Bryan Caplan  

Demographics of the Oligarchs

PRINT
Test Scores and Economic Perfo... Teaching Statistics...

You've heard about the Russian "oligarchs," right? They're the richest men in Russia. The insinuation is almost invariably that they owe their riches not to entrepreneurial ability, but to political connections. It's not "what you know," but "who you know," right?

If this theory were true, you would expect the oligarchs to have unusual demographics for business leaders. In particular, they should be:

  • Unusually likely to have been important members of the Communist Party before they went into business.

  • Unusually unlikely to come from groups - like Jews and Armenians - known around the world for their entrepreneurial talent.

    Both predictions are wrong.

    Most of the oligarchs are too young to have been Communist Party bigwigs. As one interesting paper explains, "Most of the individuals... are relatively young: nine of them are in their 30s, and 13 are in their 40s." The older oligarchs generally had Communist backgrounds, but were hardly leading figures in the Party: "The older oligarchs have typically come from Soviet-era nomenklatura. Prior to transition, they were either managing the respective enterprises or working in government agencies supervising the enterprises, and when the Soviet-era firms were privatized, they converted their de facto control into ownership rights."

    Even more striking: The oligarchs are disproportionately Jewish. 90% of Russian Jews have left the country over the last 30 years, but 6 out of the 7 leading oligarchs have Jewish ancestry. This would be hard to explain if their success were primarily due to political connections - but expected if their success largely reflected entrepreneurial ability.

    Of course, in a corrupt and chaotic environment like post-Communist Russia, no successful businessman is going to have a perfectly clean record. You've got to compromise with the system to get by, and cut corners to get ahead. The real question is: "How much of the oligarchs' success stems from entrepreneurial ability, and how much from political connections?" Demographic information alone can't resolve the question, but it does tilt the scales in the direction of ability.


  • Comments and Sharing





    TRACKBACKS (3 to date)
    TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/560
    The author at DealBreaker.com in a related article titled How Russia’s Oligarchs Got That Way writes:
      Back in 1993 we were living in Washington DC, playing cub reporter in the nation’s capital and trying to uncover dirt on young members of the Clinton administration. As you can imagine, this job was not the most satisfying in... [Tracked on September 14, 2006 11:29 AM]
    COMMENTS (29 to date)
    Dylan writes:

    I believe many of the oligarchs were part of the system of illegal but tolerated middle men who made the communist system "work" by brokering barter trades between various planning units that had surpluses and shortages of various materials. They parlayed that bastard entrepreunership and the contacts they had in shady under the table business into buying assets for less than market value when they were privatized. In some ways, it's the worst of both worlds.

    RWP writes:

    Marshall Goldman, an economist and sovietologist, has a good treatment of the subject. In his The Piratization of Russia he addresses why these men, and he treats them individually, were successful. His basic thesis is that these men were involved in 'illegal' economic activities under the Soviet Regime and when those activities were legalized they had much better experience at getting things (goods).

    It is true that many minorities struggled in mainstream Soviet society. But then it should be unsurprising that they excelled in areas that were against the law. Ethnic Russians saw the Party as the way towards advancement, but non-Russians would have seen the blackmarket as their best chance. One should expect many minorities would not put up with the repression of economic activities and chose to leave. Those that stayed had a leg up on ethnic Russians that foundered in the new Russian economy.

    Unfortunately, humans are not homo economicus as you might wish. We need practice in business. Many economists seem to ignore that the vast majority of Soviet wealth ended up in the hands of 13 men, because they believe that eventually those corporations will operate as they do in the West. That is asking a lot from the Russian legal system.

    Richard Pointer
    MA Russian Studies Student
    University of Toronto

    Martin Kelly writes:

    The oligarchs are nothing but common thieves.

    Wondering:

    You wrote a comment that I accidentally deleted while removing a massive spam flood from EconLog this morning. It sounded like an interesting comment! It began like this:

    How come the country with the most Armenians, Armenia, is so poor? And h...

    I apologize for the error! Please feel free to repost your comment.

    Lauren
    Editor

    Martin Gregor writes:

    The insinuation is not that they "compromise with the system", but that they largely profit on behalf of the others (the state budgets).

    Your empirical definition of enterpreneurial ability thus involves willingness to steal.

    Otherwise, very nice.

    Martin Gregor
    Prague, Czech Rep.

    jake writes:

    Steve Sailer addresses Bryan Caplan's remarks:

    http://isteve.blogspot.com/2006/09/unbearable-innocence-of-economists.html

    Arin writes:

    The reason armenia is so poor is because the government is very inefficient and lacks the natural resources (oil, gold, etc) that most of its neighbors have. You have to remember the reason that America is such a wealthy country is because it had abundant natural resources in the beginning (timber, oil, gold, steel, etc) when it started out and leveraged that to grow into a superpower.

