We are living in a world where the largest corporations are larger and the richest entrepreneurs are richer than ever before – and an increasing number of billionaires are based in emerging countries. Who are these tycoons and how important are they to their economies?
A new book by Caroline Freund aims to answer these questions by examining the characteristics and impact of 700 emerging-market billionaires whose net worth adds up to more than $2 trillion.
Rich People, Poor Countries: The Rise of Emerging-Market Tycoons and Their Mega Firms finds that very large firms are export superstars in their home countries.
In the United States the top 1% of firms account for 80% of exports. In emerging countries, the top 1% account for 50% of exports but that figure is rising rapidly, Freund said at a book launch at the World Bank’s Infoshop on March 23.
Emerging market firms include Alibaba, started by a teacher and 18 friends and now larger than Walmart and GE; Alibaba’s founder, Jack Ma, is the richest man in China, with an estimated wealth of $21 billion. Dilip Shanghvi started pharmaceutical company Sun Pharma with a $1,000 loan from his father; it’s now a $27 billion company and Shanghvi is the second wealthiest man in India, worth $12.8 billion. The Zorlu Group in Turkey, a major exporter of appliances, employs 30,000 people and accounts for 3% of Turkey’s manufacturing exports; founder Ahmet Nazif Zorlu is worth $2 billion.
Such entrepreneurs are part of a new billionaire class displaying the same kind of “capitalist skills” usually associated with advanced economies – innovation, creativity, and ingenuity, says Freund, a senior fellow at the Peterson Institute for International Economics and former World Bank chief economist for the Middle East and North Africa region. She estimates about a third of the mega-rich tycoons in emerging markets are “self-made” entrepreneurs who, like Ma, Shanghvi, and Zorlu, founded companies or are company executives.
She divides the other two-thirds into the following categories: people who inherited wealth; government-connected billionaires whose wealth derives from natural resources, privatizations, or other connections to the government; and finance and real estate billionaires.
Among the BRICS countries, Russia has the most resource-related, politically connected wealth. China has the greatest share of company founders and executives. Brazil has a large share of billionaires with inherited wealth (47.7% in 2014), and India is a mix of company founders and inherited wealth.
The Middle East and North Africa is the only emerging-market region where the share of inherited wealth is increasing and entrepreneurship is declining, says Freund. Self-made billionaires in the region are highly dependent on resource-related and politically connected wealth.
Crony capitalism, in which the wealthy and powerful use political connections to distort government regulation and taxation, reduces productivity and harms growth, Freund says.
Overall, individual firms matter and large firms are good for growth, she argues. A large highly productive firm is more efficient than 1,000 smaller firms, and development is spurred when resources are drawn to the best firms. “The emergence of rich people and rich companies in poor countries is a reflection of a healthy economy.”
Or, put another way, entrepreneurs and mega firms are the source of industrialization. Freund says it’s very hard to find examples of countries that got richer without the emergence of extreme wealth.
How to make sure extreme wealth plays a beneficial role? Freund recommends policies that could work: promoting entrepreneurship; limiting cronyism, and taxing less productive sources of wealth more heavily – such as inheritance.
This book – and Freund’s new database on the characteristics of billionaires -- is food for thought as we debate how to reduce inequality.