The rich get rich – The poor stay poor

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Being rich is undeniably fun. In many cases it is also well-deserved, acquired through hard work and excellence in one’s trade, there’s no question about that. But are there any limits to how rich can one get? Not in a numerical sense, obviously, but rather in subjective perception of one’s life quality. Is a person with 1.1 billion pounds really 10% happier than the one with only a billion or is it just greed?

Taking this thought further one might ask at which point pleasuring a single human being starts being less useful for the society as a whole than satisfying basic needs of the many. Populism, you shout, but hold your contempt for this article just a while, for this article will not be populists, but strictly economical. Let’s assume that the rich person we are talking about is deservedly rich (to nip in the bud all the moral issues) and not greedy (putting money in a vault like Scrooge McDuck is obviously harmful to economy growth). Let’s also take into account all the jobs our Richie Rich both directly and indirectly through his travels, shopping, etc. and ask a question what happens to the money left. Wouldn’t it be better for the society if this overabundance of money was actually working for economy growth? Yes, yes, I know there are banks, investment funds and charities. They are all better than nothing, but terribly inefficient. So how rich does one have to be to become a liability for the society?

Let’s start with world’s average income. Have you heard that one-third of the world’s population earn less than $2 per day while a median household income in Maryland is nearly 100 times more? Do you think it’’s true? Well, the answer is not as easy as a simple “yes” or “no” (although definitely $72 483 is a true median household income in Maryland for 2014). Apart from that, is the $2 part of the statement really that bad? Imagine a man who won a million dollars in a lottery in 2013 and travels the world in 2014 not earning a dime. His income is $0 and he’s still doing great. Statistics can be deceitful. Income data is meaningless without information about wealth. So let’s unravel the mystery and explain the numbers.

Unfortunately, it is difficult to measure directly and we have to deal with a well-educated guess rather than hard data. The best way to compare different currencies is to make the comparison in PPP$ (Purchasing Power Parity dollars) per year. This unit means dollars as earned and spent in the USA (and more specifically in Nebraska – currently the most average state income- and price- wise) and eliminates most doubts of exchange rates and local prices disparities. Furthermore, there is only scarce data describing the actual wages, so I will present you GDP per capita data instead where needed (Gross Domestic Product per capita shows how much money was made by a country per one citizen). Still, taking into account the difficulty of the task, we should be happy to have any numbers to chew on and finally shed some light on the problem.

Best data so far was provided by International Labour Organisation and comes from 2009 when the average wage amounted to around 17 760 PPP$ (Purchasing Power Parity dollars) per year. This unit means dollars as earned and spent in the USA (and more specifically in Nebraska – currently the most average state income- and price- wise). Unfortunately, this was calculated with data collected from only 72 countries (out of 196 existing – if you count Taiwan). The most notable exception is Nigeria, the world’s 20th economy with a population of 175 million people. Another very important fact is that ILO measures wages rather than income. What’s the difference? Wages are paid to employees, income is generated also by farmers, pensioners and the self-employed.

According to ILO data, the highest average wage in 2009 was paid in Luxembourg (49 068 PPP$/year) and the lowest was reported in Pakistan (3 060 PPP$/year). This makes the lowest reported average wage equal to 8.38 PPP$/day. Not a lot, but over four times more than the dreaded 2$/day. Pakistan, however, is on 134th place (out of 187) according to the International Monetary Fund 2014 GDP ranking (denominated in PPP$). When we compare Pakistani GDP of 4736 PPP$ with that of the 187th Central African Republic (607 PPP$), we can assume that in Central African Republic the average wage is in fact around 1.075 PPP$/day (7.75 less than in Pakistan). There are actually seven more countries with the average wage probably below 2 PPP$/day (in ascending order  Congo Democratic Republic, Malawi, Liberia, Burundi, Niger, Mozambique, Eritrea). All those countries are populated by 151.8 million people. Obviously, that’s a lot of poverty, but hardly a third of the world.

Alas, what’s troubling in the ILO report is that the combined amounts of the last ten countries add up to only 42 996 PPP$ – not even 90% of Luxembourg’s wage. When you look at the IMF 2014 GDP report, the disparity is even clearer, with last 157 countries’ figures adding up to roughly the same amount as the leading Oman’s 143 427 PPP$.

Thus, we now face multiple wealth accumulation processes. In the developed countries the wealth disparity is reversing, especially after the 2008 financial crisis, while it is gaining more momentum than ever in the developing economies, and staying roughly the same in the poor societies. Meanwhile, if we look at the world as a whole, the wealth gap is becoming larger every day. In other words – the rich get rich, the poor stay poor with very little in between.

