Capital in the Twenty-First Century (81 page)

FIGURE 12.4.
   The world capital/income ratio, 1870–2100

According to the simulations (central scenario), the world capital/income ratio might
be near to 700 percent by the end of the twenty-first century.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

To be sure, one can easily imagine scenarios much more unbalanced than the central
scenario. Nevertheless, the forces of divergence are much less obvious than in the
case of the sovereign wealth funds, whose growth depends on windfalls totally disproportionate
to the needs of the populations benefiting from them (especially where those populations
are tiny). This leads to endless accumulation, which the inequality
r
>
g
transforms into a permanent divergence in the global capital distribution. To sum
up, petroleum rents might well enable the oil states to buy the rest of the planet
(or much of it) and to live on the rents of their accumulated capital.
⁴⁶

FIGURE 12.5.
   The distribution of world capital, 1870–2100

According to the central scenatio, Asian countries should own about half of world
capital by the end of the twenty-first century.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

China, India, and other emerging countries are different. These countries have large
populations whose needs (for both consumption and investment) remain far from satisfied.
One can of course imagine scenarios in which the Chinese savings rate would remain
persistently above the savings rate in Europe or North America: for example, China
might choose a retirement system funded by investments rather than a pay-as-you-go
system—a rather tempting choice in a low-growth environment (and even more tempting
if demographic growth is negative).
⁴⁷
For example, if China saves 20 percent of its national income until 2100, while Europe
and the United States save only 10 percent, then by 2100 a large part of the Old and
New Worlds will be owned by enormous Chinese pension funds.
⁴⁸
Although this is logically possible, it is not very plausible, in part because Chinese
workers and Chinese society as a whole would no doubt prefer (not without reason)
to rely in large part on a public partition system for their retirement (as in Europe
and the United States) and in part because of the political considerations already
noted in the case of the petroleum exporting countries and their sovereign wealth
funds, which would apply with equal force to Chinese pension funds.

In any case, this threat of international divergence owing to a gradual acquisition
of the rich countries by China (or by the petroleum exporters’ sovereign wealth funds)
seems less credible and dangerous than an oligarchic type of divergence, that is,
a process in which the rich countries would come to be owned by their own billionaires
or, more generally, in which all countries, including China and the petroleum exporters,
would come to be owned more and more by the planet’s billionaires and multimillionaires.
As noted, this process is already well under way. As global growth slows and international
competition for capital heats up, there is every reason to believe that
r
will be much greater than
g
in the decades ahead. If we add to this the fact that the return on capital increases
with the size of the initial endowment, a phenomenon that may well be reinforced by
the growing complexity of global financial markets, then clearly all the ingredients
are in place for the top centile and thousandth of the global wealth distribution
to pull farther and farther ahead of the rest. To be sure, it is quite difficult to
foresee how rapidly this oligarchic divergence will occur, but the risk seems much
greater than the risk of international divergence.
⁴⁹

In particular, it is important to stress that the currently prevalent fears of growing
Chinese ownership are a pure fantasy. The wealthy countries are in fact much wealthier
than they sometimes think. The total real estate and financial assets net of debt
owned by European households today amount to some 70 trillion euros. By comparison,
the total assets of the various Chinese sovereign wealth funds plus the reserves of
the Bank of China represent around 3 trillion euros, or less than one-twentieth the
former amount.
⁵⁰
The rich countries are not about to be taken over by the poor countries, which would
have to get much richer to do anything of the kind, and that will take many more decades.

What, then, is the source of this fear, this feeling of dispossession, which is partly
irrational? Part of the reason is no doubt the universal tendency to look elsewhere
for the source of domestic difficulties. For example, many people in France believe
that rich foreign buyers are responsible for the skyrocketing price of Paris real
estate. When one looks closely at who is buying what type of apartment, however, one
finds that the increase in the number of foreign (or foreign-resident) buyers can
explain barely 3 percent of the price increase. In other words, 97 percent of today’s
very high real estate prices are due to the fact that there are enough French buyers
residing in France who are prosperous enough to pay such large amounts for property.
⁵¹

To my mind, this feeling of dispossession is due primarily to the fact that wealth
is very highly concentrated in the rich countries (so that for much of the population,
capital is an abstraction) and the process of the political secession of the largest
fortunes is already well under way. For most people living in the wealthy countries,
of Europe especially, the idea that European households own 20 times as much capital
as China is rather hard to grasp, especially since this wealth is private and cannot
be mobilized by governments for public purposes such as aiding Greece, as China helpfully
proposed not long ago. Yet this private European wealth is very real, and if the governments
of the European Union decided to tap it, they could. But the fact is that it is very
difficult for any single government to regulate or tax capital and the income it generates.
The main reason for the feeling of dispossession that grips the rich countries today
is this loss of democratic sovereignty. This is especially true in Europe, whose territory
is carved up into small states in competition with one another for capital, which
aggravates the whole process. The very substantial increase in gross foreign asset
positions (with each country owning a larger and larger stake in its neighbors, as
discussed in
Chapter 5
) is also part of this process, and contributes to the sense of helplessness.

