Bad billionaires are the sour cream rising to the top of corrupt societies. It is possible to sound out which societies are most corrupt using the annual surveys conducted by Transparency International, which asks frequent travellers to rate countries from zero (perfectly clean) to 100 (completely corrupt).
Since corruption is typically most severe among the poorest countries and tends to decline as countries grow richer, the best way to judge the level of corruption in a country is by comparing it to nations with similar average income.
A 2012 study by Renaissance Capital found that fifteen countries, including Poland, Britain, and Singapore, are less corrupt than their peers, with TI scores 10 to 20 points lower than the average for their income level. Another six countries, including Chile and Rwanda, are much less corrupt than their peers, with TI scores 20 to 30 points lower than the average for countries at their income levels.
On the darker side, twenty-five countries, led by Russia and Saudi Arabia, are more corrupt than normal for their income level, and unsurprisingly, these countries tend to be dominated by rent-seeking industries, particularly oil. Of the twenty-five countries that ranked as more corrupt than the average for their per capita income category, eighteen are oil exporters.
That does not mean all oil tycoons are bad billionaires, but it does confirm that oil states tend to be havens for bad billionaires.
A strong link also exists between high levels of corruption and high levels of inequality, both of which can kill growth. Bad billionaires often seek to accrue an ever-greater share of the national wealth, and they thrive on rising corruption.
Ned Davis Research has shown that countries that rank worst among their peers on the TI corruption surveys, such as Venezuela, Russia, Egypt, and Mexico, tend also to be the most unequal. Countries that rank best on the corruption surveys, including South Korea, Hungary, Poland, and the Czech Republic, are typically more equal than their peers.
Furthermore, inequality is strongly linked to corruption found in the black economy, where owners conduct their business in cash and off the books, to evade taxes. Researchers at the Organization for Economic Cooperation and Development have found that countries with large black economies also tend to be the most unequal and that this is no accident.
Jobs in the black economy are often poorly paid, with no benefits, on dead-end career paths.
Bad billionaires are the kings of this shady realm, which is large.
It accounts for 8 percent of GDP in the United States and over 10 percent of GDP in many European countries, including Britain, Germany, and France. The black economy is also more than 25 percent of GDP in a range of developed and emerging countries, from Italy and Poland to Mexico and Turkey. At the extreme, it comprises more than 35 percent of GDP in five emerging nations: Brazil, the Philippines, Russia, Thailand, and Peru.
Large black economies can breed social resentment, since the art of dodging taxes is often most refined among the rich. In India, the government manages to collect income taxes equal to only 3 percent of GDP, and the size of the black economy is estimated to account for around 30 percent of GDP.
This is one reason India suffers from chronic government deficits. The culture of avoiding taxes starts at the top: In a vast population with more than 250,000 millionaires, only 42,000 individuals report incomes of $150,000 or more, as economist Tushar Poddar has pointed out. He argues that tax dodging at the top creates a strong disincentive for any Indian citizen to pay up, in turn perpetuating tax evasion.
The habits of the billionaire class matter greatly because they tend to set the tone for the wider business culture.
In India, many of the top tycoons command sprawling empires that often include at least one but often all four of the following businesses: a local hospital, a school, a hotel, and a local newspaper. One of India’s top newspaper publishers recently pointed out to me that this rule of four now often holds true even for local kingpins in relatively small towns.
The reason is simple. Most people understand it is wrong to take cash bribes, but few in India see much of a problem in accepting gifts in kind, even one as valuable as free medical treatment for a family member, free schooling for a child, free hotel banquet facilities for a niece’s wedding, or favourable coverage for one’s business or political ambitions in the local rag.
These ancillary businesses are seen as unprofitable but necessary investments for cultivating contacts among politicians and bureaucrats, who often repay their benefactors by granting special licences or other favours. Backdoor deals of this kind entrench the power of insiders and increase inequality, while funnelling money into unproductive industries.
India has a bewildering array of publications, most too small to be economically viable. Of more than 13,000 dailies and 86,000 magazines, fewer than forty have more than 100,000 readers. Bad billionaires may not own most of these publications, but they set the tone of a business culture in which it is seen as quite routine to own a newspaper for the purpose of peddling influence.
Governments that can’t control or tax their dodgy tycoons are also hamstrung in their ability to invest in ways that help address inequality, such as building roads and airports. In short, bad billionaires tend to feed a vicious cycle of corruption, rising inequality, and slow growth.
The Rise of the Billionaire Rule
The billionaire rule is growing in importance, because inequality has been rising all over the world, from the United States and Britain to China and India, due mainly to massive gains for the very rich. While in many nations all income classes are making gains, the rich are gaining much faster than the poor and the middle classes. Income and wealth gaps are growing, even as the number of people living in poverty falls, and the global middle class is expanding in size.
As a result, the poor are more likely to rub shoulders with the middle class, and both are more likely to live in the shadows cast by a fast-growing global billionaire class. Inequality and the tensions it can cause are rising in importance as a political issue and threat to growth.
I am wary of countries where crony capitalism and bad billionaires are on the rise because they can reflect a deeper dysfunction: a business culture in which entrepreneurs become brazen after a run of success, a political culture in which officials grow complacent after a long period in power, a system in which cumbersome or nonexistent rules virtually invite corrupt behavior.
I am also on the lookout for positive turns in countries that are responding to growing inequities by repairing the system: for example, by writing land acquisition laws that fairly balance the interests of farmers and developers, or holding auctions for public goods like oil fields or wireless spectrum in a transparent manner that rules out backroom deals.
Mexico’s auction in 2015 to sell offshore oil rights was considered underwhelming because it drew relatively low bids, but it was a success for the system because it was conducted live on national TV, which made crony dealmaking unlikely, if not impossible. In this kind of changing environment, which can be detected only by observation and not in data, good billionaires can rise and help trigger a process of wealth creation that spreads its fruits more broadly.
The billionaire class is a useful bellwether for the economy as a whole.
As the number of billionaires rises, the data are getting more significant over time, as a statistical sample and an analytical tool for spotting countries where the balance of wealth is skewing too sharply to the super rich. Measuring changes in the scale, rate of turnover, and sources of billionaire wealth can help to provide some insight into whether an economy is creating the kind of productive wealth that will help it grow in the future.
It’s a bad sign if the billionaire class owns a bloated share of the economy, becomes an entrenched and inbred elite, and produces its wealth mainly 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 economic pie.Excerpted with permission from The Rise and Fall of Nations, Ruchir Sharma, Penguin Books.
Ruchir Sharma is one of the world’s largest investors and has been a newspaper columnist since he was 17. His book Breakout Nations: In Pursuit of the Next Economic Miracles (2012) foretold the slowdown in the BRIC economies of Brazil, Russia, India and China.