To picture the problem let me refer to Oxfam studies published in the beginning of 2015. Defining wealth as all the assets (realties, cars, home appliances, gadgets, cash, etc.) minus all the liabilities (mortgages, debts, loans, taxes, bills, etc.) Oxfam claims that it takes only $3650 (roughly £2350) to be better off than half of mankind. Unfortunately, this in itself is nothing to brag about, as Oxfam states the bottom half owns roughly only as much as the world’s 85 richest people.

(It is sad to say that myself, I belong by far to that bottom half. Thus, I encourage you to buy my books to help me change that. If you like a good story you won’t be disappointed.)

For many years, wealth disparity was a local problem with the rich countries producing sophisticated, costly, technology-based goods for their societies and the poor economies concentrating on simple, cheap, labour-oriented production. The game began to change in the second half of the XXth century with the globalisation of crude resources markets (coal, oil, tungsten, etc,), but at the turn of the centuries globalisation went a step further. In XXIth production is global and so the problem of wealth disparity became global as well.

The first aspect of this issue is relativity. If you are living in the EU (~25.8% of world net wealth), North America (USA + Canada – 27.1%), Australia (~1%), one of the Far East Tigers (Japan ~10%, South Korea ~1.3%, Hong Kong ~0.9%, Singapore ~0.3%, Macao ~0.3%, Taiwan + Brunei ~0.05%) or the oil-abundant countries of the Middle East (~0.8%), chances are that even being relatively poor you are still much better off than 99% of all the people elsewhere. With only this crude geographical differentiation, it turns out that 17.22% of the world’s population hold 67.55% of the world’s wealth.

Another thing is local disparity, which is greater in places not mentioned in the paragraph above (with the exception of Hong Kong and USA) with Russia leading this infamous ranking, followed by Turkey, Indonesia, Phillippines, Thailand, India, Egypt and Brazil closing the worst ten.

Why should we care about all that? Well, with the globalisation of economy the poor are striking back. No, I am not talking about a global revolution or a World War III, I am talking about the inevitable processes that are slowly undermining the well-being of our society: pauperisation and decline of the middle class and corporatisation of the market. This happens because an old-fashioned economy model, which was based on a strong middle class and local small and medium businesses, is being replaced by a corporate, global one.

At the moment, the global production, held by transnational corporations, is migrating from the rich societies to the poorer ones following cheaper labour. The actual production process takes place in the countries with the lowest labour cost possible, and middle-grade jobs like customer service call centres and accounting services are outsourced to countries like India or Poland, where education is funded by the state and the labour costs remain relatively low. This significantly lowers the corporate production costs making it increasingly difficult for any local company to compete with them. Only highly specialised industries, requiring extraordinary skills or inseparably connected with their region, remain.

Thus the employment market changes. Instead of a well-balanced mix of various low grade and entry level positions, a vast middle class and a few rich top managers and business owners we face a different reality. Simple, difficult to move, jobs (sales, hospitality, construction) are sparser and less diverse causing more people to apply for entry level positions offered by the state or the corporations. This in turn reduces the wages pushing the basic and low management jobs down from middle-class level to little more than minimal wage level.

The middle class (defined as those, who earn more than ⅔ of the local median and less than three times as much) shrinks even further, because a vast number of middle-grade jobs decrease in number or disappear (qualified workers, local small business owners, artificers). In addition to that, strong polarisation trends in the free trades (read about it here) push many artists and writers out of the middle class either into poverty or wealth (unfortunately mostly the former happens). Finally, there is an upward flow from the upper middle class to the rich, caused by an increase in top management positions, increase in importance of certain trades (software engineers) or wealth accumulation.

This process is already visible in the USA where between 2000 and 2013 middle class shrunk from 0,3% of the population in Wyoming up to a whopping 5.7% in Wisconsin, with Ohio, Vermont, New Mexico, Nevada, North Dakota, Georgia and both Carolinas around the 5% mark. Moreover, whilst the average pay (inflation adjusted) in the USA increased by around 6%, the median recorded a 0.5% decrease. This means that regardless of the wealth disparity improvement after the 2008 crisis, the US economy shares the world’s tendency of income polarisation, which, if unaddressed, will quickly deepen the problem again.

Another conclusion is that raw data fed to the public need to be constantly processed and commented upon to extract the true picture of the global economy as well as national ones. Otherwise we will fall victim to a dangerous pattern of hidden economic dichotomy, when although the main general economy figures (GDP, average wage, unemployment and inflation rates, etc.) remain strong, they stop reflecting the lives of ordinary citizens, who become more and more impoverished. Beware, because the symptoms can already be seen.

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