New global elite and the growing income inequality

New global elite and the growing income inequality

International Herald Tribune

By Chrystia Freeland, International Herald Tribune

January 28: The greatest riches now don’t go to institutions but to individuals smart enough to make it on their own.

“The next 10 years is going to be the most exciting time in our lives!” said Tejpreet Singh Chopra, an Indian entrepreneur. “The Indian economy will double! It will be incredible!”

It was hot and humid — typical spring weather in Dar es Salaam, Tanzania. It was also late — close to midnight. But the enthusiastic Chopra, dressed in a still-crisp light shirt with blue and white stripes, navy trousers and blue turban, was on his way to yet another meeting.

Chopra was in East Africa last May as one of the World Economic Forum’s Young Global Leaders, a sort of farm team for the full-grown global business elite that gathers every January in Davos. As the meeting of the World Economic Forum (WEF) begins, Chopra, 41, is among the 2,500 participants.

And intentionally or not, Davos will focus attention on one of the most striking consequences of the most recent technological revolution and the spread of globalisation that has transformed the world economy in the past 30 years or so: the emergence of an international economic elite whose globe-trotting members have largely pulled away from their compatriots.

The trend is particularly stark in the United States, where from 1980 to 2005 more than 80 per cent of the total increase in income went to the top one per cent of the population. The gap there between the super rich and everybody else is now greater than at any time since before the Depression of the 1930s. Income inequality has surged in much of the rest of the world, too: in Britain and Canada, to be sure, but in the more egalitarian countries of Scandinavia and Germany as well.

And while poor but resource-rich countries like Brazil, Mexico and South Africa have long been known for stark disparities in wealth and income, the divide is widening further in most emerging markets, including India and China, which now has a bigger gap between the top and bottom than the US.

But in contrast with the landed, and often leisured, aristocracies of previous eras, the elite now consists mostly of ‘the working rich,’ in the words of Emmanuel Saez, an award-winning economist at the University of California, Berkeley, who is one of the leading students of income inequality.

In 1916, Saez’s research shows, the richest one per cent of Americans received only one-fifth of their income from paid work. In 2004, in contrast, paid work accounted for 60 per cent of the income of that same sector.

Chopra clearly belongs in this group. Born and educated in Chennai (formerly Madras, and also the hometown of Indra Nooyi, the chief executive of Pepsi, who will be one of the star speakers at Davos this year), Chopra’s first two jobs were working for Lucas Diesel Systems in Britain and France. He earned a master’s degree in business administration from Cornell University, and spent the next decade at General Electric in Connecticut and Hong Kong before moving back to India.

Chopra met his future wife — a fellow Indian — while he was working in the US. She has a law degree from New York University and handled mergers and acquisitions for the Wall Street law firm Weil, Gotshal & Manges.

Losing economic relevance
While Tanzania and Kenya are popular as tourist destinations for affluent westerners seeking some of the last wild places on earth, Dar es Salaam and nearby Zanzibar had their last moment of global economic relevance in the 16th and 17th centuries, when they were important entrepôts in the spice trade. Since then, they have pretty much fallen off the world business map.

That was part of the reason Chopra was there. In anti-globalisation circles, the WEF has become a symbol for rapacious international capitalism and the insular elite that benefits from it. The more complicated reality is that Klaus Schwab, the Swiss professor who created and masterminds the WEF, is a rather traditional European social democrat who aims to encourage among its participants a kind of noblesse oblige, or its modern equivalent, stakeholder capitalism.

Hence his summoning of the crown princes of international business to sleepy Tanzania, giving the country a national branding opportunity gratefully acknowledged in front-page coverage of the conference and the VIP status accorded to its participants.

It was easy to see why the backroom boys at the Forum had tapped Chopra — ‘my friends call me TP’ — as one of global capitalism’s dauphins. In 2007, when he was just 37, Chopra was chosen as the first Indian to run GE’s Indian business.

While there, he helped manage the creation of the Mac 400, a portable electrocardiogram machine designed and made in India. A less expensive, cruder and lighter version of an American model, the Mac 400 weighs one-fifth what the original does; its price is the equivalent of less than $1,000. Virtually all of the engineers who created it were based at GE’s Bangalore research lab.

Selling western technology and brands into emerging markets is an old story — even drowsy Dar es Salaam boasts international hotels like the Kempinski and Holiday Inn and billboards hawking Nokia cellphones. So is selling cheap labour to developed markets in the form of manufactured goods or services like call centres.

The Mac 400 is an example of the next stage: emerging market engineers, employed by a western company, creating a product inspired by a western prototype and redesigned for emerging-market consumers. Two years ago, in the Harvard Business Review, Jeffrey R Immelt, GE’s chief executive and now a top outside adviser to President Obama, called this process ‘reverse innovation’ and said that without it western companies like GE would be defeated by their emerging market competitors.

To be sure, the world’s most sophisticated companies, like GE, Google and Goldman Sachs, are finding plenty of ways to profit from the great economic shift under way. But the greatest riches go not to institutions but to individuals smart enough and lucky enough to make it on their own. Just a few years after dropping out of college, for example, Facebook’s founder, Mark E Zuckerberg, is already challenging Google, prompting the recent management shakeout there.

