Slim was a vocal supporter of his friend’s reform effort, speaking in favor of the plan in both public and private and lobbying politicians and the media to back it, too. When Telmex, the country’s telecom monopoly went on the block, he pounced. Unlike so many of the post-Soviet privatizations, Telmex was auctioned off for real money—$1.76 billion, for a more than 20 percent controlling stake, which was widely considered reasonable at the time. (Even at that healthy price, one of the losing bidders, and an erstwhile close friend of Slim’s, Roberto Hernández, has suggested the auction was rigged. Both Slim and Salinas have repeatedly denied that charge.)
Telmex’s privatizers were right to argue that the state monopoly had done a dreadful job serving Mexicans. Before Telmex was sold off, the average wait for a telephone line was a year, and only one-quarter of Mexican homes had a phone. But the sale was also a rent-seeker’s dream. That’s partly because, to dress up Telmex on the auction block and make the privatization a political success in the short term, the winner was offered a six-year extension of the company’s national phone monopoly and the only national cell phone license.
These formidable advantages were enhanced by a remarkably weak regulatory setup. The sale itself was conducted by the finance ministry, rather than the telecommunications ministry, and a telecom regulator was created only three years after the Telmex privatization. Once it was up and running, the regulator was severely outgunned; its annual budget was just a couple of days’ revenue of the Slim telephone businesses. Even when regulators do rule against Telmex, as a study by Mexican and American political scientists Isabel Guerrero, Luis-Felipe López-Calva, and Michael Walton has found, the company is very effective at using amparos, a Mexican court injunction that allows government rulings to be blocked, to delay unfavorable decisions. When Salinas’s party, the PRI, gave way to Vicente Fox, Mexico’s first president elected by the opposition party in decades, Slim’s cozy relationship with the state endured—Fox named a former Telmex employee, Pedro Cerisola, as minister of communications and transport.
The result has been lucrative market dominance for the Slim telecom empire, which controls about 80 percent of all fixed lines, and about 70 percent of all cell phones. One consequence of that near-monopoly control is low investment in innovation—Mexico’s is among the lowest in the OECD. Indian companies filed five telecom patents in 2001 and thirteen in 2005; Mexican firms didn’t file any between 1991 and 2005. Another is high price. Within the OECD, Mexican businesses pay the highest rates for a basket of cell lines and landlines; Mexican individuals pay the second-highest rate. As a result, in 2007 half of Mexicans had a landline telephone and 60 percent had a cell phone. That is a great improvement on 1990, but a poor performance compared with a country like Turkey, which has roughly the same per capita GDP as Mexico but a phone penetration of 75 percent.
Slim is the biggest beneficiary of Mexico’s liberalization, but he isn’t its only one. In 1991, shortly after Salinas launched his reform drive, there were two Mexicans on the Forbes billionaire list. In 1994, at the end of the Salinas presidency, there were twenty-four. Like Slim, Mexico’s other billionaires were enriched not only by the initial sell-off of state assets, but also by an ongoing ability to influence the rules of the economic game. The political scientists who rated Slim’s success at getting telecom judgments that helped Telmex did a broader calculation of the legal effectiveness of the country’s plutocrats. They found that billionaires were three times more likely than other plaintiffs to win rulings in their favor and triumphed over state regulators an average of three out of four times when their disputes went to court.
The rise of the Mexican and former Soviet privatization billionaires is an easy target, because the broader impact of liberalization on their countries’ economies has been mediocre. Mexico grew by an average of 3.5 percent a year in the 1990s and under 2 percent a year in the first decade of this century. Russia, after a sharp decline following the collapse of communism, has grown by an annual average of over 4 percent since 2000. Those are good numbers, but they pale in comparison with the performance of emerging market tigers like China, where average annual growth over the past decade has been 9 percent; India, which averaged 7 percent; or Brazil, which grew at an average rate of over 3 percent.
But as Rajan warned his audience at the Bombay Chamber of Commerce, even in India, with its stellar economic growth and democratic political system, rent-seeking is turning out to be a very effective way to join the super-elite.
RENT-SEEKING AND THE END OF THE LICENSE RAJ
It wasn’t supposed to turn out this way. Manmohan Singh, another idealistic technocrat who became prime minister in 2004, had brought the global market reform revolution to India in 1991 when he was finance minister. The animating idea was to liberate the country from the License Raj, a protectionist system that sheltered state-dominated firms and the privately owned national champions who were in on the game. The old system was a good deal for government officials and for the private firms granted access to the License Raj, but it was a poor setup for everyone else. India’s GDP increased at a sleepy average of around 3 percent in the decades between independence and 1991—known, with self-deprecating irony, as “the Hindu rate of growth”—and India’s consumers, who were poor to begin with, had their purchasing power further eroded by being limited to more costly and lower-quality domestic goods.
