Can one be poor yet refined

Distribution and poverty globally

As has already been seen in the example of Austria, the definition of relative poverty is heavily dependent on the prosperity within a country and can therefore not be applied to the entire world. Therefore, the definition of absolute poverty is mostly used worldwide.

Anyone who has less than 1.25 US dollars a day is considered to be absolutely poor (adjusted for purchasing power). This currently applies to around 1.01 billion people. There are far too many. But the successes in the fight against poverty with the help of advancing globalization are remarkable. While in 1980 around two billion people lived below the absolute poverty line, today there are just under a billion, even though the population has grown by more than three billion during this period - especially in poorer countries.

Worldwide development of poverty and population

Fig. 20. Source: World Bank.

Viewed differently: While around 1980 more than 43 percent of the world's population lived in absolute poverty, it is currently (2011) “only” 14.5 percent. That is 14.5 percent poor too many, but that does not change the fact that the misery has lost strength. This development is no coincidence, it correlates with the globalization of the markets. With the exception of Burma, Venezuela, Zimbabwe, Hong Kong and the USA, economic freedom is greater in all countries today than it was 30 years ago. The removal of trade barriers made it possible for the inhabitants of poorer regions to participate in world trade, to exploit their comparative cost advantages there and to slowly increase their extremely low standard of living.

In just under two decades, 60 percent of global economic output will come from developing and emerging countries, which are still rarely involved in globalization. This means that the poor regions will have increased their share in the global economy by almost 50 percent within three decades. Who would have ever thought such a thing possible?

"Yes, but ..." can be heard over and over again at the well-set tables of Western affluent societies. Not entirely wrong. Because people in the Third World are still starving to death. But the situation is improving. Those who see the light of day in one of the developing countries today have a much higher chance than their ancestors of surviving their birth. In China, infant mortality has fallen by 85 percent, in India by two thirds, and in Africa it has halved since 1970. Nine out of ten children attend primary school today, and almost 80 percent of the world's population have access to electricity. However, productivity in developing countries is low, mainly due to poor education, a lack of infrastructure, corruption and war. Regardless of this, countries that have opened up economically have been able to set in motion a process of catching up.

The evolution of the global distribution of income

When people talk about the distribution of income, they usually think of the distribution within their own country. In the course of globalization, however, the development of the worldwide distribution of income is also interesting. In the age of almost free movement of goods, services and people as well as the Internet, people and economies are networked like never before. Capital and labor are increasingly losing their regional ties.

The global distribution of income can be determined using three measurement methods - which provide three different results:

  • Concept 1: The distribution is measured using the median incomes of the countries. Every country is weighted equally, the size of the population does not matter. To put it simply, changes in distribution in a small country like Cyprus have the same effect as changes in a large country like China.
  • Concept 2: The distribution is measured using the median income of the countries. However, each country is weighted according to its population. Changes in distribution in a large country like China therefore have a greater impact than changes in Cyprus.
  • Concept 3: The distribution is calculated on the basis of personal incomes from all countries. All statistically available individual data are used for evaluation.

Globalization critics like to choose concept number 1, while globalization proponents prefer concept number 2. Why? We see that the Gini coefficient in Concept 1 rose during the period of globalization and only fell again since 2000 - so the inequality between the countries has increased since then. However, the different population sizes of the countries are not taken into account here. Concept 2 does exactly that, accordingly the age of globalization also shows a sharp decrease in inequality between countries. However, this ignores the distribution within the individual countries.

Concept 3 can be seen as the best method of determining the distribution. However, since individual data are required for this, the determination has only been possible since the late 1980s. Here you can see a slight increase in inequality up to 2000, but since then a downward trend again.

Worldwide distribution of income - different measurement methods

Fig. 21. Source: Milanovic (2013).

“If we compare the last point (of Concept 3, note) with a few others from earlier years, we see something that may be historically significant: Perhaps for the first time since the Industrial Revolution, there is likely to be a decline in global inequality. Between 2002 and 2008, the global Gini coefficient fell by 1.4 points. We must not rush to conclude that what we are seeing recently represents a real or irreversible decline or a new trend because we do not know whether the decline in global inequality will continue for decades. It's a tiny drop so far, a kink in the trend, but a hopeful sign indeed. For the first time in nearly 200 years - after a long period of global inequality growing and then reaching very high levels - it could be on a path down. "[1]

For the first time in 200 years, there seems to be a slight downward trend in the global distribution of income inequality. It can be assumed that this is mainly due to the opening of the markets, which has also led to the fact that, for example, services can be outsourced to other countries via the Internet.

In order to explain the reasons for the global inequality - which increased up to the year 2000 according to measurement concept number 1 - it is important to analyze the development in the individual population groups. With the help of the Theil index, differences between the countries (country of birth) and within the countries (social affiliation) are shown. An interesting development becomes visible:

What determines the global distribution of income? Social affiliation vs. country of birth

Fig. 22. Source: Milanovic (2013).

