Why plutocracy endangers emerging market economies. Looks like they area reading Elmat.
But they've got it wrong. One thing is Robber Barons:
They are healthy developments of capitalism.
Being Carnegie, J.P Morgan, Rockfeller Li Ka Ching or Salinas.
Plutocracy is a totally different thing. Plutocracy is the amalgamation of money-government whwre you no,longer can discern what is the w ealthy and waht's government.
Why plutocracy endangers emerging market economies.
By Martin Wolf
Why plutocracy endangers emerging market economies
Published: November 6 2007 19:56 | Last updated: November 7 2007 08:32
Mexico’s Carlos Slim is now the richest man in the world, or so Fortune magazine has told us. His ascension is fascinating. This is not only because he is extraordinarily rich. It is also because the manner in which he has accumulated his wealth tells us much about the capitalism that is spreading across the globe.
Estimated at $59bn, Mr Slim’s fortune is equal to 6.6 per cent of Mexico’s gross domestic product. Bill Gates, in contrast, at about $56bn, is worth a mere 0.4 per cent of US GDP. Even at its peak John D. Rockefeller’s wealth was less than 2 per cent of US GDP. The richest person in the US would need $900bn to possess the same wealth, relative to US GDP, as Mr Slim does relative to Mexico’s.
Does this extraordinary accumulation of wealth in a single man’s hands matter? One reason someone might think so is that it implies extraordinary inequality. If, for example, one assumed a real return of 6 per cent a year, the Slim family’s permanent income would be $3.6bn a year. On World Bank figures, the average income of Mexico’s poorest 10 per cent was $1,200 per head in 2005. So the Slim family’s permanent income equals the current incomes of 3m of Mexico’s poorest people. I am no egalitarian. But this surely needs some justification.
Furthermore, vast concentrations of wealth are sure to have political consequences, inciting corruption and populism. Thus, it seems sure to weaken both the legitimacy and effectiveness of fragile democracies.
These dangers are evident. But one can counter that the drive to accumulate wealth is the spur to entrepreneurship. It matters, therefore, how far wealth is generated in competitive as opposed to relatively protected markets.
How, then, did Mr Slim make his fortune? A part of the answer is that he is a businessman with an eye for opportunity. What, however, was his most important opportunity? In Mr Slim’s case, the gold-mine was Teléfonos de México, or Telmex, in which he obtained a controlling stake from the government in 1990.
Telmex has proved to be a licence to print money, a description once used of ITV, the UK’s first commercial television station. When privatised, Telmex was given what amounts to six years of exclusivity. Moreover, as Brian Winter of USA Today points out, Telmex still controls 92 per cent of the country’s fixed-line market.* According to the Organisation for Economic Co-operation and Development, Mexico has some of the highest telephone charges among its members, both for fixed lines and mobile telephony. Mr Winter reports that voice-over-internet providers, Vonage and Skype, have accused Telmex of intentionally blocking access to their sites, to protect its long-distance services.
Telmex denies these charges. But two points are clear: Telmex is an extremely profitable privatised quasi-monopoly; and Mr Slim’s ownership has catapulted him from being rich to enormously wealthy. No British government could have allowed an individual to become so rich from a single privatisation.
Thirty nine of the 100 richest people in the world, according to Forbes, are Americans. Interestingly, the fortunes of all these people together amount to only 4.5 per cent of US GDP and, so, to relatively less than Mr Slim’s in Mexico. These American super-rich made (or inherited) their money from many different activities (including technology, media, retail and resorts). But it did come from success in competitive markets. Even where this position is controversial, as in the case of Microsoft, most (though not all) would agree that the company played a useful role in standardising products in a dynamic new industry.
To put the point bluntly, there exist more or less useful ways of making a fortune. The least useful are through political connections; the most useful are in competitive markets. These different ways of becoming very rich correspond broadly to the distinction between “limited access” and “open access” economic and political orders made in a paper co-authored by the Nobel-Laureate Douglass North that I cited earlier this year (“As long as it is trapped, the bear will continue to growl”, February 21 2007).**
Are the vast fortunes being made in emerging economies the result of productive entrepreneurship or of rent-seeking? The answer to this question depends on where the economies are likely to go. The bigger the fortunes made by extracting rent from uncompetitive markets, the greater the resistance to the introduction of fiercer competition and so the weaker competition itself is likely to be. As I learnt in Mexico just over a week ago, knowledgeable observers partly ascribe the country’s weak growth to the lack of robust competition across the economy. Guillermo Ortiz, governor of the central bank, is known to share this view. Mr Winter also notes that investment in information and communications technology is only 3.1 per cent of Mexico’s GDP, against 6.7 per cent in Chile, 6.9 per cent in Brazil and 8.8 per cent in the US.
Thus, Mexico retains many characteristics of a limited access order. Other important emerging economies do, too. As many as 14 of the 100 richest individuals in the world are Russians, with an aggregate wealth equal to 26 per cent of the country’s GDP. After the US, no other country has so many people in this list. So how did they make their money? The answer is that they appropriated much of the wealth of a collapsing superpower.
In his article, Mr Winter worries that “as the core of the global economy shifts to countries with weak rule of law and institutions, connections to government, rather than entrepreneurial skill, are becoming the quickest and most effective route to wealth”. Fortunately, there are many counter-examples, such as Azim Premji of Wipro, the Indian software company. Moreover, even where the origin of the fortune rests in connections, the new owners are likely to use their assets more skilfully than governments. Mr Slim’s Telmex is an example. The Russians’ companies are, too.
Yet concerns remain. A capitalism that generates vast wealth, partly on the back of political connections, and rewards those who resist competition is likely to generate the social and political drawbacks of the system without many of the offsetting gains. Not all capitalisms are created equal. Those who support the market economy must never forget this.
* How Slim Got Huge, Foreign Policy, November/December 2007; ** A Conceptual Framework for Interpreting Recorded Human History, NBER working paper 12795, December 2006, www.nber.org |
