Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (32 page)

Marcus Crassus, who lives on today as a cartoon villain in video games based on Spartacus’s slave revolt, which he helped crush, was famous in his own time as the wealthiest man in Rome. He was nicknamed “Dives” or “the Rich” and successfully defended himself when charged with the capital crime of corrupting a vestal virgin by explaining he was after the maiden’s money, not her virtue; his fellow Romans thought that account rang true to character. Plutarch estimated Crassus’s fortune at 170 million sesterces; Pliny the Elder put it a little higher, at 200 million. That second estimate was roughly the size of the entire government treasury of the Roman empire. Gauged by Milanovic’s metric, Crassus’s fortune translated into an annual return that was equal to the average yearly income of thirty-two thousand Romans.

That’s a lot, but Crassus was handily outearned by the first generation of plutocrats, the robber barons of the Gilded Age. Andrew Carnegie’s wealth was at its apex in 1901, when he purchased U.S. Steel. His share in the company was worth $225 million, which yielded an annual income the same as that of 48,000 average Americans. John D. Rockefeller did even better: his peak fortune of $1.4 billion in 1937 yielded an annual income equal to that of 116,000 Americans.

But all three are trumped by the man at the head of the 2012
Forbes
global rich list, Mexican tycoon Carlos Slim.
Forbes
put Slim’s fortune that year at $69 billion, enough to earn an income equivalent to the average annual salary of more than 400,000 Mexicans. Here’s another way to see Slim’s relative economic weight in Mexico: His fortune could buy 6 percent of Mexico’s annual economic output. At his peak wealth, Rockefeller could buy less than 2 percent of the U.S. annual output. Bill Gates, America’s top dog in the twenty-first century, could afford less than 0.5 percent of the country’s yearly economic output. If you make a telephone call, smoke a cigarette, go to the bank, take a flight, or ride a bike in Mexico, you probably pay a few pesos to Slim. His presence is so ubiquitous that one restaurant in the capital quips on its menu that it is the only place in Mexico not owned by Slim.

Like the Russian oligarchs—as it happens, Milanovic thinks the second-richest person of all time was oil baron Mikhail Khodorkovsky, who he calculates could buy the labor of a quarter of a million Russians in 2003, the year before Khodorkovsky was arrested—Slim owes his leap from millionaire to billionaire to the wave of economic liberalization that swept the world, particularly the previously state-dominated emerging market economies, in the nineties. In Slim’s case, the windfall was telecom privatization.

That sale was orchestrated by Carlos Salinas, a Harvard-educated technocrat determined to reform a stagnant Mexican economy whose growth was constrained in part by the dominance of inefficient, state-controlled companies. Like the liberals who spearheaded Russia’s great sell-off, Salinas was a true believer in market reforms. And he believed in Slim, whom he had befriended in the eighties. That was a rough decade—the 1982 nationalization of the country’s banks and the plummeting price of oil had provoked capital flight and weakened economic growth—but Slim, building on his family’s retailing fortune and his own balance-sheet brilliance, held his nerve and bought assets on the cheap, expanding into cigarette production and insurance. Salinas liked Slim’s commitment to the country, his ability to see opportunity at a time of peril, and his entrepreneurial verve. The pair were dubbed “Carlos and Charlie’s” after a cheap and cheerful local restaurant chain.

Slim was a vocal supporter of his friend’s reform effort, speaking in favor of the plan in both public and private and lobbying politicians and the media to back it, too. When Telmex, the country’s telecom monopoly went on the block, he pounced. Unlike so many of the post-Soviet privatizations, Telmex was auctioned off for real money—$1.76 billion, for a more than 20 percent controlling stake, which was widely considered reasonable at the time. (Even at that healthy price, one of the losing bidders, and an erstwhile close friend of Slim’s, Roberto Hernández, has suggested the auction was rigged. Both Slim and Salinas have repeatedly denied that charge.)

