Poverty of inequality reports

Dr Eric Crampton
The National Business Review
22 January, 2016

Oxfam does fantastic work in the developing world. It is one of the relatively few charities endorsed by The Life You Can Save: the Peter Singer-inspired NGO that ranks charities by their effectiveness.

A dollar given to Oxfam does, on average, far more good than a dollar given elsewhere. And so it is frustrating when its research reports on global inequality wind up being, in a word, terrible.

This week’s report, An Economy for the 1%, followed the same pattern as last year’s. Oxfam took Credit Suisse’s annual report on global wealth, which provided country-level data on trends in wealth holdings, and re-sliced it to argue that the world’s wealth is being taken over by the already-wealthy.

It’s an approach that generates a lot of headlines and supportive commentary from anti-inequality campaigners around the world.

We can start by considering what it takes to get into the global top-tier. New Zealand, population 4.47 million, has 453,000 in the world’s top 1% by wealth. About half of New Zealand makes the world’s top 10%.

If you read Oxfam’s report and were inspired to rail against the global rich, and you own a home in Auckland, look in the mirror.

But the more headline-grabbing figures compared the world’s wealthiest with the world’s poorest. And those figures did not make much sense.


Doesn’t make sense

Oxfam’s graph tracks the net wealth held by the poorest half of the world against the net wealth held by a group of very rich people.

The chart should cause your sceptic’s eyebrow to arch, at least a little. Incomes are pretty variable – they move with the economic cycle and as people move through their life cycle. Wealth varies, too, at the individual level but follows a slower process of accumulation followed by spending in retirement. Neither should fluctuate massively when averaged across a set of, well, about 3.5 billion people.

But if we believe that chart, the real wealth of the world’s bottom half roughly doubled from 2004 through 2007, fell in 2008, rose sharply through the global financial crisis and subsequent recession, and has trailed off since then.

Does that make any sense? Is the bottom half of the world heavily invested in very cyclical assets?

For an answer, look to the Y-axis. Total wealth is measured in billions of dollars evaluated at current exchange rates.

This demonstrated when the US exchange rate is measured against the trade-weighted index and then inverted. Peaks then mean that the US dollar is low relative to its trading partners, while troughs mean the dollar is high.

The 2000s saw a slow and steady depreciation of the US dollar, a sharp appreciation during the global financial crisis, another depreciation and then a slow appreciation (with a sharp appreciation very recently).

The fluctuations seen in Oxfam’s green line seem mostly to be movements in the exchange rate.

The US dollar value of the wealth held by the poorest half of the world appreciated as the dollar depreciated, shrank as the dollar rose, appreciated again when the dollar depreciated, then dropped back as the dollar again appreciated.

The most recent sharp appreciation, if maintained, will mean that next year’s Oxfam figures will be even more headline-grabbing.

Now ask yourself: which group is more likely to have hedged their assets against currency risks. Billionaires whose wealth is mostly held in globally diversified financial assets? Or the world’s poorer half?

Should we really conclude that the world’s poor are massively poorer in 2015 as compared to 2010? The drop in wealth is substantial: down about 30% from its peak. Or is the poorer half of the world actually relatively unaffected by the appreciation of the US dollar? I would lean toward the latter.

But it gets worse than that. The relative rankings of people in the Forbes Rich List move around from year to year. If you measure the wealth of the “Top N” people in this year’s Forbes ranking, it is almost guaranteed to have shown an increasing trend.

Why? Any of last year’s list whose wealth dropped enough will not be in this year’s list. And those from last year’s list who earned enough to jump into the top of this year’s list will have had really strong growth in wealth.

And it gets a little bit worse. I noted earlier that the world’s least wealthy hold assets outside of the US but debt within the US.

That was not quite right. A lot of the world’s poorest also hold debt within the European Union. Why? The Credit Suisse figures on which the report is based are measures of net wealth.

Net wealth means assets minus liabilities. A freshly-minted Harvard graduate with $US100,000 in student loans is poorer, by this measure, than the poorest person in Bangladesh.

That indebted student’s measured debt looks worse when the US dollar is high and less bad when the US dollar is low. By my rough calculations, correcting for this would roughly double the number of billionaires required in Oxfam’s headline figures.

Who should be blamed?

Should we blame the underlying Credit Suisse report for any of these mistakes? Not really. Right on the webpage where Credit Suisse hosts its report, we can read “This year, the United States continued adding to global wealth at an impressive rate, with solid growth also evident in China. Elsewhere, local currency wealth gains were offset by depreciation against the US dollar …”

Later in the report, Credit Suisse warns: “The fact that the wealth declines observed last year depend so heavily on the prevailing exchange rate cautions against giving too much attention to the consequences of these setbacks, which may well be reversed in the near future.”

Finally, where Oxfam says policy should foster inclusive and pro-poor growth, the most recent work by David Dollar and co-authors in the European Economic Review shows that there are not really reliable policies to achieve this other than encouraging strong overall economic growth.

It’s a shame Oxfam’s reports look like this. I sympathise strongly with the parts of its report where it condemns wealth acquired by rent-seeking. But, on the whole, the reports seem more designed to fuel envy than to encourage the kind of policy that helps the poorest over the longer term.

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