Caroline Freund Presentation at the IBC Tel Aviv December 7, 2015 1
(How Much) Does Inequality Cost Us? Recent focus on extreme wealth Is it bad irrespective of how it is made? Cronies or Creators Large firms move economies Allocative efficiency Growth and jobs Individuals are behind these firms Apple (Jobs), Microsoft (Gates), Zara (Ortega), Alibaba (Ma), Tata (Tata), Foxconn (Gou), Serum (Poonwalla) 2
Growth in Extreme Wealth total real net worth, billions 1996 USD 5000 4000 3000 2000 42 percent of World s billionaires are now from emerging markets. Given trends, by 2025 more than half will be from the South. 1000 0 1995 2000 2005 2010 2015 World Advanced Economies Emerging Markets 3
Part 1: Who are the Superrich? Inheritors Self-made Company founders Executives Politically connected/resource based Finance/real estate 4
Self-made in the South 5
Founders Founded a company Non-resource Non-privatization Non-finance/real estate Non-license No corruption charge
Sources of Wealth Share of billionaires Region/source of wealth 2001 2014 Emerging markets Self-made 56.3 79.1 Company founder (nonfinance) 11.6 23.8 Owner or executive 4.9 10.9 Financial sector 23.3 23.3 Resource related, privatization related, and politically connected 17.5 21.1 Inherited 42.7 20.9 Advanced economies Self-made 58.9 62.7 Company founder (nonfinance) 32.9 30.7 Owner or executive 9 8 Financial sector 15.4 20.1 Resource related, privatization related, and politically connected 1.6 3.9 Inherited 41.1 37.3 7
Part 2: Large Firms are Good for Growth 8
Large firms are good 1: Rich European countries have more employment in large firms percent 60 50 40 30 20 10 0 Large firm share employment Value added large firms Source: Eurostat 2010. 9
percent 60 50 40 30 20 10 0 Large firms are good 1: Rich European countries value added and employment shares are closer Suggestive of allocative inefficiency Large firm share employment Value added large firms Bartelsman, Haltiwanger and Scarpetta (2013) measure covariance b/w productivity and size in US industry: US is more efficient than in the United Kingdom, Germany and France. In addition, the covariance between size and productivity was near zero (or negative) at transition in Eastern Europe and has since increased, i.e. allocative efficiency has improved 10 sharply.
Large firms are good 2: Growth in the US is driven by large firms gdp growth 6.0 growth in share of employment 1 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0.8 0.6 0.4 0.2 0-0.2-0.4-0.6-4.0 GDP Growth Growth in large firms' share of employment -0.8 Source: US Bureau of Labor Statistics Share of large firms increased from 49 to 53 percent over period. 11
Large firms are good 3: Manufacturing employment & large firms percent 90 80 70 number 60 of employees 0-49 50 50-99 40 100-199 30 200-499 20 500+ 10 0 % firms %employment % firms %employment China 2004 India 2007 Source: van Ark et al. 2010 Martin, Nataraj and Harrison (2014) find dereservation in India led to a 7 percent increase in employment, as the better firms grew large. 12
Wealth and Large Firms go Together country share of billionaires (percent) 30 20 United States 10 Russia Brazil India China Japan 10 20 30 country share of Global 2000 firms (percent) 13
Where there are more Mega Firms there is more Extreme Wealth percent 25 20 15 10 BRIC share of fortune global 500 BRIC share of billionaires 5 0 1995 2000 2005 2010 2015 BRIC countries include Brazil, Russia, China and India 14
Part 3: Extreme Wealth is Part of Development billionaires per 100 million, log scale 250 150 100 50 10 1 5000 10000 20000 40000 60000 GDP per capita, PPP (constant 2011 international $), log scale billionaire density smoothed line 15
US in the at the turn of last century and the BRICS this century India China South Africa Russia Brazil 16
US in the at the turn of last century and the BRICS this century US growth surged 17
China s Growth Dominates US 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 US China US took another 20 years to get there. 18
Wealth is Growing Faster than Income in the North but not the South 19
Coming January 2016 20
Brazil BRICs Split 2001 2014 2001 2014 share of billionaires share of billionaires India share of billionaires share of billionaires Self-made wealth 33.3 52.3 Self-made wealth 100 66.1 company founder 0 21.5 company founder 40 33.9 owner or executive 0 7.7 owner or executive 0 7.2 financial sector 33.3 18.5 financial sector 0 14.3 politically connected 0 4.6 politically connected 60 10.7 Inherited wealth 66.7 47.7 Inherited wealth 0.0 33.9 Number of billionaires 6 65 Number of billionaires 5 56 Russia China Self-made wealth 100 100 Self-made wealth 100 98 company founder 0 10.8 company founder 0 39.4 owner or executive 0 2.7 owner or executive 0 25 financial sector 12.5 27.9 financial sector 0 23.7 politically connected 87.5 58.6 politically connected 100 9.9 Inherited wealth 0 0 Inherited wealth 0.0 2.0 Number of billionaires 8 111 Number of billionaires 1 152 21