Column: Be wealthy through innovation

Written by Michael Walton | Michael Walton | Updated: Apr 2 2010, 01:33am hrs
Carlos Slim Hel, the Mexican business magnate, weathered the global financial crisis pretty well. Early in March, Forbes reported his family net worth at $53.5 billion, back from $35 billion in 2009, if still down from the bubble-induced $60 billion of 2008. He has finally overtaken Bill Gates to become the richest man in the world. Is this a sign of the dynamism of developing country markets or of the power of oligarchic capitalism to extract monopoly rents

Billionaires from emerging markets are indeed rising in importance in the Forbes list. Mukesh Ambani comes in at fourth richest in the world with $29 billion. Lakshmi Mittal is fifth, just behind Ambani, though he is based in the UK. Brazilian Eike Batista is eighth with $27 billion. There are some five Russians around the $10-billion mark. Particularly striking has been the rise in the numbers of billionaires from China and India. In 2005, China had only one billionaire; in 2010 it has 72. In the same period, the number in India rose from 6 to 47. In terms of the sheer volume of billionaire wealth, India stands out, and especially so for a relatively poor country. The ratio of the total net worth of all billionaires-to-GDP is over 14%, comparable to Chile, Russia and Saudi Arabia, and substantially above Mexico or the US. This ratio is still less than 3% in China.

So lets return to the question at stake. Capitalist wealth can drive overall innovation and investment. But capitalists also like to protect their positions. Big capitalists are more likely to have the market power and influence over the state to do this. Two questions are of particular interest. How was the wealth gained And does extreme, concentrated wealth impose costs

The story of Carlos Slims wealth is telling. The big break occurred when President Salinas privatised various state-owned industries 20 years ago. This helped create many of todays Mexican billionaires. Slim did particularly well with his 1990 acquisition of the public telecom company, Telmex. The new private owners got several years of monopoly before facing competition, supposedly to allow time for restructuring. They did make the company a lot more efficient. But they also entrenched their market power. By the time competitors were allowed in, Telmex could effectively protect its dominant market position, including against Mexicos regulatory structures. The Mexican competition authority brought cases of anti-competitive behaviour against the company, but Telmex used the courts and legal staying orders to render this largely irrelevantthe legal review process can take years (as in India). With respect to the telecoms regulator, there is evidence of bias in favour of Telmex, suggesting regulatory capture.

These anti-competitive strategies are part of a broader phenomenon in Mexico. Statistical work has found that billionaire-controlled companies were more likely to be subject to cases being brought against them by the competition authority, but also more likely to use the technique of a legal stay to make this tool ineffective.

Telmexs behaviour has imposed costs on Mexico. The company has behaved like a classic monopolistcoverage is relatively low, and prices are very high by international standards, hurting Mexicos competitiveness. This is not because the company is badly runit is up to global industry standards, and this allows it to deliver unusually high profits.

Carlos Slim has strong links with the major political parties and has been known to advocate low taxes, this in the context of an absurdly low tax effort of some 12% of GDP. Meanwhile, Slim has been highly effective internationally, using the rich profits from Telmex as a base for expansion. His company Amrica Mvil was recognised in the top 25 global champions by AT Kearney, earlier this year.

The issue is not that Slim is a bad oligarchic capitalist and Gates a good dynamic entrepreneur (now re-born a philanthropist). Both are clearly highly effective entrepreneurs. But both work within a broader system. Gates Microsoft has also been subject to vigorous action by the US and European competition authoritiesand has vigorously fought this.

Are there broader lessons here Take India. The billionaires are a mixed group. Some clearly built their wealth through creation of new activitiesin IT and pharmaceuticals, for example. Many others emerged in areas thick with economic rents and connections, notably in land, construction and natural resources. The biggest strategic question for the future is of imbalance between extraordinary concentrations of wealth and a relatively weak state. This combination has long-run dangers. Global reach and success are not sources of comfort. As the case of Carlos Slim shows, companies can become dynamic multinationals even as they distort domestic markets and state functioning, whilst creating high levels of inequality.

The author is at the Harvard Kennedy School and the Centre for Policy Research