In
Part Four
I will show how useful a tool a global (or if need be European) tax on capital would
be for overcoming these contradictions, and I will also consider what other government
responses might be possible. To be clear, oligarchic divergence is not only more probable
than international divergence, it is also much more difficult to combat, because it
demands a high degree of international coordination among countries that are ordinarily
engaged in competition with one another. The secession of wealth tends, moreover,
to obscure the very idea of nationality, since the wealthiest individuals can to some
extent take their money and change their nationality, cutting all ties to their original
community. Only a coordinated response at a relatively broad regional level can overcome
this difficulty.

Another point that needs to be emphasized is that a substantial fraction of global
financial assets is already hidden away in various tax havens, thus limiting our ability
to analyze the geographic distribution of global wealth. To judge by official statistics
alone (relying on national data collated by international organizations such as the
IMF), it would seem that the net asset position of the wealthy countries vis-à-vis
the rest of the world is negative. As noted in
Part Two
, Japan and Germany are in substantial surplus relative to the rest of the world (meaning
that their households, firms, and governments own a lot more foreign assets than the
rest of the world owns of their assets), which reflects the fact that they have been
running large trade surpluses in recent decades. But the net position of the United
States is negative, and that of most European countries other than Germany is close
to zero, if not in the red.
⁵²
All told, when one adds up the positions of all the wealthy countries, one is left
with a slightly negative position, equivalent to about
−
4 percent of global GDP in 2010, compared with close to zero in the mid-1980s, as
Figure 12.6
shows.
⁵³
It is important to recognize, however, that it is a very slightly negative position
(amounting to just 1 percent of global wealth). In any case, as I have already discussed
at length, we are living in a time when international positions are relatively balanced,
at least when compared with the colonial period, when the rich countries enjoyed a
much larger positive position with respect to the rest of the world.
⁵⁴

Of course this slightly negative official position should in principle be counterbalanced
by an equivalent positive position for the rest of the world. In other words, the
poor countries should own more assets in the rich countries than vice versa, with
a surplus on the order of 4 percent of global GDP (or 1 percent of global wealth)
in their favor. In fact, this is not the case: if one adds up the financial statistics
for the various countries of the world, one finds that the poor countries also have
a negative position and that the world as a whole is in a substantially negative situation.
It seems, in other words, that Earth must be owned by Mars. This is a fairly old “statistical
anomaly,” but according to various international organizations it has gotten worse
in recent years. (The global balance of payments is regularly negative: more money
leaves countries than enters them, which is theoretically impossible.) No real explanation
of this phenomenon has been forthcoming. Note that these financial statistics and
balance-of-payments data in theory cover the entire world. In particular, banks in
the tax havens are theoretically required to report their accounts to international
institutions. The “anomaly” can presumably be explained by various statistical biases
and measurement errors.

FIGURE 12.6.
   The net foreign asset position of rich countries

Unregistered financial assets held in tax havens are higher than the official net
foreign debt of rich countries.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

By comparing all the available sources and exploiting previously unused Swiss bank
data, Gabriel Zucman was able to show that the most plausible reason for the discrepancy
is that large amounts of unreported financial assets are held in tax havens. By his
cautious estimate, these amount to nearly 10 percent of global GDP.
⁵⁵
Certain nongovernmental organizations have proposed even larger estimates (up to
2 or 3 times larger). Given the current state of the available sources, I believe
that Zucman’s estimate is slightly more realistic, but such estimates are by nature
uncertain, and it is possible that Zucman’s is a lower bound.
⁵⁶
In any event, the important fact is that this lower bound is already extremely high.
In particular, it is more than twice as large as the official negative net position
of the combined rich countries (see
Figure 12.6
).
⁵⁷
Now, all the evidence indicates that the vast majority (at least three-quarters)
of the financial assets held in tax havens belongs to residents of the rich countries.
The conclusion is obvious: the net asset position of the rich countries relative to
the rest of the world is in fact positive (the rich countries own on average more
than the poor countries and not vice versa, which ultimately is not very surprising),
but this is masked by the fact that the wealthiest residents of the rich countries
are hiding some of their assets in tax havens. In particular, this implies that the
very sharp increase in private wealth (relative to national income) in the rich countries
in recent decades is actually even larger than we estimated on the basis of official
accounts. The same is true of the upward trend of the share of large fortunes in total
wealth.
⁵⁸
Indeed, this shows how difficult it is to track assets in the globalized capitalism
of the early twenty-first century, thus blurring our picture of the basic geography
of wealth.