Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (33 page)

“The Gini coefficient [an economic measure of income inequality] always rises whenever growth takes off,” Arun Maira, a former industrialist and now a member of the country’s influential planning commission, told me. “When you open more opportunity, like more free markets and the opportunity for people to do their own thing, those who already have some capital, or they have some education, or they have access to people in power so that they could help get access to the new opportunities more easily, they will first grow themselves, their own wealth. So you will get the people with something becoming richer faster than those who don’t have access to education, to some capital, and to the system.”

As Mr. Maira pointed out, one of the most powerful advantages of the 1 percent is “access to people in power.” Corrupt business deals are the most extreme use—and abuse—of those relationships. But there is a more subtle reason the game is most effectively played by those who are already winning it.

“The tendency is that people who have access to power and access to governments, etc., tend to get a better deal actually,” said Kris Gopalakrishnan, the cochair of Infosys, the pioneering Indian technology company. “The policies, the roots are framed because they are people who give inputs to those policies. Because you don’t ask everybody when policies get formed. You ask the key people I need to talk to.”

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To understand what it is like to operate in a society where both opportunity and corruption are flourishing, I spoke to a young, up-and-coming Mumbai businessman. Raj, who is in his midthirties, agreed to be frank in exchange for my promise not to use his name (the details of his life are precise; the name is disguised). In America, where he went to business school, Raj would be a member of the 1 percent. In India, where he was born, Raj is part of the 0.1 percent, but he is no billionaire.

After getting his MBA at Duke, Raj went to work for one of the major consulting companies in New York; he still owns a one-bedroom apartment in the Flatiron district, which he bought partly as an investment and partly to maintain a connection with the city he loves. Two years ago, however, he moved to his company’s newly opened office in his hometown, Mumbai, and he plans to make the rest of his career in India. Raj believes the Indian economy will grow at least 7 percent a year for the next decade, creating a world of possibilities unimaginable in the slower-developing West. One example: in addition to his day job and his duties as the father of six-year-old and six-month-old daughters (his American-born wife works part-time at another multinational), Raj has founded his own company, which manufactures molded-plastic injection parts.

“You could be a billionaire if you moved to India, too,” he tells me. “All you need is the luck to meet the right government official and a willingness to risk going to jail.”

Raj is thriving both in his day job as a consultant and in his weekend shift at the factory. The consultancy is booming because “Indian firms are now going global.” One of his clients, for instance, whom Raj describes as a “midlevel player” with a net worth of around $500 million, is considering the acquisition of a company with operations in Mexico and Europe. “This globalization is new for Indian companies at this level, and it will be the big trend for the next five years,” he said.

Raj’s plastics business, which initially failed to take off but now is expanding at about 100 percent a year, is thriving for a different reason. “It took me a long time to figure out who to bribe in government to get a government contract,” Raj said. I asked if he minded paying backhanders. Not especially, he said, but he wished it had been easier and quicker to identify and befriend the right decision maker in the civil service.

R
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LIGARCHS

On March 5, 2012, the three thousand members of the National People’s Congress gathered in Beijing for their annual ten-day meeting. The National People’s Congress is nominally the highest governmental body in China. In practice, real power resides with the twenty-five-member Politburo and its Standing Committee. The National People’s Congress partly serves as a political Potemkin village, a rubber-stamp legislature whose role is to create a pretense of popular representation in what is an authoritarian system, just as the “elections,” with their 99 percent majorities, did in the Soviet era.

But the National People’s Congress isn’t purely ornamental. The NPC’s March meeting is held every year alongside the annual Chinese People’s Political Consultative Conference. Together, the two events are known as the
lianghui
—or two meetings—and they form the most important event on the Chinese political calendar. The lianghui let the world know which political faction is ascendant within the Communist Party—at the 2012 meetings Bo Xilai, the flamboyant party secretary of Chongqing and a powerful Politburo member, was publicly demoted, in a sign that the statist group, of which he was the most prominent member, was in decline—and which direction economic policy is likely to take. They are a forum at which political trial balloons can safely be floated and the private factional battles that are at the heart of China’s real politics can subtly be rehearsed before a wider audience.

