The income of the world’s poor is going up, but they’re $1 trillion poorer. What’s going on?

April 28, 2016

     By Duncan Green     

Oxfam number cruncher Deborah Hardoon tries to get her head round something weird – according to the stats, Deborah Hardoonthe poorest half of the people are getting poorer even though their incomes are rising.

It has become something of a tradition that in January every year we take a look at the Forbes list of billionaires and the Credit Suisse Global Wealth databook and calculate how many billionaires it takes to have the same amount of wealth as the bottom 50% of the planet. Since we started doing these calculations, we have watched the wealth of the top grow at the same time as the wealth of the bottom 50% has fallen. The data tells us that the bottom 50% have approximately $1 trillion (that’s $1,000 billion) less wealth than they did 5 years ago, whilst the richest 62 have about $0.5 trillion more.

The extremely wealthy are able to accumulate more wealth in a day than a whole factory full of workers could earn in a year. On 21st April, in a 24 hour period, Carlos Slim made more than $400 million. Thomas Piketty famously points out that the rate of return on capital is higher than the general growth rate, such that capital owners are at a distinct economic advantage.

Hardoon figMeanwhile those 3.6 billion people in the bottom 50% include people in debt, people with nothing and people with a net wealth of up to about $5,000. People with little, no, or negative wealth, especially in developing countries with poor social insurance mechanisms (four out of five people in the bottom 50% live in Africa or Asia – including China and India), will not only find it hard to respond to financial shocks – like a poor harvest or a medical bill, but will also find it much harder to invest in their families’ future. Having little wealth may be concerning, but having less and less wealth year to year is even more worrying.

So when it comes to wealth, the rich are getting richer and the poor are getting poorer. However this is counter to what the income data tells us. That’s not to say that income inequality isn’t increasing – it is in most countries around the world. This has been because the incomes of the richest have been growing faster in relative and absolute terms than the incomes of everyone else – but not in most cases because the incomes of the poorest are actually falling. In fact to the contrary, the incomes of the poorest have been rising, millions of people have been escaping poverty and in 2015 it was estimated that the extreme poverty rate had fallen to less than 10%. (note – this result is based on both income and consumption data, whichever is available for each country)

So what’s going on here? Mark Goldring asked Tony Shorrocks of Credit Suisse, and their conversation highlights a

OK, that's the assets, but what's happening on income?

OK, that’s the assets, but what’s happening on income?

need to dig deeper. I have some ideas I think are worth exploring and I invite you to comment on these, tell me if I am barking up the wrong tree, but also if you want to do some work with us to help answer this conundrum, I’m all ears! Here are my initial thoughts:

Firstly we need to unpack whether the statistics that are telling us extreme poverty is falling are based on income or consumption – this matters if we are to then work out the relationship with wealth. We also know anecdotally that the wealth poor are not always the same people as the income poor (eg a high earning professional with a student debt lacks wealth, but not income), so establishing a clearer link at the individual or household level between being income poor and wealth poor could be helpful.

If we assume that the improvement in the poverty data is based on consumption, it could be that incomes have not being increasing but that in fact people have been turning turn to wealth/debt to fund their consumption. Better functioning credit markets could be helping the bottom 50% borrow money to pay for food, healthcare and school books. From microcredit loans in poorer countries to credit cards and finance agreements in richer countries, this is a plausible explanation as to why we might see consumption increase whilst wealth decreases. However the data from Credit Suisse breaks down wealth into assets and debt and shows no marked increase in debt over the 2009-2015 period. Rather than taking on debt, the bottom 50% could therefore be funding their consumption by drawing down their limited assets, which is concerning as it makes them more vulnerable in the long run.

If however consumption and incomes are rising together, people could be feeling more confident about the future, such that they may choose to spend more and save less – the ‘future income hypothesis’. In countries where social insurance mechanisms become stronger, wealth becomes less important as a safety net and people can also afford to take on larger debts. People are better off and more confident about the future, albeit making themselves more vulnerable to financial shocks where social safety nets fail.

Another explanation could be that the data, particularly for the wealth of the bottom 50% isn’t good enough at the level of detail we want it to explain – this is especially the case for poorer countries where good quality data sources are hard to find and therefore whilst the scale of the global wealth distribution is informative, we are limited to what we can learn about changes of less than 1% of the total wealth stock.

Great to hear from the P2P readership on this one!

April 28, 2016
Duncan Green