So while in 1870 more than two thirds of inequality can still be explained by differences within the countries (social affiliation), today more than two thirds can be traced back to the regional component, i.e. the differences between the countries. The “country of birth” shows the inequality that can be read from the different levels of income in the individual countries. “Social affiliation”, on the other hand, is that part of inequality that arises within a country - that is, the difference between poor and rich Americans, between poor and rich Chinese. As Figure 22 shows, the country of birth has become far more important today than belonging to a specific social class within a country. In other words: Today it is far less important to be born into a privileged home than to grow up in a country that is sufficiently globalized and thus participates in the world's growing prosperity.

In conclusion, it should be mentioned that the income differences in the individual countries are therefore tending to decrease, although the countries are in some cases drifting further apart. This is almost entirely due to African countries, which are still lagging far behind in development and which are also politically very unstable. Not least because of this, Africa tends to be excluded from trade with the world and relatively little capital flows into Africa. New forecasts (see Hellebrandt and Mauro, 2015) assume that incomes will be more evenly distributed worldwide, not least because of the positive developments forecast in the African sub-Saharan countries and in India.

Global wealth distribution or: Oxfam's subtle alarmism

Similar to the national reports on income distribution, international studies often find that rich and poor are drifting apart in terms of wealth. Oxfam, an NGO association of various aid and development organizations, reports here of dramatic developments, according to which the richest percent of the world would soon own half of global wealth - a blatant injustice that is precisely the result of capitalism and globalization. Greedy corporations ruthlessly exploit poor workers, according to Oxfam, which is why the world is unjust today as never before in human history. But is it really the case that a system that has lifted hundreds of millions of people out of the bitterest poverty in the end only helps the richest of the rich?

Oxfam relies on data from the Credit Suisse Global Wealth Report for its statements. [2] An unsuspecting source for critics of capitalism that has been reporting on the distribution of wealth around the world for years. Therefore, the development can be shown with consistent data over a longer period of time. One of the first findings that Credit Suisse draws from the comparison of the time series up to 2014 [3] is that between 2000 and 2007 the distribution of wealth became more uniform globally. This applies worldwide and on all continents, despite the rapidly increasing unequal distribution of wealth in emerging nations such as China and India. In 2007, however, in the wake of the financial crisis, this trend breaks and the distribution of wealth becomes more unequal again. In 2014, the top 0.7 percent of the wealthy owned 44 percent of global wealth. But it is important to understand what is being compared here and what influences play a role here.

In contrast to the distribution within a country, where one compares the wealthy and the poor, a comparison is made between broad layers of developed countries with those of the emerging and developing countries. Oxfam suggests that a few super-rich have grabbed the whole fortune. In order to establish this image in people's minds, the fact that an average European household ranks among the top five percent of the global wealth distribution is concealed. With around $ 4,000 in assets, you can make it into the top half of the distribution. So nine out of ten households in Austria belong to the richer half of the world. The richest percent are about 80 million people. The status achieved is defined here almost exclusively by the place of origin. The net wealth (gross wealth less debt) of the households on a reference date is also compared. But wealth changes over the course of a lifetime. The possibility of getting into debt also depends very much on the level of development of the financial market and your own assets. As a result, there are more Americans and Europeans in the lowest wealth decile than there are Chinese. This is because the lowest deciles of net wealth consist of negative assets and thus open the spread of wealth downwards as well. However, these people do not have to be (income) poor. [4]

If one compares the wealth between the countries, it must also be clear that a large number of criteria have an influence here, which are of subordinate importance in this country. The acquisition of real estate assets, for example, depends very much on legal security or the infrastructure. Property is more expensive in metropolitan areas than in rural areas. But it is of course also the case that real estate in developing countries is only a fraction of its value compared to Europe or the USA. An average homeowner, e.g. in Nicaragua, inevitably has different assets in his property than a Swiss one, although the property fulfills the same tasks. [5] In order to get the same real estate value of an apartment in Vienna's 1st district, entire areas of Burkina Faso would have to be owned. This should not hide the problems in Africa. Of course, there is great wealth inequality between countries. And of course, this is an undesirable condition. But the causes of wealth inequality in Austria are completely different from those of global distribution.

The growth in wealth in the richer countries [6] is not least driven by stock and real estate markets. For their part, stocks and real estate are again relatively unevenly distributed, especially for company holdings, which are less concentrated in the hands of them. [7] However, the stock markets have made an unprecedented race to catch up after the financial crisis. Last but not least, the loose monetary policy of the ECB (or the Federal Reserve in the USA much earlier) has accelerated the trend here. As mentioned, the DAX rose by 27 percent from the beginning of 2015 to its peak in mid-April. [8] The extent to which this development affects the distribution of wealth depends in particular on how these investments are distributed among the population. In the USA there is a broad middle class with home ownership, in Austria the proportion is significantly lower. Participation in equity assets is also concentrated in a relatively small group in Austria, so that an increase in value here tends to make the distribution appear more unequal.

Last but not least, the development in the aforementioned Global Wealth Report is very dependent on exchange rates. In 2014, for example, the euro gained five percent in value against the US dollar (in 2015 there will be a strong devaluation), while the Ukrainian currency has lost 30 percent in value. [9] The annual changes should therefore be treated with caution.

 

  • Author: Hanno Lorenz, Michael Christl
  • Date: August 01, 2015