Most important, in a country that brutally abolished hereditary social distinctions when Mao’s Communists came to power, the National People’s Congress is the closest China comes to a modern-day Debrett’s list—if you want to know who’s who in China, there’s no better place to start than the delegate list. That’s why a report published on the eve of the 2012 congress by the Hurun Report, the best source of intelligence on China’s rich, was so striking.

According to Hurun, the seventy richest members of the NPC made more money in 2011 than the total combined net worth of all the members of all three branches of U.S. government—the president and his cabinet, both houses of Congress, and the justices of the Supreme Court. The top seventy members of the NPC added $11.5 billion to their combined net worth in 2011, bringing their total to $89.8 billion. That 2011 gain of the top seventy Chinese legislators is more than 50 percent greater than the total net worth of all 660 members of the three federal branches of U.S. government, whose 2011 net worth was $7.5 billion. The contrast is equally striking when you compare the very richest members of the NPC with their U.S. equivalents. The wealthiest 2 percent of the NPC—the top sixty members—had an average net worth of $1.44 billion in 2011. The top 2 percent of U.S. legislators—eleven Congress members—had an average wealth of $323 million. Zong Qinghou, China’s beverage magnate with an estimated wealth of nearly $10 billion and one of the five richest men in China depending on the year, is a deputy of the NPC. Other business tycoons in the group include Lu Guanqiu, the chairman of the Wanxiang Group, China’s leading auto parts maker, and Wang Jianlin, a real estate developer.

These calculations by the Hurun Report were striking partly because, at a moment when American public opinion was becoming uncharacteristically agitated about the nexus of political power and money, they showed that when it came to creating billionaire politicians the Americans are pikers compared to the Chinese. More broadly, they are also a reminder that, for all its success in raising 300 million of its 1.3 billion citizens out of poverty since the introduction of market reforms in the late 1980s, Beijing has also created one of the world’s most conducive economies for rent-seeking. “There are skeletons behind every entrepreneur in China,” Rupert Hoogewerf, publisher of the Hurun Report, told a reporter.

We don’t often equate the rise of China with the rise of the red oligarchs. That’s partly because, unlike most economies that are friendly to rent-seeking, China has been so phenomenally successful: rent-seeking and the sustained high growth that China has experienced don’t often go together. It is also because, in contrast with the countries of the former Warsaw Pact, which transferred the property of the communist state into private hands with a big-bang sell-off, China’s market reforms have been slower and its avenues for rent-seeking have been more varied and more opaque than a quick privatization drive led from the top.

Finally, China’s billionaires are among the world’s most discreet. China’s rising bourgeoisie loves conspicuous consumption: gold is so popular you can buy it at ATMs, all the West’s great luxury brands are enjoying robust growth in China, and the market for the highest-end possessions—old wine and fine art in particular—is driven significantly by Chinese demand. In 2011, according to a study by the European Fine Art Foundation, China as a whole accounted for almost a third of the global art market revenue, outshopping the United States for the first time. But at the very, very top, China’s billionaires understand that notoriety is dangerous. The Russians invite British politicians to party on their yachts in the Mediterranean and buy sports teams in New York and London; the Indians vie to build the biggest mansion and to do the sexiest deal with a famous Western partner; the Latin Americans buy penthouses in Manhattan and stakes in U.S. media companies. While the Chinese state has been flexing its muscles in the Western political economy, Chinese billionaires, of whom there are ninety-five—the third-largest cohort in the world—are less visible. That is because they know that the Chinese regime—still, after all, a one-party communist state—is highly ambivalent about its plutocrats. Hence the party’s official policy of pursuing “harmonious growth” and Premier Wen Jiabao’s insistence, on the eve of the lianghui, that “we should not only make the cake of social wealth as big as possible, but also distribute the cake in a fair way and let everyone enjoy the fruits of reform and opening up.” “Four legs good, two legs better” is the politically dangerous contradiction at the heart of China today. One way to appease the restive four legs is to imprison the occasional Chinese plutocrat, which is why you probably can’t name a single one.

