This is not an easy question . There are good billionaires , but the last decade saw a worldwide rise of bad billionaires. Back in the 1990s, many of the new tycoons were tech entrepreneurs, and those who endured the dotcom crash are still delivering new smart phones, ereaders , cloud computing. They are good billionaires, driven perhaps by greed but also by the kind of genius that creates innovative products and more productive economies. Unfortunately , the 2000s saw the rise of a rawer kind of greed and a class of billionaires who make money by using political connections to corner monopolies or contracts for peddling natural resources.
The reversal is striking. In 2001, the world had 29 billionaires in energy, 75 in technology. By 2011 the numbers had flipped: 91 in energy (mostly oil), and 36 in technology. These new tycoons make money essentially by digging stuff out of the ground, and make a productive contribution only if they inspire rivals to find alternatives to oil. No bubble is a good bubble, but commodity bubbles are the worst, because they cause a lot of pain but leave nothing of value behind.
One way to distinguish good from bad billionaires is by closely reading the lists from Forbes. If holdovers from five or ten years ago dominate the lists, as is in Russia and Mexico, it suggests that the elite are prematurely entrenched. If the top billionaires control too great a share of national wealth—and in Russia they control assets equal to about 20 percent of GDP, the highest share of any major country—it could spark unrest. If billionaire fortunes are relatively small—the average for the top 10 in Korea is just $4 billion, less than half the average in Russia or India—it suggests a more stable balance.
The world capital of the bad billionaires is Russia, with its intense concentration of billionaire wealth in commodities. Eight of the top 10 are holdovers from 2007 list. As of 2011, Russian billionaires obtained 80 percent of their wealth in nonproductive industries, especially oil and gas, the largest share in the world, and 69 of the 100 Russian billionaires lived in Moscow, reflecting their close ties to the state. Russian billionaires are squeezing out the middle class, and the millionaires too. Russia ranks second in the world for the numbers of billionaires, and sixth for individuals worth more than $100 million. It doesn't make the top 15 for millionaires.
In India, the 1990s generation of tech entrepreneurs has increasingly made way on the billionaire list for provincial tycoons who cut political deals to corner unproductive industries like mining or real estate. With no wealth or inheritance taxes, India has long been top heavy with billionaires, but this class is now exploding in worrisome directions. Economists Aditi Gandhi and Michael Walton recently found that 43 percent of India's billionaires and about 60 percent of their total wealth come from "rentthick" industries like real estate or construction that enjoy abnor mally high profits.
India's business scene is drawing comparison to the robber baron era in the United States, while the desirable model is closer to America today. More established fortunes are normal in a more mature economy, but billionaire wealth now represents only 11 percent of US GDP, or about the emerging market average. The deepest fortunes are in productive companies (Microsoft, Berkshire Hathaway, Walmart) that would make any economy more competitive.
Bad billionaires are also rising faster in India than in China, which has more balance and competition at the top. The average wealth of the top 10 Indian billionaires is about $11 billion, nearly double the Chinese average of $6 billion. In India , billionaires hold assets equal to 11 percent of GDP, compared to 3 percent in China. Eight of the top-ten Indian billionaires on the latest Forbes list are holdovers from the 2007 list, while only two of China's top 10 are holdovers.
China also has a stronger middle tier. The latest CS Global Wealth recently found that while China has a relatively small share of families in the top and bottom 10 percent of the global income distribution, it has a disproportionally large share in the upper middle class (the top 50 to 90 percent ). Meanwhile India is overrepresented at the top and bottom, but underrepresented in the middle.
The strength of the billionaire class in India is due in part to the incomplete reform agenda, which makes it hard for new challengers to arise. Today India sits near the bottom of World Bank rankings of 183 countries by ease of starting a business (166), or ease of obtaining a construction permit (181). These obstacles are chasing big business overseas , and preventing small businesses from getting off the ground. A recent HBS report shows that industries dominated by state or traditional private enterprises before the 1990s reforms are still dominated by the same firms today.
The billionaire lists are likely to grow more useful as the sample for emerging markets, many of which had few tycoons even 15 years ago, increases. It's clear what to look for: Billionaires should face competition that limits their control of the economy, that promotes turnover at the top, and that generates wealth in industries that are productive, not politically connected. Competition helps keep in check the dark side of greed and the rise of bad billionaires, who are the most powerful enemies of capitalism. (Ruchir Sharma is head and emerging markets and global macro at Morgan Stanley Investment Management and the author of the bestseller 'Breakout Nations' . He will be the closing speaker at the Times of India Literary Carnival , at Mehboob Studios, at 5.30pm on December 9.)
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