Plutocrats

Everywhere, the goal was to get the government out. But the irony of the victory of the liberal economic idea is that putting it into practice delivered the greatest rent-seeking windfall in economic history—the state, after all, was in charge of privatization. Influencing that one-off division of the spoils was one of the surest ways to join today’s global super-elite.

WHO WAS THE RICHEST MAN IN HISTORY?

In fact, according to calculations by Branko Milanovic, the richest man who ever lived isn’t a Russian oligarch, but he does owe much of his fortune to the great wave of liberalization that swept the world when Soviet communism collapsed.

Comparing income across history is hard. The conversion tools we use to make comparisons across geographies today—currency exchange rates or the more subtle measure of purchasing power parity—are ineffective when the goods we consume—horses vs. private jets or personal scribes vs. iPads—are so different. Milanovic gets around this mismatch by turning to Adam Smith. His yardstick of wealth was how much of our compatriots’ work we can buy: “A person must be rich or poor according to the quantity of labor which he can command.” Among today’s billionaires, Milanovic’s calculations favor the rich man in a poor country—he can employ more of his less well-paid compatriots. If anything, it is also a measure that overstates the wealth of the ancients —after all, no matter how rich you were in Rome or Egypt, what today are ordinary middle-class services like telephones or airplane travel were in those days luxuries that were literally unimaginable. What Milanovic’s approach may understate is the power gap between ancient oligarchs and everyone else: many owned slaves or serfs, whom they were free to beat or kill, and some could raise their own armies, which rivaled the power of the relatively weak state.

Marcus Crassus, who lives on today as a cartoon villain in video games based on Spartacus’s slave revolt, which he helped crush, was famous in his own time as the wealthiest man in Rome. He was nicknamed “Dives” or “the Rich” and successfully defended himself when charged with the capital crime of corrupting a vestal virgin by explaining he was after the maiden’s money, not her virtue; his fellow Romans thought that account rang true to character. Plutarch estimated Crassus’s fortune at 170 million sesterces; Pliny the Elder put it a little higher, at 200 million. That second estimate was roughly the size of the entire government treasury of the Roman empire. Gauged by Milanovic’s metric, Crassus’s fortune translated into an annual return that was equal to the average yearly income of thirty-two thousand Romans.

That’s a lot, but Crassus was handily outearned by the first generation of plutocrats, the robber barons of the Gilded Age. Andrew Carnegie’s wealth was at its apex in 1901, when he purchased U.S. Steel. His share in the company was worth $225 million, which yielded an annual income the same as that of 48,000 average Americans. John D. Rockefeller did even better: his peak fortune of $1.4 billion in 1937 yielded an annual income equal to that of 116,000 Americans.

But all three are trumped by the man at the head of the 2012 Forbes global rich list, Mexican tycoon Carlos Slim. Forbes put Slim’s fortune that year at $69 billion, enough to earn an income equivalent to the average annual salary of more than 400,000 Mexicans. Here’s another way to see Slim’s relative economic weight in Mexico: His fortune could buy 6 percent of Mexico’s annual economic output. At his peak wealth, Rockefeller could buy less than 2 percent of the U.S. annual output. Bill Gates, America’s top dog in the twenty-first century, could afford less than 0.5 percent of the country’s yearly economic output. If you make a telephone call, smoke a cigarette, go to the bank, take a flight, or ride a bike in Mexico, you probably pay a few pesos to Slim. His presence is so ubiquitous that one restaurant in the capital quips on its menu that it is the only place in Mexico not owned by Slim.

Like the Russian oligarchs—as it happens, Milanovic thinks the second-richest person of all time was oil baron Mikhail Khodorkovsky, who he calculates could buy the labor of a quarter of a million Russians in 2003, the year before Khodorkovsky was arrested—Slim owes his leap from millionaire to billionaire to the wave of economic liberalization that swept the world, particularly the previously state-dominated emerging market economies, in the nineties. In Slim’s case, the windfall was telecom privatization.

