Johnson and Rajan have a shared concern: in an age of super-wealth, we need to be constantly alert to efforts by the elite to get rich by using their political muscle to increase their share of the preexisting pie, rather than by adding value to the economy and thus increasing the size of the pie overall. As the gap between the super- rich and everyone else has grown, enrichment through reallocation—which economists call “rent-seeking”—has become a hot political issue. It is one thing for Steve Jobs, whose products are so often objects of adoration, or even Bill Gates, whose products are so often instruments of torture, to accumulate billions. It is quite another for multimillion-dollar compensation to be paid to bankers whose institutions were bailed out by taxpayer trillions, or private equity fund managers who pay 15 percent tax on most of their earnings, or for the CEOs of multinational companies to take home higher paychecks than their billion-dollar firms pay in tax in the United States.
That’s why today rent-seeking is a favorite theme for the left. But as a field of formal study, rent-seeking was most energetically elaborated by economists on the right: it is, after all, the product of state control and distribution of wealth, something the right has been in the business of trying to decrease. And as inequality rises in twenty-first-century America, some on the right have returned to the idea that the central economic ill is rent- seeking. Speaking about “The American Idea” at the Heritage Foundation in the fall of 2011, Paul Ryan, the wonkish Wisconsin congressman, argued that, rather than raise taxes on individuals, we should “lower the amount of government spending the wealthy now receive.” The “true sources of inequity in our country,” he continued, are “corporate welfare that enriches the powerful, and empty promises that betray the powerless.” The real class warfare that threatens us, he said, is “a class of bureaucrats and connected crony capitalists trying to rise above the rest of us, call the shots, rig the rules, and preserve their place atop society.”
Here’s another paradox: some of the most egregious examples of rent-seeking in recent decades have been the unintended consequence of liberal reforms designed to loosen the state’s grip on the economy. These range from the transformative privatizations in formerly centrally planned economies to the deregulation of the financial sectors of the Anglo-American economies.
Rent-seeking also takes the more classic form of powerful groups using their influence to bend the rules of the economic game in their own favor. That is easiest to do, of course, when you control the state—which is why, for instance, Nicaragua’s authoritarian Somoza family and Mir Osman Ali Khan, the last hereditary prince of the Indian state of Hyderabad, both appear on lists of the richest families of the twentieth century. Finally, innovators can be rent-seekers if they become so successful their companies become monopolist. That was true of the railroad barons in the late nineteenth century and Microsoft in the late twentieth century, and surely will be of some twenty-first-century entrepreneur.
SALE OF THE CENTURY
October is the best month to visit Kiev. The leaves of the horse chestnut trees that line the Khreshchatyk, the wide boulevard that is the Ukrainian capital’s central artery, range from dark green to bright yellow, the average high temperature is a crisp sixty-three degrees, and the central European sun isn’t yet obscured by the clouds of November.
But on October 24, 2005, attention was turned indoors, to an undistinguished room inside the State Property Fund, a grim Soviet-era building in the exclusive Perchersky neighborhood. On this autumn day, industrialists from as far afield as India and Luxembourg, the international press, some 150 demonstrators, and the nation’s television cameras, broadcasting live, converged on the State Property Fund to participate in an event of unlikely drama: the auction of Kryvorizhstal, Ukraine’s largest steel mill.
The starting price was $2 billion. In a three-way fight between Mittal Steel, based in Europe and owned by the Indian Mittal dynasty; Luxembourg’s Arcelor, working in concert with eastern Ukrainian oligarchs; and the LLC Smart Group, a Dnipropetrovsk-based consortium of Russians and Ukrainians, the number quickly soared to more than double that amount.
“Once more, I am reminding you that on the table is the package of shares for the Kryvorizhstal company,” the auctioneer, wearing an ordinary business suit, reminded the bidders and live television audience forty minutes into the proceedings. “Participant number three [Mittal Steel] bids a price of 24,200 million hryvnias [$4.8 billion]. Three! Sold to participant number three.”
Recently ousted prime minister Yulia Tymoshenko, wearing her characteristic coronet of wheat-colored braids and displaying her equally characteristic sense of theater, was the first to congratulate Lakshmi Mittal, the family’s second-generation steel man and its reigning patriarch. “It was like a football game!” she said triumphantly.
The oligarchs, she told me when we met later (and after she had been reinstalled as prime minister), “hate me—they don’t understand me because… they cannot buy me or scare me.” She was both right and wrong. In 2011, after Viktor Yanukovych, whose candidacy was backed by several eastern Ukrainian oligarchs, was elected president, he imprisoned Ms. Tymoshenko, in a politically motivated case redolent of Mikhail Khodorkovsky. She still isn’t scared, though, and was defiant both in the dock and in statements from jail.
The auction was certainly a moment of high political drama for Ukrainians. The democratic Orange Revolution, which Ms. Tymoshenko helped lead, had swept to power ten months earlier partly thanks to public revulsion at the 2004 privatization of Kryvorizhstal, for just $800 million, to a consortium that included the then president’s son-in-law. The 2005 reprivatization, at a price that was six times higher, was both a fulfillment of one of the Orange Revolution’s central promises and a vindication of one of its chief complaints.
But the Kryvorizhstal auction is also the central drama in an even bigger story. Of all the state-owned assets in the entire former Soviet Union sold to private owners since 1991, when the USSR collapsed, the one with the very highest price tag is Kryvorizhstal. That is an astonishing fact. In the two decades since the end of Soviet communism, the successor states have privatized oil companies that control around one hundred billion barrels of crude oil reserves, a mine that produced 25 percent of the world’s nickel, a major diamond producer, and a vast aluminum industry. But it is a Stalin-era steel mill in a grim and anonymous city in southern Ukraine that, if cost is any measure of value, turns out to have been the crown jewel in the former Soviet Union’s natural resource and industrial patrimony.
That, of course, is absurd. Which is why the real story of Kryvorizhstal isn’t the successful multibillion-dollar sale of a Ukrainian steel mill to an Indian magnate, it is how it dramatizes the vast giveaway of the rest of the assets of the former Soviet Union. That shift from state to private ownership is probably the single largest transfer of assets in human history. When it comes to the creation of twenty-first-century billionaires, the USSR’s sale of the century is also the most powerful driver, more important than Silicon Valley’s technology revolution or the flourishing of finance on Wall Street and in the City of London. Just consider: of the 1,226 billionaires on the
The fire sale of the assets of the former Soviet Union stands out because it marked such a sharp shift from nearly total state ownership, because the loot that was privatized was so valuable, and because the transition was so swift. But it was also part of a wider global trend. If you ever doubt that ideas matter, consider the astonishing, bloodless victory of liberal economic thinking and its concrete impact around the world in the last two decades of the twentieth century. The two great behemoths of state ownership—the former Soviet Union and China—shifted vast assets into private hands. Mixed economies in the developing world like India, Mexico, and Brazil sold off state companies and natural resources. Western capitalist countries, led by Britain, sold off companies that had once been considered natural monopolies and spun off the provision of many services that had once been thought best performed by the state.
