How countries treat their rich
Business Standard, 9 January 2023
In the recent period, some rich and powerful people have faced troubles in countries such as the US, Russia, China, and Saudi Arabia. When the rule of law is lacking, wealth protects the rich when it comes to threats from goons and other rich. But they are not protected from the state. The richest people are at the greatest risk. The life strategies of rich people are reshaped by these problems. This is an additional channel of influence shaping `the third globalisation', one which limits the possibilities for low rule-of-law countries.
The United States
Jeff Bezos owns the Washington Post. It was an important part of the full-throated criticism, by the free press in the US, of Donald Trump. We know there is rule of law in the US because Donald Trump was not able to induce investigations or orders by federal agencies against Jeff Bezos, his associates, or firms.
The United States has a score of 83 (and is classified as "Free") in the Freedom in the world index by Freedom House. Rich people in the US can oppose the government without fear of death, jail, exile, expropriation or commercial harm. Things look different in less free countries.
In Saudi Arabia (score of 7, "Not Free"), on 4 November 2017, about 500 people were locked up in the Ritz-Carlton by the "anti-corruption agency". Many victims were forced to buy their freedom by giving up their wealth. Government officials said they hoped to get between $300 to $400 billion, and consolidate political power, through this assault.
China has a score of 9 and is also "Not Free". Once Xi Jinping took office in March 2013, he deployed state power against the source of China's success, the private sector, thus damaging Chinese growth in the 2013-2022 period. The "anti-corruption program" generated outcomes such as an 18-year prison sentence for a real estate executive who criticised Xi Jinping in a private email. Jack Ma was worth $60 billion in late 2020, and lost a lot of the shareholding in his empire last week.
In Russia (score of 19, "Not Free") a different dynamic has played out. Once the Ukraine war started, there has been tremendous economic stress. For example, the ruble has lost its hard currency status: they now have detailed capital controls analogous to the Indian rupee. In this turmoil, rich Russians have been dying under mysterious circumstances at an average rate of 3 per month.
Rich people had suffered a wave of death, jail, exile and expropriation in the early decade of the Putin regime, with the populist playbook of anti-corruption campaigns. By the time the war started, Putin had consolidated power: the surviving rich were generally those allied to the regime. So the recent wave of killing rich people is unlikely to be shaped by opposition to the invasion. It seems to be more about the heightened conflicts for money at a time when the pie has shrunk. We are reminded of the question Why do you rob banks? and the answer Because that's where the money is. When times are tough, the toughs try to grab from the rich.
Two kinds of selection bias shape our knowledge on this problem. When the regime attacks Jack Ma, it makes waves, while in many other cases, the reporting might be limited or absent. Alongside this, the extremes of wealth attract covetous eyes, so the probability of expropriation is correlated with the level of wealth.
The American politician Adlai E. Stevenson once said My definition of a free society is a society where it is safe to be unpopular. A free society is one where it is safe to be rich. Even when the rule of law is weak, the rich are privileged: they are protected from attacks by private persons. Goons and rich people are able to torment normal people, but not the rich. But the rich are not protected from the coercive power of the state.
The optimisation of the rich in the third globalisation
People respond to incentives
The rich are people
So the rich respond to incentives
It is important to understand the optimisation of the rich. There was a time when there was optimism about how the world would work out. After the Berlin wall came down, the journey of the future was supposed to be one of inevitable progress towards capitalism and freedom. While many things went wrong in the small, there was confidence in the basic trajectory: "Though the course may change sometimes, rivers always reach the sea".
Things didn't work out like this, and the world is cleaving into a `third globalisation' where there is true globalisation within the ranks of the free countries but caution when engaging with the rest of the world, at three levels:
- The use of state power in ways that are inimical to globalisation (e.g. the US government blocking Chinese de facto PSUs like Huawei from operating in the US),
- The higher risk premia demanded by financial investors in the first world when investing in unsafe places, and
- The narrowing of global value chains to emphasise production in safe places.
The third globalisation is also being fueled by the subject of this article, the modified optimisation of the very rich. Uneasy lies the head that wears a Forbes rank. Families in places like China and Russia are moving assets, businesses, homes, and loved ones, into rule-of-law havens like London.
This is not the old notion of home bias, that was designed to think about DM decision makers over-emphasising familiar DM assets. Here, we have capital flowing uphill through the optimisations of EM decision makers.
The growth camp and the redistribution camp see eye to eye on this problem. Whether the rich are the target of taxation, or the engine of growth, their exit is harmful for both camps.
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