Like Soviet communism, which had been a partial ideological inspiration for “third-way” India—when he trained as an economist in the 1970s, one of Singh’s projects, like that of all Indian economists of his generation, was learning how to create a five-year national central plan—the License Raj was a rent-seeking dystopia. Singh’s reforms were meant to end that systemic corruption and create an economy where the way to get rich was by producing more, better, and cheaper goods and services.
By many measures, the reforms were a dazzling success. The Indian economy grew an average of 7 percent in the past two decades, and average annual per capita income nearly quadrupled between 1991 and 2011. But on the road to the market, Indians have had one unwelcome surprise. Ending the License Raj hasn’t ended rent-seeking. In fact, government connections are probably more lucrative today than they were in the old system.
As in other liberalizing emerging markets, India’s reforms have been a hugely effective mechanism for billionaire creation. India had just one billionaire in 1991, on the eve of Singh’s reforms. In 2012, there were forty-eight. With a fortune of $22.3 billion, Mukesh Ambani was the richest Indian in 2012. He had just under a third of the wealth of Slim and, because India is so vast, a fraction of his control of the national economy. As a group, though, India’s plutocrats—the forty-eight billionaires—in 2012 had a combined net worth equal to more than 14 percent of their country’s GDP. That’s equal to the economic footprint of America’s 424 billionaires.
The rent-seeking side of Indian capitalism became a dramatic part of the national conversation in 2010, when tapes tax investigators had made of more than 140 conversations of Niira Radia, a glamorous Delhi lobbyist, were leaked to the media. In the hundreds of hours of talk between Radia, businessmen, journalists, and politicians, ministries are described as ATM machines and the ruling party is called “our shop.” She is explicit about how lucrative mobile phone licenses were allocated: “When it came to spectrum, they went to [Andimuthu] Raja [the telecommunications minister] and paid him a bribe and got spectrum allocated,” she tells a rival businessman.
One measure of the impact was an Indian version of the popular protests that swept the world in 2011, from Tahrir Square to Zuccotti Park. The subcontinent’s 99 percent coalesced around Anna Hazare, a veteran activist whose anticorruption hunger strike rallied the country’s hitherto quiescent urban middle class and may lead to the creation of a stronger anticorruption investigative body.
One of Hazare’s top lieutenants is Dr. Kiran Bedi. Bedi is a national legend in her own right. She was the first Indian woman police officer—off
icials asked her to consider another career when she applied to join the force in 1972—and rose to be the head of its investigative division. She once doused herself in water from a street fountain before running into a burning building to lead her team in the rescue of its seventeen occupants. She is equally famous for having Indira Gandhi’s car towed for parking illegally—a beloved signal that no one was above the law. When I met Dr. Bedi in Mumbai in 2011, she was a sixty-one-year-old grandmother with glasses and her black hair trimmed in a brisk boyish haircut. Bedi is small—she claims five feet, three inches—and was once lifted from the ground by a student protester she was policing. She was dressed in a vibrant turquoise shalwar kameez that matched her energetic manner.
“India has been overwhelmed by corruption scams,” Dr. Bedi told me. “While it has been apparent that India is shining, India has also been declining in many ways in that there has been rampant exposure of corruption.
“It was a relationship of illicit wealth between the people in power and the people who had money,” Dr. Bedi said. “The rich could get richer by buying to be rich. They could afford to buy better contracts and those contracts which are expensive and monopolistic—the mining rights, the key infrastructure rights . . . They broke the balance of a level playing field for the younger and the newcomers, so therefore I think that was the imbalance which happened in the economy or in the distribution of the economy.”
Nor is it just the activists who have come to fear that alongside India’s remarkable economic surge the rot has been spreading, too.
“Corruption is endemic,” Rajiv Lall, the chief executive officer of the Infrastructure Development Finance Company, a partly state-owned financial institution, and the official who invited Rajan to give his Bombay Chamber of Commerce lecture, told me. “I don’t think anybody here is pretending that there’s no corruption in the country. And corruption can take on a new dimension, especially in this time of great transformation.”
“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.”
—
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.
RED OLIGARCHS
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.
Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else Page 24
