (Virgin Group) from the Giving Pledge website here.

Fortunately, early on in my life I realised that personal ‘stuff’ really didn’t matter. Joan and I lived on a houseboat and one day it sank. We realised that we missed nothing except our treasured photo albums. Later our house in London caught fire, destroying everything inside. Last year our home in the British Virgin Islands was completely gutted as a result of a lightning strike. We were so relieved that everyone got out safely that even the loss of photo albums and notebooks were of little consequence. ‘

Stuff’ really is not what brings happiness. Family, friends, good health and the satisfaction that comes from making a positive difference are what really matters.  – Richard Branson, founder of Virgin 

Practice being rich. Andy Stanley, pastor of North Point Church, tells people to practice being rich. Don’t wait until you are rich to be generous and thoughtful with money. Start stewarding your wealth now. Practice being rich. For any billionaire blog readers, this applies to you too.

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4 thoughts on “Billionaires part 2: The Bad

  1. Simon Teale

    Thanks for this small series of blogs. Very interesting research.

    Certainly in the UK i would like to see hikes in inheritance tax (with fewer loopholes) and cuts in VAT (consumption / sales) and income tax.

    Reply
    1. consultantsmindadmin Post author

      Thanks for reading. For me, probably have a slightly different view on taxes. Less income tax definitely. Higher consumption tax (has to be paired with some subsidy on necessities for lower income folks).

      Inheritance tax would not necessarily increase. . but do think culturally, we can make heroes out of the wealthy who do great work (grow their companies, fund charity, set an example). As a libertarian, feel that government over-reaches a lot of the time – also the law on unintended consequences. A leads to B which incentives C which undermines A etc.

      Thanks again for reading.

      Reply
  2. Toby

    Corruption-prone industries – you did not included banking, insurance, arms manufacturing and government.

    Reply
    1. consultantsmindadmin Post author

      So true. So true. Will add in. Thanks for comment.

      Reply

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