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wealth inequality overall. Wealth inequality that wasn't due to political connections, income inequality and poverty all had little effect on growth.
“The negative effects of wealth inequality are largely being driven by politically connected wealth inequality. That seems to be the primary channel that drives this relationship,” Bagchi said in an interview.
The researchers estimate that a 3.72 percent increase in the level of wealth inequality would cost a country about half a percent of real GDP per capita growth. That's a big impact, given that average GDP growth is in the neighborhood of two percent per year, Bagchi said.
Why is politically connected wealth inequality so bad for a country? The researchers suggest that when wealth and power becomes concentrated in the hands of a few, those business and political elites often influence government policy in a way that hurts the broader interest.
For example, politically connected business elites can charge consumers higher prices for services, control access to bank loans and other funding, and prevent outsiders from starting competing businesses. “One of the things that shocked us is that once the billionaires had a significant amount of wealth, they would often take steps to try to limit the amount of competition,” Bagchi said.
Bagchi points to the example of Carlos Slim Helú, a Mexican billionaire who started in telecommunications. Slim made his fortune when Mexico privatized its telecom sector, and sold a chunk of it to Slim's company at a cheap price. The Mexican government did this with the expectation that Slim's Grupo Carso would reduce its prices and expand coverage, says Bagchi. “That really didn’t pan out."
Today, prices for telecom services continue to be significantly higher in Mexico than in other countries, and investment in the sector is lower. And Slim has used the wealth he gained from telecom to expand into other sectors of the economy.
Bagchi cites Russia's oligarchs as another example. Russia did not have any billionaires on the Forbes list until the 1990s, when the country began to privatize state-owned oil and gas companies. Certain government employees “were in the right place at the right time, and they acquired control of these natural resource companies at bargain-basement prices,” Bagchi says.
For example, the study mentions Russian billionaire Mikhail Fridman, who financed Boris Yeltsin’s re-election campaign in 1996 and was able to buy state-owned oil and metals companies at very cheap prices, the Wall Street Journal reported in 2001. Over the next 20 years, crony capitalism made Russian society more unequal and reduced its economic potential, Bagchi says.
According to Bagchi, one takeaway of the research is that developing countries should limit how much businesses have to interact with the state to get things done

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