Institute of Global Affairs public lectureRich People Poor Countries: the rise of emerging market tycoons and their mega-firmsCaroline FreundFormer Chief Economist for the Middle East and North Africa, World Bank

Hashtag for Twitter users: #LSEIGA

Professor Erik BerglofChair, LSE

Caroline FreundPeterson Institute for

International Economics

Presentation at LSEOctober 25, 2016

2

Growth in Extreme Wealth

3

0

1000

2000

3000

4000

5000

1995 2000 2005 2010 2015

World Advanced Economies Emerging Markets

total real net worth, billions 1996 USD

42 percent of World’s billionaires are now from emerging markets.

Given trends, by 2025 more than half will be from the South.

Sources: Forbes World’s Billionaires and World Bank WDI.

Extreme Wealth & Mega Firms

4

0

5

10

15

20

25

1995 2000 2005 2010 2015

percent

BRIC share offortune global500BRIC share ofbillionaires

BRIC countries include Brazil, Russia, China and IndiaSources: Forbes World’s Billionaires and Fortune 500.

Who are the Superrich?

• Inheritors• Self-made

– Company founders– Executives– Politically connected/resource based– Finance/real estate

5

• Founded a company• Non‐resource• Non‐privatization• Non‐finance/real estate• Non‐license• No family in gov’t or corruption charge

Founders

Sources of Wealth

7

0102030405060708090100

2001 2014 2001 2014

Advanced Countries Emerging Markets

Resource related/politically connected Financial sectorInherited Company founder & executive

A Note on the Advanced Countries

8

0

10

20

30

40

50

60

70

80

90

100

United States Europe other advanced economies1996 2001 2014 1996 2001 2014 1996 2001 2014

share of billionaires

inherited wealth self-made company founders self-made financial sectorself-made owners and executives political connections and resource related

BRIC Source of Wealth

9

0102030405060708090100

Russia Brazil India China

Distribution of billionaires, by source of wealth, 2014

Inherited Financial sector

Political connections, privatization, resources Company founders & executives

Who are the Richest?Chile v. Tunisia

10

• 1985 same level of development, 2014 Chile is three times richer• Chile has 12 billionaires in 2014, Tunisia 0

Horst PaulmanFounder:  CencosudFirst hypermarket in 1976645 stores in Latin America

Marouen MabroukOwner: French chain Casino (and Orange)Married to former President Ben Ali’s daughter

• Business environment encouraged large outward looking firms in Chile.• Ben Ali clan bought state companies and lured foreign investors in Tunisia.

Individuals Matter

• Case studies: eg. Samsung’s success & innovations by Lee Kun-Hee of Samsung.

• Large literature showing CEOs explain a significant share of firm policies and performance, controlling for other determinants. Exogenous variation in leadership – (unexpected) death of CEO.

• CEOs with more decision making power matter more.

11

Wealth and Large Firms Go Together

12

Brazil

China

India

Japan

Russia

United States

10

2030

10 20 30country share of Global 2000 firms (percent)

country share of billionaires (percent)

Sources: Forbes World’s Billionaires and Global 2000.

Large Firms Promote Modernization

• Alfred Chandler –Scale, R&D, and management.

• Allocative efficiency – Firm heterogeneity and resources flow to most productive uses.

• Individual firms matter.

13

050

100150200250300350

US

Japa

n

German

y

UK

China

India

Russia

Brazil

Advanced economies Emerging markets

Number of Top 500 Firms

1962 1993 2014

Large Firms & Manufacturing Employment

14

0

10

20

30

40

50

60

70

80

90

% firms %employment % firms %employment

China 2004 India 2007

number of employees

percent

0‐4950‐99100‐199200‐499500+

Source: van Ark et al. 2010

Branding Development:US at the turn of last century and the BRICS this century

15

BrazilRussia

ChinaIndia

Source: Maddison Project 2013.

A Note on Extreme Wealth & Inequality Wealth is growing faster than income in the North,

but not in the South

16

Growth in wealth of the 5 richest and GDP growth 2006‐2012

Source: Author’s calculations using data from Forbes World’s Billionaires and World Bank WDI.

Global inequality has declined:Growth Incidence Curve, 1988-2008

17

Source: Lakner and Milanovic (2013)

0

10

20

30

40

50

60

70

80

0 10 20 30 40 50 60 70 80 90 100

Percentiles of the global income distribution

Income growth rate (percent)

Policy Implications

• Promote entrepreneurship • Property rights, free entry and openness to trade

• Limit cronyism • Transparent privatization & government procurement, competition policy

• Tax more heavily less productive sources of wealth• Inheritance & (some) finance

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Institute of Global Affairs public lectureRich People Poor Countries: the rise of emerging market tycoons and their mega-firmsCaroline FreundFormer Chief Economist for the Middle East and North Africa, World Bank

Hashtag for Twitter users: #LSEIGA

Professor Erik BerglofChair, LSE