Comments on

Rich People, Poor Countriesby Caroline Freund

Francisco H. G. Ferreira

DECPI

Sketch of the argument

Extremely talented entrepreneurs

Large and productive firms

Growing economies

Sketch of the argument

Extremely talented entrepreneurs

Large and productive firms

Growing economies

Billionaires

Sketch of the argument

Extremely talented entrepreneurs

Large and productive firms

Growing economies

BillionairesTherefore: Billionaires are good for growth

employmentstructural transformation

and are even not bad for inequality!

Examining the relationships (i)

Extremely talented entrepreneurs

Large and productive firms

Growing economies

BillionairesBased on a solid literature examining the relationship between firm size and productivity:

Hsieh and Klenow (2009) and followersBartelsman et al (2013)Hsieh and Olken (2014) on the myth of the missing middleEtc.

Examining the relationships (ii)

Extremely talented entrepreneurs

Large and productive firms

Growing economies

Billionaires A weaker empirical link

Some evidence that entrepreneurs matter to firm outcomes in general (e.g. Bertrand and Schoar, 2003),

But for billionaires, nothing but simple correlations)

Examining the relationships (iii)

Extremely talented entrepreneurs

Growing economies

Billionaires

This link may be valid for about one third of the 1,645 billionaires in the 2014 Forbes list!

Examining the relationships (iii)

Extremely talented entrepreneurs

Growing economies

Billionaires

Large regional heterogeneity.

And the one-third “good” billionaires is likely an overestimate:

Growing economies

Isabel dos Santos (born 20 April 1973)[4] is an Angolan investor [5] considered by Forbes to be the richest woman not only in Angola, but the whole of Africa.[6][7][8] In 2013, according to research by Forbes, her net worth had reached more than three billion US Dollars, making her Africa’s first billionaire woman. She is the daughter of Angola's President José Eduardo dos Santos, who has held that office since 1979.

Freund, p.118

Wikipedia

Bottom line on empirics

Extremely talented entrepreneurs

Large and productive firms

Growing economies

Billionaires

Pre-existing evidence (nicely summarized in the book) suggests that good managers and entrepreneurs matter for development.

The book contains no convincing evidence that most billionaires are such people. By its own (likely over-optimistic) counts, most billionaires are in fact heirs or rent-seekers (benefitting from political largesse, natural resource or finance rents).

An inverse relationship between billionaire density and income inequality?The dangers of “argument by correlation”…

Figure 1: Income levels and inequality around the world

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0.50

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0.00 5,000.00 10,000.00 15,000.00 20,000.00 25,000.00 30,000.00 35,000.00 40,000.00 45,000.00

GDP per capita

GIN

IThe density of dollar billionaires is likely positively associated with GDP per capita. GDP pc and inequality are negatively associated. Omitting GDP and population from Figure 9.7 mean that the bivariate correlation is completely uninformative.

Source: Ferreira and Ravallion, 2009

Freund’s policy recommendations

• Good business environment• Secure property rights• Ease of firm entry and exit• Openness to trade• Openness to FDI

• Raising estate taxes

• Taxing “unproductive activities” and strengthening financial regulation

• An activist industrial policy that “promotes firms rather than sectors”?• Samsung v. Skolkovo Innovation Center• Embraer v. Zona Franca de Manaus• Engineering and construction companies serving Petrobras…• My take: try this after you have got all the basics right: security, infrastructure, education, etc.

Bottom line on policy

Extremely talented entrepreneurs

Large and productive firms

Growing economies

Billionaires

By all means:- Preserve a business environment that does not discriminate against specific sectors

or firms, including large firms.

- Recognize that credit constraints and other factors militate against many start-ups

- Recognize that there are huge needs for public investment in leveling the playing field for workers, which also contribute to growth. Tax progressively to finance these.

Scientists and inventors?

Educated workers?

Captured institutions (inverse)