Growth and the Superrich
Inherited wealth can slow the pace
Those concerned by the growing concentration of wealth can point to a telling statistic: the swelling ranks of billionaires. Their number in the U.S. jumped from 96 in 1991 to 189 in 1998, as tabulated by Forbes magazine, while the worldwide tally now exceeds 400.
Aside from the moral qualms such wealth may stir, a key question is whether billionaires are good or bad for national economies. According to a National Bureau of Economic Research study, the answer appears to depend on how large such wealth is relative to national output--and especially on whether it is inherited or newly created.
Analyzing 1993 data from some 41 countries, economists Randall K. Morck, David A. Stangeland, and Bernard Yeung found that billionaires' holdings varied from an average 2.4% of gross domestic product in industrial countries to an average 13.3% in East Asian developing countries (chart). They then looked at how two types of such wealth--money created by self-made entrepreneurs and old money in the hands of heirs--affected economic growth rates in subsequent years (1994-1996).
The results were revealing. Adjusting for countries' initial levels of gross domestic product per capita, educational levels, and investment rates, the researchers found that self-made billionaire wealth was associated with faster growth. By contrast, heir-controlled wealth inhibited growth, with high levels--over 6.7% of GDP--subtracting as much as two percentage points a year from the pace of economic activity.
To explain these findings, the analysts turned to studies by other economists. These indicate that in most countries (but not in the U.S. and Britain), rich families play a big part in their national economies, using leverage and "pyramids" of holding companies to control assets that far exceed their own wealth. Rather than trying to create new wealth, such families tend to use their economic and political clout to protect their holdings from competition.
The authors' case in point is Canada, where 197 of the 246 largest public companies in 1988 were controlled by individual shareholders with at least 20% of voting power. Comparing the heir-controlled companies in this group with similar widely held companies in the U.S. and Canada, they found that they had lower earnings and often slower growth in sales and employees. Founder-controlled companies, on the other hand, grew as fast or faster than their widely held competitors.
Heir-controlled Canadian companies also spent less on research and development than other companies. Indeed, the study found that such outlays tend to be low--and barriers to foreign investment relatively high--in most countries with high levels of inherited wealth.
More important, the winds of competition now appear to be changing Canadian corporate structures. Share prices of family-controlled companies fell in the wake of NAFTA, the authors note, and heir control is declining.
The moral of the story: Opening up trade and capital markets and other steps fostering competition may be the best ways to counter the inhibiting effects of old wealth on national economies--and to ensure that the creative efforts of today's entrepreneur billionaires are not reversed when the goodies are passed on to their heirs.BY GENE KORETZReturn to top
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Europe Cottons to Mutual Funds
And bond funds get the lion's share
European households have caught America's mutual-fund fever. London economists Michael Saunders and Steven Englander of Salomon Smith Barney report that net inflows to bond, equity, and mixed funds in Germany, France, Italy, and Spain--hit 213 billion euros (about $241 billion) in 1998, close to the amount Americans ponied up. That's almost double the 1997 pace.
To be sure, Europeans still prefer bond funds to equity funds--by a ratio of 2 to 1--while Americans favor stocks by the same ratio. But there's little doubt that their growing appetite for mutual funds have helped buoy Europe's stock and bond markets.
Looking ahead, the two economists believe mutual-fund inflows will stay high for a while. The combination of a graying population, possible cutbacks in old-age pensions, and low short-term interest rates is inspiring Europeans to search for higher-return investments, they say.BY GENE KORETZReturn to top