Specifically, when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy, the study finds. But when billionaires get their wealth through the market -- through business activities that are not related to the government -- it does not.
This study is important in part because it's one of the first to find a way to study wealth inequality across a big group of countries. Strange as it may seem, economists have a hard time studying wealth, defined as all the assets someone owns minus their debt. A lot of countries around the world don't have good data on wealth, especially over a long period of time. Usually, economists look at income instead, since it's easier to ask someone how much they earned last week than calculate their total debt and assets.
The problem with this approach is that variations in income tend to be much smaller than variations in wealth. Because wealth represents all of someone's income and inheritance built up over time, wealth inequality is almost always a lot greater than income inequality.
To analyze wealth across a big group of countries, Bagchi and Svejnar created a novel measure using a well-known source -- the Forbes magazine annual list of billionaires. In 1982, Forbes began curating a list of the 400 richest Americans, and in 1987 it expanded this list to global billionaires. The authors sum the wealth of all the billionaires on the Forbes list in a given country, and then divide that total by a country's GDP, population or physical capital stock to normalize billionaire wealth for the country's size.
The researchers found that wealth inequality was growing over time: Wealth inequality increased in 17 of the 23 countries they measured between 1987 and 2002, and fell in only six, says Bagchi. They also found that their measure of wealth inequality corresponded with a negative effect on economic growth. In other words, the higher the proportion of billionaire wealth in a country, the slower that country's growth. In contrast, they found that income inequality and poverty had little effect on growth.
The most fascinating finding came from the next step in their research, when they looked at the connection between wealth, growth and political connections.
The researchers argue that past studies have looked at the level of inequality in a country, but not why inequality occurs whether it's a product of structural inequality, like political power or racism, or simply a product of some people or companies faring better than others in the market. For example, Indonesia and the United Kingdom actually score similarly on a common measure of inequality called the Gini coefficient, say the authors. Yet clearly the political and business environments in those countries are very different.
So Bagchi and Svejnar carefully went through the lists of all the Forbes billionaires, and divided them into those who had acquired their wealth due to political connections, and those who had not. This is kind of a slippery slope -- almost all billionaires have probably benefited from government connections at one time or another. But the researchers used a very conservative standard for classifying people as politically connected, only assigning billionaires to this group when it was clear that their wealth was a product of government connections. Just benefiting from a government that was pro-business, like those in Singapore and Hong Kong, wasn't enough. Rather, the researchers were looking for a situation like Indonesia under Suharto, where political connections were usually needed to secure import licenses, or Russia in the mid-90s, when some state employees made fortunes overnight as the state privatised assets.
The researchers found that some countries had a much higher proportion of billionaire wealth that was due to political connections than others did. The data, which ranks only countries that appeared in all four of the Forbes billionaire lists they analysed, shows that Colombia, India, Australia and Indonesia ranked high on the list, while the US and UK ranked very low.
Looking at all the data, the researchers found that Russia, Argentina, Colombia, Malaysia, India, Australia, Indonesia, Thailand, South Korea and Italy had relatively more politically connected wealth. Hong Kong, the Netherlands, Singapore, Sweden, Switzerland and the UK all had zero politically-connected billionaires. The US also had very low levels of politically connected wealth inequality, falling just outside the top 10 at number 11.
When the researchers compared these figures to economic growth, the findings were clear: These politically connected billionaires weighed on economic growth. In fact, wealth inequality that came from political connections was responsible for nearly all the negative effect on economic growth that the researchers had observed from wealth inequality overall. Wealth inequality that wasn't due to political connections, income inequality and poverty all had little effect on growth.
"The negative effects of wealth inequality are largely being driven by politically connected wealth inequality. That seems to be the primary channel that drives this relationship," Bagchi said in an interview.
