The Rise and Fall of Nations by Ruchir Sharma

The basic question: Is inequality threatening the economy? This is one of those issues that need to be addressed more by political art than by economic science. Inequality starts to threaten growth in part when the population turns suspicious of the way wealth is being created. If an entrepreneur is creating new products that benefit the consumer or building manufacturing plants and putting people to work, that form of wealth creation tends to be widely accepted. However, if a tycoon is making a fortune by cozying up to politicians and landing contracts from the government, or worse by capitalizing on Daddy’s contacts, then resentment surfaces, and the nation’s focus turns to redistributing rather than creating wealth.

The most rigorous statistical measures of inequality can offer a useful snapshot of the big picture, but they are updated too infrequently to provide the necessary warning signs of fast-shifting popular sentiment. The most common measure of income inequality, the Gini coefficient, scores a nation from one to zero: One represents a totally unequal society in which one person gets all the income, and zero represents a completely egalitarian society in which everyone has the same income. But the Gini score is derived from official data by academics, using a variety of methods, published on no particular schedule and for no consistent sample of countries. There is no more current source for cross-country comparisons than the World Bank, and as of mid-2015 its most recent Gini scores for Chile came from 2011, for the United States from 2010, for Russia from 2009, for Egypt from 2008, and for France from 2005. The long shelf life of Gini scores renders them useless as a current indicator of which nations are most threatened by rising inequality.

It is the rise of an entrenched class of bad billionaires in traditionally corruption-prone and unproductive industries that is most likely to choke off growth and to feed the popular anger on which populist demagogues thrive.

My approach to monitoring trends in inequality starts and ends with keeping an ear to the ground, because I know of no data that will clearly signal shifts in a nation’s attitudes toward wealth. But I do use a careful read of the Forbes billionaire list as one tool to identify the outliers: countries where the scale and sources of the largest fortunes are most likely to trigger tensions over inequality, and to retard growth in the economy. To identify countries in which tycoons are taking an unusually large and growing share of the pie, I track the scale of billionaire wealth relative to the size of the economy. To identify countries in which the tycoon class is becoming an entrenched elite, I track the share of inherited wealth in the billionaire ranks. Most important, I track the wealth of ‘bad billionaires’ in industries long associated with corruption, such as oil or mining or real estate. It is the rise of an entrenched class of bad billionaires in traditionally corruption-prone and unproductive industries that is most likely to choke off growth and to feed the popular anger on which populist demagogues thrive. I also listen closely to how the public is talking about the nation’s leading tycoons, because it is often the popular perception of inequality, even more than the reality, which shapes the political reaction and economic policy.

To sceptics who find issues like wealth inequality or an approach like reading billionaire lists too soft to take seriously, I would argue that this is an increasingly vital sign. Some world leaders still tend to dismiss vices like inequality, and the corruption that often feeds it, as timeless and inevitable sins that are common to all countries, particularly poor ones in the chaotic early stages of development. But this is a cop-out. Developing societies do tend to be more unequal than rich ones, but it is increasingly unclear that their inequality problem will naturally disappear.

The belief that inequality fades over time had been the working assumption since the 1950s, when the economist Simon Kuznets pointed out that countries tend to grow more unequal in the early stages of development, as some poor farmers move to better-paying factory jobs in the cities, and less unequal in the later stages, as the urban middle class grows. Today, however, inequality appears to be rising at all stages of development: in poor, middle-class, and rich countries. One reason for the widening threat of inequality is that the period of intense globalization before 2008 tended to depress blue-collar wages. It became much easier to shift factory jobs to low-wage countries, while continuing advances in technology and automation was replacing jobs that had earlier lifted many people into the middle class. As inequality spreads within countries, at every level of development, it is increasingly important to monitor the wealth gaps in all countries, all the time.