Caroline Freund

Peterson Institute for

International Economics

February 11, 2016

1

Growth in Extreme Wealth

2

0

1000

2000

3000

4000

5000

1995 2000 2005 2010 2015

World Advanced Economies Emerging Markets

total real net worth, billions 1996 USD

42 percent of World’s billionaires are now from emerging markets.

Given trends, by 2025 more than half will be from the South.

Sources: Forbes World’s Billionaires and World Bank WDI.

Extreme Wealth & Mega Firms

0

5

10

15

20

25

1995 2000 2005 2010 2015

percent

BRIC share of

fortune global

500BRIC share of

billionaires

BRIC countries include Brazil, Russia, China and India

3Sources: Forbes World’s Billionaires and Fortune 500.

Data

• Forbes Billionaires List 1996-2014– Based on shareholder information and ownership

information on large private firms

• New characteristics data (based on web searches) 2001, 2014

• Inherited or self-made wealth

• Main source of wealth—company, founding date, and industry

• Political Connections—based on biographic information

• Firms: FT EM 500, Fortune 500, Global 2000, Bloomberg.

Who are the Superrich?

• Inheritors

• Self-made

– Company founders

– Executives

– Politically connected/resource based

– Finance/real estate

5

• Founded a company• Non-resource• Non-privatization• Non-finance/real estate• Non-license• No family in gov’t or corruption charge

Founders

Sources of Wealth

7

0

20

40

60

80

100

120

2001 2014 2001 2014

Avanced Countries Emerging Markets

Company founder & executive Inherited

Financial sector Resource related/politically connected

BRIC Source of Wealth

8

0

10

20

30

40

50

60

70

80

90

100

Russia Brazil India China

Distribution of billionaires, by source of wealth, 2014

Company founders & executives Political connections, privatization, resources

Financial sector Inherited

Who are the Richest?

Chile v. Tunisia

9

• 1985 same level of development, 2014 Chile is three times richer• Chile has 12 billionaires in 2014, Tunisia 0

Horst PaulmanFounder: CensocudFirst hypermarket in 1976645 stores in Latin America

Marouen MabroukOwner: French chain Casino (and Orange)Married to former President Ben Ali’s daughter

• Business environment encouraged large outward looking firms in Chile.• Ben Ali clan bought state companies and lured foreign investors in Tunisia.

Individuals Matter

• Case studies: eg. Samsung’s success & innovations by Lee Kun-Hee of Samsung.

• Large literature showing CEOs explain a significant share of firm policies and performance, controlling for other determinants. Exogenous variation in leadership – (unexpected) death of CEO.

• CEOs with more decision making power matter more.

10

Wealth and Large Firms

Go Together

11

Brazil

China

India

Japan

Russia

United States

10

20

30

10 20 30country share of Global 2000 firms (percent)

country share of billionaires (percent)

Sources: Forbes World’s Billionaires and Global 2000.

Large Firms Promote

Modernization

• Alfred Chandler’s view – Scale, R&D, and

management.

• Allocative efficiency – Firm heterogeneity and

resources flow to most productive uses.

• Individual firms matter.

12

Large Firms &

Manufacturing Employment

0

10

20

30

40

50

60

70

80

90

% firms %employment % firms %employment

China 2004 India 2007

number of employees

percent

0-49

50-99

100-199

200-499

500+

13

Source: van Ark et al. 2010

Branding Development:US at the turn of last century and the BRICS this century

14

Brazil

Russia

ChinaIndia

Source: Maddison Project 2013.

A Note on Extreme Wealth & Inequality Wealth is growing faster than income in the North,

but not in the South

15

Growth in wealth of the 5 richest and GDP growth

Source: Author’s calculations using data from Forbes World’s Billionaires and World Bank WDI.

Policy Implications

• Promote entrepreneurship

• Property rights, free entry and openness to trade

• Limit cronyism

• Transparent privatization & government procurement

• Tax more heavily less productive sources of wealth

• Inheritance & (some) finance

16

Global inequality has declined:Growth Incidence Curve, 1988-2008

17

Source: Lakner and Milanovic (2013)

0

10

20

30

40

50

60

70

80

0 10 20 30 40 50 60 70 80 90 100

Percentiles of the global income distribuion

Cumulative income growth rate (percent)