Oxfam’s claims about global wealth inequality

1 February, 2016

You may have heard last week that 62 individuals have the same wealth as the bottom half of humanity. That is, there are 62 people with the combined total wealth as the poorest 3.6 billion people in the world. As far as headline-grabbing statistics go, the numbers sure are staggering.

The numbers are also woefully flawed.

The statistic comes from a recently released report by Oxfam (with the wealth statistics generated by Credit Suisse), ominously titled An Economy for the 1%. As the name suggests, the report argues the wealth of the world’s 1% is earned at the expense of the poor.

As The New Zealand Initiative has argued previously, the changes in the wealth of the bottom 50 percent of the global population are rather counter-intuitive in the Oxfam report.

According to one of the graphs in the report, the wealth of the world’s poorest is volatile, roughly doubling between 2004 and 2006, and reaching an all-time peak during the global financial crisis. Should we then conclude that recessions are good for the poor? Even if the changes in wealth did intuitively correspond with events (they don’t), it would still be hard to believe average wealth could fluctuate so dramatically when spread across a large population.

The reason for such counter-intuitive fluctuations have to do with the unit total wealth is measured in: as total wealth evaluated at current exchange rates. The peaks in total wealth show when the US dollar is low relative to its trading partners, and vice versa: the troughs are where the US dollar is high. Oxfam hasn’t really graphed changes in the wealth of the world’s poorest, what is has tracked is fluctuations in the value of the US dollar.

The method of using the Forbes Rich List to measure the richest in the world is also fraught with difficulty. The wealth of the upper echelons increases year on year (it is a ranking list after all), as could probably be expected over the long run for a stable economy. But what also changes year on year is the people who make the Forbes list: the top 62 this year may not be the same as the top 62 next year.

Finally, the report uses a measure of net wealth as an illustration of global wealth. Global net wealth is calculated as the present value of assets minus debt. What does that mean in practice? It means households with large amounts of debt – think mortgages and student loans, as well as differences based on age demographics.

Using this measure of wealth, virtually no one in China is poor, while around 20 percent of the world’s poor are in Europe. This is not an indicator of standards of living, but levels of household debt. And remember, debt is not always a bad thing. It plays a part in consumption smoothing – where consumption and savings tend to average out over a longer period of time. The Adam Smith Institute points out that debt can even be a sign of prosperity as loans are often only offered to those with reasonable financial prospects for paying them back.

But apart from the questionable methodology, one of the most grating things about the Oxfam report is the insistence that the current economic system is not working.

The report claims “power and privilege is being used to skew the economic system to increase the gap between the richest and the rest”, and that “if growth had been pro-poor, with the incomes of the bottom 40 percent growing by 2 percentage points faster than the average, poverty could be at half the level it is today".

Such views on growth go against more recent evidence that growth is in fact still good for the poor.

A study published in 2016 by Dollar, Kleineberg and Kraay has looked at the world’s poorest two quintiles, and whether specifically “pro poor” policies could do more to benefit the poor than economic growth alone. The short story? Promoting economic growth does much more to improve the incomes of the poorest and increase shared prosperity than specific macroeconomic policies. Their conclusion, not to mention title of the report, Growth still is good for the poor shows the direct effects of economic growth.  

Focussing specifically on macroeconomic policies, as well as common determinants of inequality (as considered by the broader literature, the study finds the relationship between the income growth of the poorest quintiles and average income growth is strongly equiproportionate (equal in proportion). Growth in incomes –for the average and poorest – are attributable to economic growth in general, rather than specific targeted policies. Where there are trade-offs between pro-poor policies and economic growth, the authors conclude countries are better to stick with policies that are pro-growth.

While it is hardly a new or innovative conclusion, the “still matters” part of Dollar, Kleineberg and Kraay’s report is rather important. When vastly different factions from Oxfam, to political parties, to the Pope are questioning the shared benefits of economic growth, studies like this remain relevant. Oxfam’s claims about global wealth inequality are misleading, but its claims about the economic system could be even more insidious.  

As The New Zealand Initiative has argued time and time again, growth is good.

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