Crony capitalism thrives around the world in the age of the pandemic
By Rajesh Mehta and Uddeshya Goel
Barely 2% of the total wealth generated in India last year is enough to provide quality health services free of charge to all citizens for a year.
As we move through the 2020-2021 pandemic year, the quote from the Greek Platonic philosopher Plutarch seems to materialize: “An imbalance between rich and poor is the oldest and deadliest disease of all republics. The long trend in income inequality has been fueled by the pandemic.
As the virus spread, central banks injected $ 9 trillion into economies around the world, in a bid to keep growth alive. They cut positive interest rates to near zero; where rates were already very low, they massively increased asset purchases; many central banks have put in place emergency financing for struggling companies and have pledged to maintain their unprecedented parameters for the next few years. In 2020, governments rolled out at least $ 12 trillion in fiscal stimulus, according to the International Monetary Fund, and central banks provided trillions more in monetary support.
At the macro level, the measures have worked. Global bond markets which showed alarming signs of dislocation in March 2020 have turned calm. Stock markets around the world have recovered. Emerging market currencies strengthened, leaving their central banks to rally to the easing action as well. The result has been extraordinarily low yields, even for the longest debt securities and traditionally riskier borrowers.
However, at the micro level, the loosening of liquidity triggered the levels of income disparity. The reason lies in the types of assets that make up wealth and how the value of those assets changed during the year of the plague, 2020.
For the majority of the population, if they have substantial wealth, it is usually held in the form of housing and retirement. Among the richest households, financial wealth and commercial wealth represent a much larger share of the total. So, as liquidity boosted the system, money flowed through central banks to the world’s largest corporations, extraordinarily expanding the financial wealth of the ultra-rich.
As a result, the total wealth of the world’s billionaires increased from $ 5,000 billion to $ 13 trillion in just 12 months and the number of billionaires in the world increased from 700 to 2,700 in 2020-2021, l most dramatic increase ever on the compiled annual list. by Forbes magazine. On the other hand, due to falling income levels of the masses, house prices remained low for most of the period, shaking the wealth of middle households.
The evolution of wealth depends both on the evolution of the value of existing wealth and of additional savings. As many households have experienced declines in income since before the crisis, saving money has become difficult if not impossible. In addition, debts are increasing among households with both new and existing benefit claims as they grapple with increased economic hardship.
READ: How crony capitalism is killing India’s environment (July 27, 2016)
On the other hand, high-income households have accumulated the majority of their income in the form of savings in the form of investments, widening the wealth gap.
India, although relatively poor compared to developed countries, the number of billionaires has increased from 38 to 140. The total wealth of billionaires has increased to nearly 20% of GDP, the second highest among emerging countries , after Russia. Moreover, more than 55% of the wealth of billionaires is concentrated in family fortunes, second only to Indonesia. The only good news was that the bad wealth of billionaires, mostly coming from the real estate and minerals sectors, declined as a proportion of the total last year, as new wealth arrived in industries such as tech, manufacturing and in particular, in diversified conglomerates.
Gautam’s net worth Adani, a first generation entrepreneur, jumped from $ 16.2 billion in 2021 to $ 50 billion, according to the Bloomberg Billionaires Index. This made him the biggest wealth gainer of the year, even beating Jeff Bezos and Elon musk, who fought in 2021 for the title of the richest in the world.
However, billionaires don’t keep pace with philanthropy, making money much faster than they give it away. Barely 2% of the total wealth generated in India in the past year is enough to provide free quality health services to all Indian citizens for one year. There has been strong discouragement by the business community against wealth taxes, citing that such a move would negatively affect investor confidence.
Although there is some reality in the arguments of these big companies, however, a dynamic system of income distribution should be installed in the country to close the growing wealth gap and calm the long-awaited social unrest. A fundamental change in income distribution policy is needed, in which, in addition to direct tax support to low-income households, the government should inject cheap funds into MSMEs through equity, rather than debt . This will indirectly support the income levels of 40% of the population, who are directly employed by these small businesses in India. In addition, anti-takeover laws are expected to be enacted with stricter standards by India’s competition commission, preventing monopolies in the economy and decreasing the concentration of wealth.
As historical events show, whenever income disparity and crony capitalism increase in the country, social unrest takes precedence over economic growth. So whatever happens next in terms of the public’s attitude towards wealth creation depends in part on how the boom evolves from here. Because as the English philosopher Jeremy Bentham says: “Any inequality which has no particular utility to justify it is an injustice.
(Rajesh Mehta, Contributing Editor, is a leading consultant and columnist working on market entry, innovation and public policy. Uddeshya Goel is a financial researcher with specific interests in international trade and capital markets. capital.)