Which Country Has the Best-Quality Elites?

Executive Summary

Elite members of economies currently face intense scrutiny, yet not all are created equal. Academics at the University of St. Gallen have developed a measure for the quality of a country’s elites. They find that some run ‘value creation business models’ that give more to society than they take, while others do the opposite. And then they rank them (Chart 1).

So, who comes out on top? Singapore. While elites there have too much political power, they more than make up for it by being the highest value creators on the planet. Next come the Germanic elite models of Switzerland (2nd) and Germany (3rd) which foster a high level of value creation. The Anglo-Saxon elites follow, led by the UK (4th) and the US (5th). Interestingly, American and British elites manage to rent seek more than power scores would suggest.

Other noteworthy results include China (12th), which has the highest score for a middle-income country. It scores better than France and Italy. At the low end are Egypt (last), Argentina (second last) and South Africa (third last).

Background

Elites are narrow, coordinated groups with business models that successfully accumulate wealth. And they have entered the firing line in recent years, whether due to automatization creating a new digitally illiterate underclass, rising social and economic inequality, or growing ESG concerns. Yet the quality of elites varies across countries, and so the researchers constructed an index, the EQx, to measure both elite power and value creation.

Countries more prone to discontent are those with ‘low-quality elites’ that choose business models which extract value or are rent seeking. Rent seeking is obtaining unearned rewards through a quest for privilege. This value extraction is inefficient because it redirects resources into less productive uses, e.g. legislation that prevents new innovative businesses from competing. On the other side of the coin is value creation. ‘High-quality elites’ will use business models that create more value than they capture. That is, they grow the size of the pie, benefiting themselves and society in general.

Source: Elite Quality Report, p1

How Is the EQx Index Constructed?

Underpinning the EQx measure are four sub-indices (Chart 2). Each sub-index contains a further three pillars. Within each of the 12 pillars sit six indicators that are built using numerous datasets. In all, there are four sub-indices, 12 pillars and 72 indicators. Details of the sub-indices and their corresponding pillars are given below.

Political Power:

• State Capture – how distributional coalitions capture the state (e.g. political corruption).
• Regulatory Capture – the extent to which interest groups capture rules and regulation (e.g. crony capitalism).
• Human Capture – the power of labour and civil service coalitions (e.g. unionisation rates).

Economic Power:

• Industry Dominance – the degree of industry diversity in an economy (e.g. relative import volumes).
• Firm Dominance – the power of single businesses within the economy (e.g. market cap).
• Creative Destruction – the replacement of outdated structures by innovative ones (e.g. firm turnover).

Political Value:

• Giving Income – how the government manages public finances for the provision of services (e.g. subsidies and transfers).
• Taking Income – how the state collects income (e.g. housing affordability).
• Unearned Income – the exploitation of natural resources such as Dutch disease propensity (e.g. government debt as percentage of GDP).

Economic Value:

• Producer Rent – the rents extracted by producers and suppliers in goods/services markets (e.g. FDI).
• Capital Rent – the rents extracted directly and indirectly from financial market participation (e.g. FX appreciation).
• Labour Rent – the rents arising from interventions by both supply and demand forces in labour market (e.g. unemployment rate).

Therefore, the ideal state would be one where elites have low power (e.g. low corruption, less monopolies) but create lots of value (e.g. affordable housing, low producer rents).

Source: Elite Quality Report, p10

Results

The EQx has a scoring system where 100 indicates a purely value-creating society of elites, while a score of zero reflects a purely rent-seeking/value-extracting business model. Chart 3 shows the country scores for each sub-index and their pillars. Countries rank by their overall score.

Singapore comes out on top because it high scores especially on the Value pillars (blue and turquoise): within political value (blue), the pillars giving (iii.7) and taking (iii.8) income are over 75; within the economic value pillars, the rent measures are in the 70-80 range.

Source: Elites Quality Report, p30

The US and UK

Both American and British elites have relatively low power, which means they score highest on the power sub-index. The index is an indicator of future value creation potential, and so the US and UK have the largest economic and human development potential. In practical terms, the US and UK have a significant degree of creative destruction (entrepreneurialism) and industry diversity.

But the two countries perform relatively worse on the value sub-index. This means US elites do extract rent through things like firm dominance – that is, there are a number of very large firms that dominate market share (hence the index score is 41.6). High government debt also reduces social programmes.

China

The country’s EQx score is at the high end of the spectrum. China’s performance is interesting given its middle-income status. It is comparable to European advanced economies like Norway or Sweden and at a level much higher than its peers in the middle-income category.

China scores much better on value than power. The elites appear to have significant political clout (or vice versa), meaning they score poorly on the political power pillar. In contrast, there is a strong degree of creative destruction and industry diversity. The country performs best on redistribution, or giving income. It ranks third, behind Singapore and Saudi Arabia.

Singapore

Singapore is the stand-out leader. It scores among the top three countries in half of the 12 pillars (creative destruction, giving income, taking income, producer rent, capital rent and labour rent). The majority of these come under value. The country extracts very few rents in goods and services markets and has low unemployment rates.

Elites in Singapore do have strong political powers. As such, the country comes low down on the power index (15). This could potentially become a significant hurdle for future economic development. South Korea, on the other hand, has weaker elites (4) because of better regulation and labour rights, but it has lower value creation (9).

Special Mentions

There are three notable successes: capital rent by Botswana, human capture by Mexico, and firm dominance by Argentina – despite the overall rankings in the aggregate Index.

Data unavailability might affect Botswana’s score. However, Argentina dominates the indicators that measure market capitalization and revenues as percentages of GDP, indicating a lower potential for rent seeking by large firms. Mexico’s high scores for collective bargaining coverage and unionization rate will perhaps be short lived, given the introduction of a law allowing workers to form independent labour unions.

Another Way to Interpret the Results

The authors place countries into quadrants depending on their index scores (Chart 5). In the top right are countries in which elites are less able to extract power and more able to create value. In the bottom left are countries in which elites extract rent to accumulate wealth for themselves.

To aid interpretation, take two countries with similar EQx scores: India and Pakistan. Both are in the bottom-left quadrant, but Pakistan is closer to the top left. That is, Pakistan elites are much more powerful but extract less value than their Indian counterparts, which on aggregate are more dispersed and yet manage to rent seek more effectively.

Source: Elite Quality Report, p23

South Africa is the only country in the bottom-right quadrant. Reforms have reduced wealth transfers and power concentration, helping the country reach the middle ranges of the power sub-index. Yet, rent-seeking levels are among the world’s highest, and so most economic growth translates into inequalities. This is mainly driven by the revolving door between business and politics, leading to favourable rules for rent seeking, private contracts and even bribery.

The Bottom Line

The World Bank’s Ease of Doing Business Index, the World Economic Forum’s Global Competitiveness Index and the UN’s Human Development Index are all good measures of a country’s economic development and institutional credibility. The EQx index builds on these by capturing the influence of elites on those two outcomes.

Investors should take note of the results. Post pandemic, it will be interesting to see how ‘crisis-time’ legislation could enable elites in certain countries to transition from value creators to rent seekers. Elites that already held power over regulation before COVID may turn to business models which shrink the size of the pie, rather than generate the much-needed long-term economic stimulus. Undoubtedly, those choices will have consequences not only for development but on social discontent.

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