But if you have the self-discipline to fly below the radar, China is a rent-seekers’ paradise. That is because over the past few decades the Middle Kingdom has offered three lucrative routes to rent-seeking, and many of its billionaires have taken advantage of all of them. The Chinese hate comparisons with Russia’s capitalist transition—when my book on Russia’s sale of the century was translated into Chinese, the first question Chinese journalists always asked me was “How were the Russian market reforms a failure compared to the Chinese approach?”—but many of their plutocrats have been the beneficiaries of a slower and more opaque version of the same transition from total state ownership to some private property. Tellingly, both the Chinese and the Russians refer to the murky first fortunes of their liberalization-era plutocrats as their “original sins.”

Second, China has what you might call robber baron plutocrats: the rent-seeking billionaires who develop a network of government connections and use them to reap windfall fortunes at a moment of rapid economic growth—in China’s case, the shift from a poor, rural economy to an urban and industrial one. America doesn’t think too highly of its robber barons, but these, like the privatization plutocrats, are not the worst kind to have. Both use personal connections to unfairly benefit from a massive transition, and both capture value that a fair and effective state would have diverted to the common good. But both are also the beneficiaries, and very often the drivers, of an economic transition that transforms the economic prospects of the country as a whole. That’s why, over the past three decades, China’s average per capita income has risen from $200 to $5,400, and 50 percent of its people now live in cities, where the average income is over three times higher than in the countryside. The rent-seeking beneficiaries of these big shifts in the United States in the nineteenth century and in China over the past three decades were part of a change that had broadly shared benefits.

Third, and most important, rent-seeking in China isn’t just the result of a fast and turbulent economic transformation—though that is, of course, taking place. Making money through government connections isn’t a temporary, one-off thing in the People’s Republic, or a “corrupt” instance of rule breaking. In a state-capitalist system like China’s, making money by being close to the state isn’t an exception to the rules or a violation of them—it is how the system really works.

“What moves this structure is not a market economy and its laws of supply and demand, but a carefully balanced social mechanism built around the particular interests of the revolutionary families who constitute the political elite,” explain Carl Walter and Fraser Howie in their award-winning book on the Chinese economy,
Red Capitalism
. “China is a family-run business.

“Failure to grasp the impact of unbridled Western-style capitalism on its elite families in a society and culture lacking in legal or ethical counterbalances is to miss the reality of today’s China. Greed is the driving force behind the protectionist walls of the state-owned economy inside the system and money is the language.”

Unlike their Russian comrades, China’s red oligarchs didn’t get rich in a one-off privatization of the country’s natural resources. China hasn’t had a mass privatization moment, and it lacks Russia’s vast oil and metal wealth. Instead, China’s rent-seekers prospered through privileged access to the two essential economic goods the state does control: land and capital. A preponderance of China’s plutocrats, including Wu Yajun, the country’s wealthiest woman—and, of course, one of the delegates to the 2012 National People’s Congress—have made their fortunes in real estate. Because land use is still closely controlled by the state, that is a business which inevitably involves close ties with the government. And almost all businesses need credit. For all China’s success in nurturing private business, more than 90 percent of loans in the country are still made by state-controlled banks. To borrow, you need a favorable relationship with the state and its mandarins, something the bosses of state-owned enterprises, who are simultaneously business executives and senior government officials, have automatically. As Walter and Howie, who have worked in Chinese finance for decades, explain: “What would the chairman of China’s largest bank do if the chairman of PetroChina asked for a loan? He would say: ‘Thank you very much, how much, and for how long?’”