That sale was orchestrated by Carlos Salinas, a Harvard-educated technocrat determined to reform a stagnant Mexican economy whose growth was constrained in part by the dominance of inefficient, state-controlled companies. Like the liberals who spearheaded Russia’s great sell-off, Salinas was a true believer in market reforms. And he believed in Slim, whom he had befriended in the eighties. That was a rough decade—the 1982 nationalization of the country’s banks and the plummeting price of oil had provoked capital flight and weakened economic growth—but Slim, building on his family’s retailing fortune and his own balance-sheet brilliance, held his nerve and bought assets on the cheap, expanding into cigarette production and insurance. Salinas liked Slim’s commitment to the country, his ability to see opportunity at a time of peril, and his entrepreneurial verve. The pair were dubbed “Carlos and Charlie’s” after a cheap and cheerful local restaurant chain.

Slim was a vocal supporter of his friend’s reform effort, speaking in favor of the plan in both public and private and lobbying politicians and the media to back it, too. When Telmex, the country’s telecom monopoly went on the block, he pounced. Unlike so many of the post-Soviet privatizations, Telmex was auctioned off for real money—$1.76 billion, for a more than 20 percent controlling stake, which was widely considered reasonable at the time. (Even at that healthy price, one of the losing bidders, and an erstwhile close friend of Slim’s, Roberto Hernandez, has suggested the auction was rigged. Both Slim and Salinas have repeatedly denied that charge.)

Telmex’s privatizers were right to argue that the state monopoly had done a dreadful job serving Mexicans. Before Telmex was sold off, the average wait for a telephone line was a year, and only one-quarter of Mexican homes had a phone. But the sale was also a rent-seeker’s dream. That’s partly because, to dress up Telmex on the auction block and make the privatization a political success in the short term, the winner was offered a six-year extension of the company’s national phone monopoly and the only national cell phone license.

These formidable advantages were enhanced by a remarkably weak regulatory setup. The sale itself was conducted by the finance ministry, rather than the telecommunications ministry, and a telecom regulator was created only three years after the Telmex privatization. Once it was up and running, the regulator was severely outgunned; its annual budget was just a couple of days’ revenue of the Slim telephone businesses. Even when regulators do rule against Telmex, as a study by Mexican and American political scientists Isabel Guerrero, Luis- Felipe Lopez-Calva, and Michael Walton has found, the company is very effective at using amparos, a Mexican court injunction that allows government rulings to be blocked, to delay unfavorable decisions. When Salinas’s party, the PRI, gave way to Vicente Fox, Mexico’s first president elected by the opposition party in decades, Slim’s cozy relationship with the state endured—Fox named a former Telmex employee, Pedro Cerisola, as minister of communications and transport.

The result has been lucrative market dominance for the Slim telecom empire, which controls about 80 percent of all fixed lines, and about 70 percent of all cell phones. One consequence of that near-monopoly control is low investment in innovation—Mexico’s is among the lowest in the OECD. Indian companies filed five telecom patents in 2001 and thirteen in 2005; Mexican firms didn’t file any between 1991 and 2005. Another is high price. Within the OECD, Mexican businesses pay the highest rates for a basket of cell lines and landlines; Mexican individuals pay the second-highest rate. As a result, in 2007 half of Mexicans had a landline telephone and 60 percent had a cell phone. That is a great improvement on 1990, but a poor performance compared with a country like Turkey, which has roughly the same per capita GDP as Mexico but a phone penetration of 75 percent.

Slim is the biggest beneficiary of Mexico’s liberalization, but he isn’t its only one. In 1991, shortly after Salinas launched his reform drive, there were two Mexicans on the Forbes billionaire list. In 1994, at the end of the Salinas presidency, there were twenty-four. Like Slim, Mexico’s other billionaires were enriched not only by the initial sell-off of state assets, but also by an ongoing ability to influence the rules of the economic game. The political scientists who rated Slim’s success at getting telecom judgments that helped Telmex did a broader calculation of the legal effectiveness of the country’s plutocrats. They found that billionaires were three times more likely than other plaintiffs to win rulings in their favor and triumphed over state regulators an average of three out of four times when their disputes went to court.

The rise of the Mexican and former Soviet privatization billionaires is an easy target, because the broader impact of liberalization on their countries’ economies has been mediocre. Mexico grew by an average of 3.5 percent