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Sunday, February 13, 2011

Kleptocrats, Oligarchs, and Billionaire Entrepreneurs (In this Game Mubarak Is a Piker)

Kleptocrats, Oligarchs, and Billionaire Entrepreneurs (In this Game Mubarak Is a Piker)

Personal wealth is created in one of two ways. On the positive side, it arises as a result of innovation, hard work, brilliant insights, or even luck. Entrepreneurs create enormous wealth when they have a better idea (Henry Ford’s assembly line), discover and develop new products (Microsoft Windows or Google’s search engine), see a new business model (Sam Walton), or are simply at the right place at the right time. Often, it is a combination of innovation and timing, something economists call network externalities.

A second and negative route to personal wealth is through political connections, lobbying to obtain benefits from the state, violence to remove competitors, or outright theft of public resources. Those who earn their fortunes the first way create jobs, raise productivity, and contribute to economic welfare. Those who use the second route are “rent seekers” who subtract from growth and welfare for their own benefit.

Bill Gates, Sam Walton, and Sergei Brin represent wealth earned through entrepreneurship. Their Microsoft, Walmart, and Google made them not only among the richest persons in the world. They have created new technologies, hundreds of thousands of jobs, new business models, and have revolutionized they way we gather and process information. Carlos Slim, the world’s wealthiest man, made his fortune by monopolizing Mexico’s telecommunications market (presumably with help from government regulators). Poor Mexicans have been denied the wide range of choice of telephone services that others have and pay for his wealth in the form of the highest telephone rates on the continent.

The most egregious rent seeking occurs in autocratic and dictatorial regimes in which wealth accumulation is not constrained by an electorate, corporate transparency, or a free press. Such authoritarian regimes breed kleptocrats –those who accumulate wealth for themselves through their official positions. Oligarchs are those who use their access to those in power to accumulate wealth. Both kleptocrats and oligarchs transfer assets from society or from others to themselves; they do not create new products or additional jobs. They reduce economic welfare by crowding out real entrepreneurs, who refrain from economic activity knowing the fruits of their labor will be stolen. Kleptocracy and oligarchy are determined by the quality of society’s institutions and rule of law. The better the institutions, the more limited kleptocracy and oligarchy.

I present here some data on the world’s kleptocrats, oligarchs, and top entrepreneurs. The wealth of kleptocrats cannot be measured with any degree of precision because, as heads of state or government officials, they wish to conceal it. However, the figures capture rough orders of magnitude. Oligarchs, not being government heads or officials, are less prone to conceal their wealth. They may even feel a sense of pride when they see their names listed in Forbes.

I begin with a ranking of kleptocrat heads of state by absolute wealth. (I convert the wealth of past kleptocrats into current dollars). Four of the top six rule (or ruled) countries with rich natural resources (Putin, Nazarbaev, Aliev, Mobutu), such as energy or diamonds. The real “oil curse” is therefore the tendency of the rulers of mineral-rich countries to steal the national wealth. Other kleptocrats controlled poor countries lacking access to rich natural resources. The recently deposed Mubarak (whose personal wealth is listed at the maximum estimate) is in the middle range of notable kleptocrats. Of the eleven countries represented, four (Philippines, Indonesia, Nicaragua, and Peru) have subsequently democratized, although Nicaragua’s democracy may be shaky. Democracy strikes at the root causes of kleptocracy by making the rulers accountable to an electorate and investigative journalists.

Ruler(ranked top to bottom)Year  Wealth (bl. 2010 $)
Putin (Russia)2011  40
Suharto (Indonesia)1998   25
Nazarbaev Kazakhstan)2011  20
Marcos (Philippines)1986  7.5
Aliev (Azerbaijan)2011  10
Mobutu (Congo, Zaire)1997  5
Mubarak (Egypt)2011  5
Abacha (Nigeria)1998  3.5
Milosevich (Serbia)2000  1
Duvalier (Haiti)1986  0.55
Fujimori (Peru)2000  0.6
Alemain (Nicaragua)2002  0.1
Estrada (Philippines)2001  0.08

Heads of state who steal from less populous countries (Serbia, Haiti, and Nicaragua) accumulate less wealth ceteris paribus than those in populous economies (Russia, Indonesia and Nigeria). The grazing ground for kleptocrats is less spacious in poor countries than in rich countries. The percentage of the kleptocrat’s wealth to GDP is a measure of the kleptocrat-head-of-state’s s burden on society. This table shows that Mobutu, at the end of his reign in Congo, had accumulated wealth equal to more than forty percent of the nation’s meager output. Duvalier had accumulated an estimated ten percent – a figure comparable to the Central Asian oil magnates of Kazakhstan and Azerbaijan. Marcos and Suharto are in the three to four percent range, whereas Putin and Milosevic are in the one to two percent range.

Ranked top to bottomYear  Percent of GDP
Mobutu (Congo, Zaire)1997  0.4202
Aliev (Azerbaijan)2011  0.1111
Nazarbaev (Kazakhstan)2011  0.1036
Duvalier (Haiti)1986  0.1000
Marcos (Philippines)1986  0.0429
Suharto (Indonesia)1998  0.0331
Putin (Russia)2011  0.0180
Milosevich (Serbia)2000  0.0165
Abacha (Nigeria)1998  0.0127
Mubarak (Egypt)2011  0.0100
Alemain (Nicaragua)2002   0.0073
Fujimori (Peru)2000  0.0029
Estrada (Philippines)2001  0.0003

It should be noted that these figures show the economic burden imposed only by the head of state. Heads of state have their courts, which share in the plunder of resources. The court’s assets are not calculable, but we imagine that, if they could be included as well, the kleptocratic burden would be multiplied many times over.