    To realize the entrepreneurial spirit of the Armenians look no further than American enterprise (MGM, Qwest, Hovnanian). Armenians comprise less than .1% of the U.S. population but at one point had 5 CEOs at fortune 500 companies. And they have one of the highest rates of business ownership in the U.S. Many people deal with Armenians on a daily basis but would never know it.

    Lauren writes:

    Arin wrote:

    You have to remember the reason that America is such a wealthy country is because it had abundant natural resources in the beginning (timber, oil, gold, steel, etc) when it started out and leveraged that to grow into a superpower.

    I think you are right to focus on resources for the success of a country, but not just the kind of physical natural resources you list.

    America's wealth stems from its human resources--the ableness, skill, education, motivation, and hard work of its citizens. Physical resources help, but it is evident from the different development rates of countries such as Russia, Mexico, and nations in the Middle East and Africa, that abundant natural resources are not enough.

    The Armenia that exists today as a country is not peopled by the same educated, skilled, motivated population for which it is named. Between 1915 and 1919, most of that population was slaughtered or fled in one of the most horrific genocides in history. The Armenians today are represented by a people in exile, living in Lebanon, the U.S., and elsewhere in the West.

    To realize the entrepreneurial spirit of the Armenians look no further than American enterprise

    Quite so. It's the human capital, not the physical resources, that make for greatness. Immigration is the greatest natural resource a country can have.

    TGGP writes:

    I'd still like an explanation for why the Armenians in Armenia are nothing special compared to diaspora Armenians. China's economy took off years after overseas Chinese had been succesful, so it's possible that Armenia might change as well. However, Armenia doesn't have anything like Maoism to move past, as far as I know.

    liberty writes:

    "You have to remember the reason that America is such a wealthy country is because it had abundant natural resources in the beginning (timber, oil, gold, steel, etc)"

    Right, just like Britain and Japan and Manhattan.

    Trade and markets have nothing to do with it, a communist island will likely do as well as a free market islands and communist mainlands as well as free market mainlands, because it is abundant natural resources that creates wealth, not comparative advantage and trade.
    .... do you see how silly that sounds?

    America is rich because we set up a free society without the tyranny of a central power that levied high taxes as in most countries, without serfdom and (for the majority white population) with protection of all rights including property rights, democracy and opportunity. Merchants and entrepreneurs were able to thrive, invent, trade and prosper. Growth and technological revolution took place in every sector. The forces that stunted growth in other countries were simply absent. That is why America is rich.

    mike writes:

    Immigration is the greatest natural resource a country can have.

    Oh, please! Stop with the cheap and obnoxious shilling for immigration. Hispanic immigration is not making America a better place. Quite the opposite.

    National resources certainly help-- especially if they are used wisely. But the most important predictive factor of economic success in the long run is the average IQ of a nation. The only instances where low IQ nations are successful is when they have an abundance of natural resources combined with an authoritarian government capable of employing those resources in an intelligent way.

    By contrast, nations with high IQs and capitalist economic systems, even with few resources (like Singapore), are bound to prosper in the long run.

    Armenia is not successful, in part, because of decades of Communism and the fact that corruption and authoritarian power structures are the norm in business and political relations throughout most of the former USSR.

    I also wouldn't be surprised to find out that the national IQ of Armenia really isn't very high and that some process has led to the selective emigration of the more intelligent and entrepreneurial Armenians to the West over the years. If the sum total of the world's Armenian population is of above-average intelligence, and the diaspora has been selected strongly for intelligence, the fact that so many Armenians live abroad would help explain both the low average IQ of Armenia and the economic success of the diaspora.

    A similar relationship exists between the Cuban exile population in Florida and Cubans living under Fidel. The average IQ of Cubans isn't very high, but the Cuban exiles in the U.S. have been reasonably successful because they represent an exceptionally intelligent and economically successful segment of the Cuban population.

    mike writes:

    Sorry, just for clarification, I posted under the name "jake" earlier. These are both names I use on different blogs. I don't post often on this blog and accidentally picked a different screen name.

    There is no intent to deceive anybody.

    liberty writes:

    "IQ" (or some measure of human capital) would be a result, not a cause of economic growth and prosperity, the cause being the institutions (protection of rights, lack of centralized control, opportunity for trade).

    Previous periods with different institutions can obviously provide a starting point IQ, but it will only last one generation.

