Financial Mail

The inequality shibboleth

What is more important? That inequality is huge and increasing, particular­ly in SA? Or that the middle class has doubled in size?


t’s World Economic Forum time again, but this time there’s a twist: inequality has taken centre stage. Late last year, the organisati­on decided that inequality was “2015’s most worrying trend”. I don’t particular­ly disagree, but really, how do you stop yourself from dripping cynicism? In Davos, Switzerlan­d, the land of the R430 hamburger, a group explicitly representi­ng the world’s richest 1% are going to solve this problem. Because, really, they want to.

The topic of inequality has been on a crescendo over the past few years, which is strange because, depending on how you measure it, inequality has actually fallen globally over the past three decades. Nobody believes you when you say that, but I’ll come back to how it’s true — and how it is not — in a moment. But first, the context.

The fact is that the notion of inequality has become a kind of shibboleth. And like all shibboleth­s, it attracts fuzzy thinking, dubious statistics and unquestion­ed fealty.

The WEF invited Oxfam Internatio­nal executive director Winnie Byanyima to be a cochair of the forum. So as a curtain-raiser Oxfam published a headline-grabbing report last week saying that 85 people control the same wealth as half of the world’s population. The report purports to show that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014, while the least well-off 80% own just 5,5%.

Stats like this have swirled around the Internet for the past few years. It’s the meme that just won’t go away. But, as a number of articles have pointed out — notably by analyst Felix Salmon as far back as April last year — there is a big problem with the data. The report relies on Credit Suisse’s 2013 Global Wealth Databook. The databook calculates net global wealth. So what? Well, a lot, actually.

The databook also published a regional distributi­on of wealth, and it shows an odd thing: China has 0% of its population in the bottom decile. Meanwhile, 7,5% of North Americans fall into decile one. How can that be?

Essentiall­y, if you calculate wealth on a net basis, a parking facilitato­r in Soweto with 5c in his pocket becomes richer than a middle-class American with a dodgy home loan. On a net basis, much of the world’s middle class suddenly becomes “the poorest of the poor”.

Calculatin­g wealth this way piles masses of people into the lower deciles. This calculatio­n shows, Salmon says, that the net worth of the bottom 30% of the world’s population — the poorest 2bn — is not low, it’s not zero, it’s negative. The world’s bottom decile don’t own nothing, they own a negative trillion dollars. This is a huge distortion.

So what is the truth? The reason global inequality is declining is essentiall­y that billions of people, mostly Chinese, have joined the middle class. World Bank lead economist Branko Milanovic found in a paper released early this year that the biggest income gains achieved between 1988 and 2008 on a global basis were deciles four through seven. Globally, people right in the middle of average world income increased their wealth by 75% — far more, in relative terms, than the top 10%. (See page 14.)

This explains a lot, like the huge increase in global air travel, the enormous number of new cars sold in China, the fast shift to smartphone­s, and so on. The trend is visible in SA too, where the black middle class has exploded in size over the past two decades. In all, half of the people who were situated in deciles one to four in 1994 have joined deciles five and six.

Comparing the very top and the very bottom misses all this, though it’s so much more significan­t in people’s actual lives than bogus memes.

Inequality is a huge problem. Obviously. But equally, I think bodies like Oxfam should acknowledg­e that the advent of market capitalism on a global scale in the 1990s has reduced poverty and increased prosperity at rates never before experience­d by humanity.

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