Column: Billionaires and crony socialism

Written by Surjit S Bhalla | Updated: Feb 8 2014, 02:13am hrs
President Barack Obama mentioned inequality in his State of the Union address: inequality has deepened in the US. A few days later, Christine Lagarde, managing director of the IMF, stated, in her Dimbleby lecture, that both the level of, and increase in, inequality was a major problem in the world. She stated that Seven out of ten people in the world today live in countries where inequality has increased over the past three decades In India, the net worth of the billionaire community increased twelvefold in 15 years, enough to eliminate absolute poverty in this country twice over.

I am quite prepared to accept that inequality may have increased, and increased substantially, in the US as both Obama and Ms Lagarde are stating. But it is by no means a slam dunk conclusion. Further, what does inequality deepening in the US have to do with billionaire wealth and poverty reduction in India The fact remains that per capita income in the poor developing countries has increased substantially faster than incomes in the West, and this has led to a radical decline in world inequality. At around a Gini level of 0.61 today, the world is the most equal since 1890. (A Gini level of 1 represents perfect inequality, one person has all the income; and a Gini of 0 means perfect equality, everyone has the same income.) It does not take an IMF to do a back-of-the-envelope calculation on trends in world inequality. Since 1980, for four-fifths of the worlds population residing in the developing world, per capita income has been growing at a significantly higher pace than the developed world. This leads to an increase in world equality. Further, it can be the case that even if in every country inequality worsens, world inequality can improve.*

Billionaire wealth: Forbes data (the only source!) for 1999 indicated that there were six dollar-billionaires in

India with $5.3 billion in assets; in 2013, that number had expanded to 55 billionaires and $183 billion in assets. This is an increase of over 34 times the 1999 value. On a per billionaire basis, the increase is only 3.8 times. Over the same time-period, both per capita income and the Sensex (in dollars) have expanded in a near identical fashion by 3.5 times.

Three conclusions follow from this quick perusal of Indian data. First, the joint wealth of dollar billionaires has expanded 34 times, well in excess of the IMF chiefs claim of only 12 times. Second, per billionaire wealth, did not expand at a pace significantly faster than the income or stock ownership of an average person. A major conclusion that follows is that unlike other countries (especially China), India has not experienced much increase in inequality over the last 15 years. This back-of-the-envelope conclusion (comparison of wealthy billionaires with the aam aadmi) is also supported by NSS data on real per capita consumptiona Gini of 0.30 in 1999 and a Gini of 0.32 in 2011-12, an increase of less than 7% over 12 years.

But the larger point that Ms Lagarde was making remains valid, though it is not immediately apparent what the larger point is. Is it the case that if billionaire wealth had not increased by a factor of 34 that poverty would have been removed twice over Are poverty removal and wealth generation not part of the same process Or perhaps what the IMF chief meant was that the somewhat ill-begotten wealth of the billionaires could be redistributed to the poor via increased taxation

Indirectly or directly, there is constant talk in the liberal media, NGOs, and international organisations (with UN being the most extreme example) about crony capitalism being behind wealth and income concentration and that if only this were to be reduced the world would be a better place. What I want to discuss today are the ills of crony socialism and their deleterious effects on poverty reduction. Crony socialism defined as only government programs meant for poverty reductionin the name of the poor expenditures. The table documents aggregate data on Indian consumption, poverty and related data for the NSS years since 1999-2000. The last two rows document the money required to achieve zero poverty in an any given year, and what government spends to reduce poverty. The former is calculated under the assumption that God, and not the politician, is identifying and redistributing to the poor as defined by the Tendulkar poverty line.

In 1999-2000, the government was spending 1.1% of GDP on transfer subsidies, and 3.1% of GDP was needed. What the data underline is the fact that as poverty has declined due to high growth, Sonianomics has engineered exactly the opposite patterntoday, only 0.44% of GDP is needed to achieve zero poverty and the government is spending six times as much to reduce poverty. Why this huge divergence Because the government expenditures for the poor are not really meant for them; they are designed to benefit the middle class but always, always, in the name of the poor.

A perspective on this is provided by the Congresss last stand before electionsincreasing subsidised LPG cylinders from 9 to 12, or an increase in the existing subsidy by 33%: from an expenditure level of R40,000 crore to R52,000 crore. What is the amount of expenditure needed with perfect targetingR48 000 crore, i.e., the amount spent on LPG subsidy alone is enough to achieve zero poverty in India in 2013-14.

Perfect targeting is not possible, but it must be possible to reduce the leakage. In this regard, the Aadhaar identification programme (incidentally dispensed by the Congress!) needs to be supported to allow poor people to get the money meant for them. But dont be surprised if money meant for them does not reach them. It is not only corruption that eats the poor mans lunch; it is badly designed policies like MGNREGA, food subsidies, free water and half-price electricity.

Oh yesMs Lagarde claim that billionaires wealth increase over the last 15 years was enough to eliminate poverty in India twice over. Reduction in crony socialism will be far more effective; today, a minimum of R3,00,000 crore are spent on transfer subsidies rather than the amount needed, R48,000 crore. The ill-begotten gains of crony capitalism over 14 years reduce poverty twice over, according to the IMF; the ill-begotten gains of crony socialism in one year can reduce Indian poverty six times over! I exaggerate, but only ever so slightly. And yesin Darwinian terms, crony socialism has the genes of a cockroach.

* These and related issues were explored in a 2002 book: Imagine There's No Country: Poverty, Inequality and Growth in the Era of Globalization, Peterson Institute for International Economics, Washington, DC. Many of the conclusions and forecasts in the book have stood the test of time!

The author is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company. Twitter: @surjitbhalla