Telmex’s privatizers were right to argue that the state monopoly had done a dreadful job serving Mexicans. Before Telmex was sold off, the average wait for a telephone line was a year, and only one-quarter of Mexican homes had a phone. But the sale was also a rent-seeker’s dream. That’s partly because, to dress up Telmex on the auction block and make the privatization a political success in the short term, the winner was offered a six-year extension of the company’s national phone monopoly and the only national cell phone license.

These formidable advantages were enhanced by a remarkably weak regulatory setup. The sale itself was conducted by the finance ministry, rather than the telecommunications ministry, and a telecom regulator was created only three years after the Telmex privatization. Once it was up and running, the regulator was severely outgunned; its annual budget was just a couple of days’ revenue of the Slim telephone businesses. Even when regulators do rule against Telmex, as a study by Mexican and American political scientists Isabel Guerrero, Luis-Felipe López-Calva, and Michael Walton has found, the company is very effective at using
amparos
, a Mexican court injunction that allows government rulings to be blocked, to delay unfavorable decisions. When Salinas’s party, the PRI, gave way to Vicente Fox, Mexico’s first president elected by the opposition party in decades, Slim’s cozy relationship with the state endured—Fox named a former Telmex employee, Pedro Cerisola, as minister of communications and transport.

The result has been lucrative market dominance for the Slim telecom empire, which controls about 80 percent of all fixed lines, and about 70 percent of all cell phones. One consequence of that near-monopoly control is low investment in innovation—Mexico’s is among the lowest in the OECD. Indian companies filed five telecom patents in 2001 and thirteen in 2005; Mexican firms didn’t file any between 1991 and 2005. Another is high price. Within the OECD, Mexican businesses pay the highest rates for a basket of cell lines and landlines; Mexican individuals pay the second-highest rate. As a result, in 2007 half of Mexicans had a landline telephone and 60 percent had a cell phone. That is a great improvement on 1990, but a poor performance compared with a country like Turkey, which has roughly the same per capita GDP as Mexico but a phone penetration of 75 percent.

Slim is the biggest beneficiary of Mexico’s liberalization, but he isn’t its only one. In 1991, shortly after Salinas launched his reform drive, there were two Mexicans on the
Forbes
billionaire list. In 1994, at the end of the Salinas presidency, there were twenty-four. Like Slim, Mexico’s other billionaires were enriched not only by the initial sell-off of state assets, but also by an ongoing ability to influence the rules of the economic game. The political scientists who rated Slim’s success at getting telecom judgments that helped Telmex did a broader calculation of the legal effectiveness of the country’s plutocrats. They found that billionaires were three times more likely than other plaintiffs to win rulings in their favor and triumphed over state regulators an average of three out of four times when their disputes went to court.

The rise of the Mexican and former Soviet privatization billionaires is an easy target, because the broader impact of liberalization on their countries’ economies has been mediocre. Mexico grew by an average of 3.5 percent a year in the 1990s and under 2 percent a year in the first decade of this century. Russia, after a sharp decline following the collapse of communism, has grown by an annual average of over 4 percent since 2000. Those are good numbers, but they pale in comparison with the performance of emerging market tigers like China, where average annual growth over the past decade has been 9 percent; India, which averaged 7 percent; or Brazil, which grew at an average rate of over 3 percent.

But as Rajan warned his audience at the Bombay Chamber of Commerce, even in India, with its stellar economic growth and democratic political system, rent-seeking is turning out to be a very effective way to join the super-elite.

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It wasn’t supposed to turn out this way. Manmohan Singh, another idealistic technocrat who became prime minister in 2004, had brought the global market reform revolution to India in 1991 when he was finance minister. The animating idea was to liberate the country from the License Raj, a protectionist system that sheltered state-dominated firms and the privately owned national champions who were in on the game. The old system was a good deal for government officials and for the private firms granted access to the License Raj, but it was a poor setup for everyone else. India’s GDP increased at a sleepy average of around 3 percent in the decades between independence and 1991—known, with self-deprecating irony, as “the Hindu rate of growth”—and India’s consumers, who were poor to begin with, had their purchasing power further eroded by being limited to more costly and lower-quality domestic goods.