    A high IQ centralized authoritarian regime will only be as successful as the best authoritarian regime economy - which is far far short of a free market economy over any period longer than perhaps 5-10 years. A free market economy, even that starts with a low IQ base of farmers, will soon be much more prosperous and have a higher IQ, than any authoritarian economy.

    mike writes:

    "IQ" (or some measure of human capital) would be a result, not a cause of economic growth and prosperity, the cause being the institutions (protection of rights, lack of centralized control, opportunity for trade).

    You can't be serious. IQ is, to a large extent, biological. Yes, serious malnutrition can have an effect on IQ but aside from that condition, IQ is not going to change much in a given population.

    IQ is not a measure of human capital. Rather, human capital is mostly a measure of IQ.

    S Campbell writes:

    Not who you know, hmm. Mikhail Khodorkovsky knew Jacob Rothschild.

    The two have known each other for years "through their mutual love of the arts" and their positions as directors of the Open Russia Foundation, Yukos' philanthropic branch, it said.
    LONDON (Agence France-Presse) — Control of Mikhail Khodorkovsky's shares in the Russian oil giant Yukos have passed to renowned banker Jacob Rothschild, under a deal they concluded prior to Mr. Khodorkovsky's arrest, the Sunday Times reported. Voting rights to the shares passed to Mr. Rothschild, 67, under a "previously unknown arrangement" designed to take effect in the event that Mr. Khodorkovsky could no longer "act as a beneficiary" of the shares, it said.
    http://washingtontimes.com/world/20031102-111400-3720r.htm
    liberty writes:

    so, you believe that certain races and/or ethnicities naturally have a higher IQ? For example, whites have a higher IQ than blacks, that sort of thing?

    I do not think so. I believe that IQ is determined mostly by education, rearing, confidence and other environmental factors including culture, health and of course study.

    I believe that in a poor feudal-based country with barely subsistance farming broadly spread across the countryside, you'll discover low IQs and very little human capital. If the same country changed its institutions and markets brought prosperity - the people now engaged in business, with broad ownership, with property and good jobs and entrepreneurship - that society would build more schools and the human capital would greatly increase; then if you took the tests again, you'd find suddenly high IQs.

    That is what I believe.

    MQ writes:

    Ummm, yeah. They were good crooks and thieves. Being a criminal involves entrepreneurial skills.

    Popperian writes:

    I saw this:

    Let me make a prediction: That interested parties like Andrei Shleifer and Larry Summers will _not_ take up Caplan's "demographic" argument to defend their involvement in what happened to Russia in the 1990s. You will not start reading widely Caplan's observation that:

    "The oligarchs are disproportionately Jewish. 90% of Russian Jews have left the country over the last 30 years, but 6 out of the 7 leading oligarchs have Jewish ancestry."

    Call me crazy, but for some vague reason, I'm guessing that Caplan's logic just isn't going to prove that popular with his fellow defenders of Yeltsin's oligarchs.

    http://isteve.blogspot.com/2006/09/unbearable-innocence-of-economists.html

    Omer K writes:

    I believe that IQ is determined mostly by education etc etc...

    =---------------------------'

    No one cares what you believe when the facts speak for themselves. The only way your 'belief' still rears its ugly head is setting the scientific standard impossibly high when it comes to proving part-genetic conclusions and absurdly low when it comes to 100% environmental ones.

    I'll have to tentatively agree with Sailer on this though. I do not see how simple enterpreneural ability concentrated the power of an entire nation in a handful of men without massive, not pidgin, politics to back it up.

    MQ writes:

    Ummm, yeah. They were good crooks and thieves. Being a criminal involves entrepreneurial skills.

    RWP writes:

    Pardon me. But doesn't Dr. Friedman always say that business is the biggest enemy of the market? I should have attack on this front instead of my previous front.

    Mr. Econotarian writes:

    Hispanic immigration is not making America a better place.

    Yes, yes, we heard this before about the Germans, the Italians, the Irish, the eastern Europeans, and the Chinese. Wait 30 years.

    Even if you look in the short term, Hispanic immigrants are already making my house a better place (painting, cleaning, lawn).

    NickNack writes:

    Jews and Armenians - known around the world for their entrepreneurial talent.

    Indeed:

    'Trust a snake before a Jew and a Jew before a Greek, but don't trust an Armenian.'--George Orwell noting a proverb, in Down and Out in Paris and London

    [Minor edit to the supplied URL added for clarity. The original comment seemed to suggest that the quoted text originated with George Orwell, when in fact Orwell was quoting a proverb. Orwell may have agreed with the quoted text, but it didn't originate with him.--Econlib. Ed.]