Three weeks before the WEF’s conference in Tanzania, Chopra left GE to start his own company. Following the model of Nucor, which revolutionised the US steel business by building minimills, Chopra has founded Bharat Light and Power, a clean-energy utility.

“I’ve helped so many entrepreneurs when they just had a piece of paper, and I thought, ‘I could do that’,” Chopra said. “When you work in a corporation, when you retire, you only look back. As an entrepreneur, you are always looking forward. I wouldn’t be happy in my life if I was always looking back.”

Chopra’s story reflects the spread of western technology and the adaptation of American management techniques to the global market. It is about making fancy medical devices available to the rural poor of India.

Risk-taking entrepreneurs
Chopra’s career — and it is just beginning — shows how a venerable behemoth like GE is adapting to the changing world economy and highlights the tremendous opportunities available to educated, risk-taking entrepreneurs.

But Chopra also embodies an uncomfortable paradox: even as the gap between the advanced industrial world and emerging markets is shrinking, raising living standards for hundreds of millions of people, within individual countries, the people at the very top are doing so much better than everyone else.

Robert B Reich, a professor at the University of California, Berkeley who is a former US labour secretary, illustrates the disparity with a vivid statistic: in 2005, Bill Gates was worth $46 billion and Warren E Buffett was worth $44 billion. That year, the combined wealth of the 120 million Americans at the bottom of the pyramid, 40 per cent of the population, was about $95 billion — barely more than the sum of the fortunes of those two men.

Gates and Buffett are extreme examples, of course, but they embody a broader trend. The richest one-hundredth of one per cent of American families — about 15,000 — accounted for less than one per cent of national income in 1974. By 2007, the figure was six per cent, according to Tyler Cowen, an economist at George Mason University outside Washington. That difference translates into hundreds of billions of dollars.

None of this is a secret, but it does not get as much attention as many critics think it deserves. One reason for that may be that the plutocrats do not like talking about it very much. In a history of global income inequality published last month, Branko Milanovic, a World Bank economist, wrote that “studies of interpersonal inequality are not too popular.” That is because, he believes, “inequality studies are not particularly appreciated by the rich.”

One concern some economists express about the emergence of a global plutocracy is that it may be driven, not only by seemingly benign forces like the technology revolution and global trade, but also by malign ones, particularly the elite’s ability to shape government and other public policy activities in its own self-interest.

That is a point made by Ragharam Rajan, a professor at the Booth School of Business at the University of Chicago, the intellectual home of free market economics in the US.

In 2008, Rajan, who will be a panelist at Davos this year, delivered a stinging keynote address at the Bombay Chamber of Commerce. India, he said, risked becoming “an unequal oligarchy, or worse — perhaps far sooner than we think.”

One piece of evidence Rajan cited was a spreadsheet compiled by Jayant Sinha, a classmate of his from the IIT, the alma mater of many Indian software entrepreneurs. Sinha had calculated the number of billionaires per trillion dollars of gross domestic product in a number of countries around the world. Russia, with 87 billionaires and a national GDP of $1.3 trillion, had the highest ratio. India, Rajan said, was No 2, with 55 billionaires and a $1.1 trillion GDP.

Proximity to the government
Rajan assured his audience that he had nothing against billionaires per se. “We should certainly welcome it if businessmen make money legitimately,” he said. But he argued that India’s high ratio was alarming because “too many people have gotten too rich, based on their proximity to the government.” Instead of reflecting new software inventions or a thriving manufacturing operation, “land, natural resources and government contracts or licenses are the predominant sources of the wealth of our billionaires, and all of these factors come from the government,” he said.

“If Russia is an oligarchy,” Rajan warned the assembled magnates, “how long can we resist calling India one?”

The rise of government-connected plutocrats is not just a phenomenon in places like Russia, India and China. The generous government bailouts of US financial institutions prompted Simon Johnson, a professor of economics at the MIT, to compare American bankers with emerging-market oligarchs. In an article in ‘The Atlantic’ magazine, which he later expanded into a book, Johnson wrote that American financiers had pulled off a ‘quiet coup.’

A further, more subtle critique of the globocrats (a term popularised by ‘The Economist’ magazine) has been articulated by another economist who will speak at Davos this year. Dan Ariely, a professor of behavioural economics at Duke University in North Carolina, worries that too many public intellectuals and policy makers have an unconscious but powerful tendency to view the sorts of big social and political questions debated at Davos through the prism of the self-interest of the elite.

For the World Economic Forum, that has turned out to be a highly effective business model. But Schwab also recognises that the gap between Davos Man (and Davos Woman) and the rest of the world is one of the biggest challenges facing the world today.

“Economic disparity and global governance failures both influence the evolution of many other global risks and inhibit our capacity to respond effectively to them,” the forum’s Global Risks report for this year’s conference notes. “In this way, the global risk context in 2011 is defined by a 21st-century paradox: as the world grows together, it is also growing apart.”