Like Soviet communism, which had been a partial ideological inspiration for “third-way” India—when he trained as an economist in the 1970s, one of Singh’s projects, like that of all Indian economists of his generation, was learning how to create a five-year national central plan—the License Raj was a rent-seeking dystopia. Singh’s reforms were meant to end that systemic corruption and create an economy where the way to get rich was by producing more, better, and cheaper goods and services.

By many measures, the reforms were a dazzling success. The Indian economy grew an average of 7 percent in the past two decades, and average annual per capita income nearly quadrupled between 1991 and 2011. But on the road to the market, Indians have had one unwelcome surprise. Ending the License Raj hasn’t ended rent-seeking. In fact, government connections are probably more lucrative today than they were in the old system.

As in other liberalizing emerging markets, India’s reforms have been a hugely effective mechanism for billionaire creation. India had just one billionaire in 1991, on the eve of Singh’s reforms. In 2012, there were forty-eight. With a fortune of $22.3 billion, Mukesh Ambani was the richest Indian in 2012. He had just under a third of the wealth of Slim and, because India is so vast, a fraction of his control of the national economy. As a group, though, India’s plutocrats—the forty-eight billionaires—in 2012 had a combined net worth equal to more than 14 percent of their country’s GDP. That’s equal to the economic footprint of America’s 424 billionaires.

The rent-seeking side of Indian capitalism became a dramatic part of the national conversation in 2010, when tapes tax investigators had made of more than 140 conversations of Niira Radia, a glamorous Delhi lobbyist, were leaked to the media. In the hundreds of hours of talk between Radia, businessmen, journalists, and politicians, ministries are described as ATM machines and the ruling party is called “our shop.” She is explicit about how lucrative mobile phone licenses were allocated: “When it came to spectrum, they went to [Andimuthu] Raja [the telecommunications minister] and paid him a bribe and got spectrum allocated,” she tells a rival businessman.

One measure of the impact was an Indian version of the popular protests that swept the world in 2011, from Tahrir Square to Zuccotti Park. The subcontinent’s 99 percent coalesced around Anna Hazare, a veteran activist whose anticorruption hunger strike rallied the country’s hitherto quiescent urban middle class and may lead to the creation of a stronger anticorruption investigative body.

One of Hazare’s top lieutenants is Dr. Kiran Bedi. Bedi is a national legend in her own right. She was the first Indian woman police officer—officials asked her to consider another career when she applied to join the force in 1972—and rose to be the head of its investigative division. She once doused herself in water from a street fountain before running into a burning building to lead her team in the rescue of its seventeen occupants. She is equally famous for having Indira Gandhi’s car towed for parking illegally—a beloved signal that no one was above the law. When I met Dr. Bedi in Mumbai in 2011, she was a sixty-one-year-old grandmother with glasses and her black hair trimmed in a brisk boyish haircut. Bedi is small—she claims five feet, three inches—and was once lifted from the ground by a student protester she was policing. She was dressed in a vibrant turquoise shalwar kameez that matched her energetic manner.

“India has been overwhelmed by corruption scams,” Dr. Bedi told me. “While it has been apparent that India is shining, India has also been declining in many ways in that there has been rampant exposure of corruption.

“It was a relationship of illicit wealth between the people in power and the people who had money,” Dr. Bedi said. “The rich could get richer by buying to be rich. They could afford to buy better contracts and those contracts which are expensive and monopolistic—the mining rights, the key infrastructure rights . . . They broke the balance of a level playing field for the younger and the newcomers, so therefore I think that was the imbalance which happened in the economy or in the distribution of the economy.”

Nor is it just the activists who have come to fear that alongside India’s remarkable economic surge the rot has been spreading, too.

“Corruption is endemic,” Rajiv Lall, the chief executive officer of the Infrastructure Development Finance Company, a partly state-owned financial institution, and the official who invited Rajan to give his Bombay Chamber of Commerce lecture, told me. “I don’t think anybody here is pretending that there’s no corruption in the country. And corruption can take on a new dimension, especially in this time of great transformation.”