    Lauren writes:

    TGGP asked an interesting question:

    I'd still like an explanation for why the Armenians in Armenia are nothing special compared to diaspora Armenians. China's economy took off years after overseas Chinese had been successful, so it's possible that Armenia might change as well....

    I asked an American Armenian friend of mine to take a look at this thread. My friend emailed this, with permission to post it:

    Economically speaking, Armenia is choking, illegally blockaded by both Turkey and Azerbaijan for many years now. Lacking open borders, or an abundance of free trade, business doesn't really have an opportunity to prosper (and sadly, neither does the population).

    In light of Bryan's post, this explanation also fits with the relative success in business of the Russian oligarchs. With the fall of the U.S.S.R., Russians are not subject to major outside blockades on trade. China, too, has enjoyed reductions of barriers to trade.

    Lauren writes:

    Hi, mike. You carped at me:

    Oh, please! Stop with the cheap and obnoxious shilling for immigration.

    I may have waxed poetic, but actually I was making an economic argument about national resources. What I said in context was:

    It's the human capital, not the physical resources, that make for greatness. Immigration is the greatest natural resource a country can have.

    The economic term human capital contains the word "capital" because it is a commodity that persists in time. Human capital is part of the stock of resources of a country, every bit as much as physical resources such as oil, land, etc.

    While most items called natural resources cannot be increased easily, the resource called human capital is relatively replenishable and increasable. That's what education is about! Twelve years of basic school, 4 years of college, on-the-job-training or graduate school or both, plus the incessant thrumming of parental goals and values can indeed increase an individual's--and hence a nation's--stock of human capital. Evidently, education investment, however it may potentially increase the stock of human capital, still takes a long time and is costly.

    By contrast, immigration can instantly increase a country's capital stock--its national resources.

    Immigration is analogous to the discovery of a new source for a natural resource, like the chance discovery of new oil. With no investment costs, a new resource endowment springs like manna--a fresh endowment of ideas, entrepreneurial ability, skilled labor, and more.

    (As an aside, note that skills don't mean just technological, medical, or entrepreneurial skills, but also physical skills. Picking ripe grapes, strawberries, or peppers, and knowing how to conserve energy to keep it up for a few consecutive days in the hot sun rather than an hour of fun at a pick-it-yourself farm, is a skill that most bloggers don't have! Do you also know how to pick and use fresh grape leaves, how to rescue faltering silk worms on mulberrry plants, bake bagels, raise and mill unusual grains, fish in storm-tossed seas, use metals in lost ways for industry or art, or deal with crop failures for hot peppers in changing weather conditions familiar in other regions? Workers in the field know and communicate these things, moving upwards even without perfect language skills.)

    Even better, the new shot of human capital that comes with immigration is innately coupled with something no physical resource can ever have--the motivation to figure out how to use itself to best advantage. Better still, positive externalities accrue when people congregate with those motivations--see the observations of Jane Jacobs and the work of Paul Romer.

    Immigration has both costs and benefits. The economic costs are often described. The economic benefits are less often described. I was describing one of those economic benefits. You and I may disagree on whether the benefits outweigh the costs. Perhaps it was my use of the word "greatest" that set you off. Other than that opinion, I wasn't shilling for anything. I was summarizing accepted economic thought.

    TGGP writes:

    Liberty, the Flynn effect does indicate that IQ is not 100% genetic and improves over time as things like micronutrients become more common. However, we have not seen any group's IQ "hold still" while others catch up with them. Tests indicated high IQs in China years before Maoism had stopped choking the life out of the country. A free country whose citizens are of mediocre may overtake a totalitarian country full of geniuses economically, but you are not going to find that the IQ of the former surpasses the latter.

    mike writes:

    Mr. Econotarian,

    We don't have to wait 30 years. It didn't take previous (European) immigrants four generations to catch up to American educational norms. Mexicans are still way behind, with no sign of improving, even four generations into American life.

    Read this:

    http://www.parapundit.com/archives/001952.html

    The dumbing down of America might prove to be the stupidest economic move in history.

    mike writes:

    Lauren,

    I disagree with you, but I shouldn't have carped. Sorry.

    [No sweat, mike! Disagreement on the size of the pros and cons of immigration gets a lot of dander up. There are credible arguments on both sides, and you've made some very good points above.--Lauren]

    jaimito writes:

    What is shocking is the lack of entrepreneurial capability within ethnic Russians. They are a very talented people, so it is difficult to explain.

    Comments for this entry have been closed
    Return to top