The next table shows the cumulated wealth of the ten wealthiest persons in industrialized democracies (the United States, the European Union, and South Korea), in two former Soviet states (Russia and Ukraine), Mexico and in China. These figures omit the wealth of the head of state.

The table shows that the top ten have more wealth in the large and wealthy United States and European Union (between 170 and 270 billion). Relatively poor Mexico and Russia both have nearly one hundred billion. (There are as many billionaires listed for “poor” Russia as for the “rich” United States – a remarkable testimony to rent seeking in Putin’s Russia.) The top ten in South Korea and Ukraine have the same amount of wealth even though South Korea is five times richer. China lies between Mexico and Ukraine although it has the world’s second largest economy.

Ranked top to bottom  Wealth of Top 10 (bln $)
US  264.8
EU (without UK)  171.5
Russia  97.0
Mexico  90.3
China  42.3
South Korea  21.4
Ukraine  17.7

The US top 10 list is comprised largely of entrepreneurs whose ideas and business methods changed whole industries (Gates, Buffet, Walton, and Brin). The Russian top 10 list is made up of Kremlin-favored oligarchs who were awarded extremely valuable assets that had previously belonged to the state. The South Korean list is populated by industrialists who formed conglomerate businesses that compete in world markets, while the Ukrainian list is made up of those who received valuable state assets during privatization. China’s list is of industrialist owners of successful Chinese companies (most partially owned with the state), who could not have been successful without the support of the Chinese state.

The next table shows the wealth of the top ten as a percent of GDP. In those countries (US, EU, South Korea) where the top wealth holders play primarily entrepreneurial roles, their share is between one and two percent. Viewed in the light of their contribution to the economy, their wealth reward seems rather modest. In Ukraine and Russia, the share of GDP of the top ten is between four and six percent – a rather substantial return to those making a negative or questionable contributions to output and welfare. The high Mexican share is due to the “Carlos Slim Effect.” He alone accounts for most of the high Mexican figure.

Top 10 Persons  Wealth of top 10 as percent of GDP
Ukraine  0.0586
Mexico  0.0583
Russia  0.0437
US  0.0184
South Korea  0.0147
EU (without UK)  0.0113
China  0.0042

China is an outlier. The wealth of its richest persons is small relative to the size of the Chinese economy. What this suggests is that there are forces at play, other than the usual constraints imposed by democracy and a free press, that have limited rapacious rent seeking on the part of connected Chinese businessmen . At this juncture, we do not know enough about the internal workings of large Chinese businesses to define the entrepreneurial roles played by their chief executives. These constraints on rent seeking in China may be one of the many (still unexplored) reasons for China’s rapid growth.

The basic message of this analysis is that, in countries with good institutions, generous wealth accumulation is a reward for positive contributions to the economy. These are rewards for innovation, radically new ideas, persistence, and risk taking. In societies with good institutions, the rewards are relatively modest as a percent of total economic activity. These rewards are constrained by competition, social morays, and the rule of law. In countries with poor institution, wealth is accumulated either by the head of state or by oligarch cronies by transferring assets from others or from society itself. Such transfers not only do not increase national wealth; they reduce it insofar as real entrepreneurs cannot prosper in such an environment.

We are often reminded of the greed of those at the top. Little attention is devoted to the contributions of those entrepreneurs whose ideas and methods have contributed to economic growth. Walmart, Microsoft and Google currently employ 2.1 million, 93,000, and 22,000 respectively. The indirect employment they create through suppliers, vendors and other stakeholders is a multiple of these figures. Their annual payrolls equal a large fraction of the accumulated wealth of their founders.

Warnings about the growing concentration of wealth at the very top must be considered in proportion to the size of economic activity, whose increase is in fact positively affected by those at the top. Today, the top ten account for less than two percent of GDP in the United States. At the turn of the twentieth century, the top ten accounted for more than five percent! In a ranking of the 100 top wealth holders from the founding of the United States to the present (as a percent of GDP), only five living persons are listed, and Gates and Buffet are ranked only numbers 31 and 39 respectively.

Data sources: This data is drawn from Forbes rankings of the world’s richest people, from estimates of Transparency International, and independent estimates of the wealth of Vladimir Putin and informal estimates of the wealth of Nazarbaev of Kazakhstan and the Aliev family of Azerbaijan. The wealth of other kleptocrats is given as of the date of their removal from power converted into 2010 US dollars. The top five Ukrainian oligarchs are taken from Only five Ukrainian oligarchs made the billionaire list; so I assume there are five more slightly below one billion. Mubarak’s wealth is taken from an ABC News report of February 11, 2011 citing U.S. intelligence sources. These sources dismiss the high figures cited in the press and place Mubarak’s wealth between $1 and $5 billion. I take the upper figure to avoid underestimation. The wealthiest 100 Americans throughout history is taken from

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