The missing trillion

Oxfam Economics


As the poorest half of people are getting poorer, but their incomes are rising, there are questions around why. Below, Mark Goldring, CEO of Oxfam GB, has a conversation with Tony Shorrocks of Credit Suisse about this issue and the need to dig deeper.


Extreme poverty rates are lower than at any time in human history, and continue to fall. A billion people escaped extreme poverty, as measured by having less than $1.90 a day, in the last 15 years. We celebrate this progress, but at the same time, our report published last month, which drew on the Credit Suisse Global Wealth Databook found that when you look at data on wealth, far from seeing progress, the wealth of the bottom half of the
world’s population has been in fast decline in the last 5 years – the poor have been getting poorer, even as many will have seen their daily income levels going up. Can this really be right? If so, there are huge implications for how poverty is measured, and how policy makers should address it.
Tony: The total wealth of the bottom half has fallen significantly since 2010, even before allowance is made for inflation and population growth. This is unexpected, and something of a mystery because there is no obvious explanation. Whatever the cause, lower wealth at the bottom of the wealth distribution does not necessarily equate to greater income poverty. The link is quite complex and more research is necessary to unpack this relationship and to understand the impact of declining wealth for the bottom 50%. 

Mark: In the development sector, most attention is put on people’s incomes – whether a family has enough money day to day to meet their needs. But clearly wealth is also important – especially in countries with a limited or non-existent social safety net. Without assets, the poorest people in the poorest countries have nothing to fall back on in the event of a poor harvest or an unexpected medical bill, and can’t invest in their future – through further education, or by growing small scale enterprises for example. Oxfam’s research has also explored how the
very wealthy can use their economic power to gain undue influence, enabling them to accumulate even more wealth under favourable conditions. And then of course there is the more direct impact that wealth can have on incomes, with the richest people sometimes earning millions every day in interest alone, whilst those with negative wealth incur a cost for servicing their debts. What insights do you have on the importance of wealth from compiling all this data?
Tony: As you say, one of the most important benefits of wealth is the ability to cope with unexpected setbacks; indeed, vulnerability to adverse events is increasingly seen as a core attribute of poverty. Paradoxically, average wealth levels tend to be much lower in countries where household would benefit more from wealth because social safety nets are primitive or non-existent, and credit is difficult to arrange or offered on highly unfavourable terms. The wealthy elites have always used their economic power to influence the direction of public policy, and there seems
little evidence that the link is diminishing in significance. It is also worth noting that wealth is better than income in facilitating the perpetuation of intergenerational inequality, since it is easier to pass on in the form of material inheritance.  

Mark: Your data, and the data from Forbes show that not everyone has seen this decline. In fact the top 1%, and particularly the super rich billionaires have continued to see their wealth accumulate, rapidly in many cases. This resonates with Thomas Piketty’s famous finding that the return on capital is growing faster than growth, helping the wealthy pull away from the rest.

Tony: The past 25 years has been a specially favourable period for those who own property, bonds or equities, since inflation and interest rates have fallen, and asset prices have risen. This trend risked coming to a halt with the financial crisis in 2007-8. But quantitative easing ensured that low interest rates continued and a flood of investment funds pushed up asset prices to record levels. This has caused wealth inequality to increase. Looking forward, the interesting question is whether these trends will reverse now that interest rates seem set to edge upwards. My
guess is that wealth inequality will ease downwards, but not by very much.

Mark: So we can’t leave the market to fix itself. We need to see bold and deliberate interventions if we want to see this extreme gap between the wealthiest and the rest decline in a meaningful way any time soon. And it does seem that there is a growing consensus that this is necessary. That said, with such a lively debate about extreme inequality now, it is perhaps unsurprising that some have sought to challenge our findings. Some have said that these results are unduly affected by exchange rates, where as the US dollar strengthens, wealth held by people in other
currencies appears to fall. Or perhaps net wealth of the poorest has fallen because credit markets have strengthened allowing more people to take out loans, for studying or investment purposes. What do you think?

Tony: Exchange rate factors make little difference. Exchange rate changes tend to even out over time, so the longer run trend is unaffected. The decline in wealth of the bottom 50% could be due to growing indebtedness in many high income countries fuelled by student loans and access to credit, but growing debt is insignificant in the overall picture. For example, we estimate that there are just 109 million adults worldwide who have negative wealth, and they collectively owe USD 844 billion, roughly one third of 1% of total global wealth. The bottom 50% remains heavily
dominated by people from poorer countries.

Mark: In our report we look at other global trends that might tell us more about global inequality dynamics. We find that over the last 30 years, in almost all countries and regions, a decreasing share of total income is going to labour – more is going to returns on capital instead. We find that wages are falling behind productivity growth and within the labour share, the gap between the extremely well paid the rest is growing. Could it be that ordinary people’s wages are not keeping up with prices, and people are using up their assets to maintain their levels of
Tony: This is a widely held view. Those that have assets draw them down in order to maintain living standards. Those who are trying to accumulate assets are finding it more difficult to save. One consequence is the rapid decline in home ownership rates for younger households. In the developing world, asset accumulation by the emerging middle class has been viewed as a means of lifting living standards; but that trend appears to have tapered off in recent years.
Mark: In our work in conflict areas, particularly in Syria, we have seen people sell their assets to fund the costs of leaving their homes and living as refugees. What do you think has been the impact of these sorts of situations, where the people who are most vulnerable are seeing their net wealth rapidly decline?
Tony: This highlights the importance of wealth when faced with emergencies. But it is made worse by the fact that families who thought they had assets like houses suddenly see everything destroyed. 

Mark: Perhaps it is because over time, more wealth is being stashed offshore? Or hiding it under mattresses. Could it be that people aren’t getting less wealthy, they are getting savvy/more creative and the data is missing this?
Tony: Wealth estimates are not exact; but neither are most economic statistics, even well accepted figures like inflation rates. The way we calculate wealth inequality gets round the problem of tax havens and hidden wealth to some extent. If there is a residual effect, it is likely to result in even high levels of wealth inequality as most hidden wealth is probably owned by the wealthiest people. But in any case the overall impact of hidden assets on wealth distribution will be relatively small from a global perspective.
Mark: These findings could have serious implications for how we measure poverty and seek to eradicate it. Whilst more people are escaping extreme income poverty, they are also becoming increasingly vulnerable as their assets are eroded. This apparent trade off is counter intuitive and hugely concerning for us as an organisation seeking to end poverty in all its forms and empower citizens. How can we find out more about what’s going on here and start to think about what the implications would be for policy? 

Tony: At the moment, we do not know if those on the margins of poverty are becoming increasingly vulnerable. Nor do we understand the impact of a decline in wealth for 90% of the global population.. These are important questions to explore. However advances in technology have created huge opportunities for reducing vulnerability amongst the poor and these are not being exploited fast enough. The aim should be to provide poor households with the ability to increase the resources available to them quickly when they are in dire need.

Read more

Read The income of the world’s poor is going up, but they’re $1 trillion poorer. What’s going on? on the From Poverty to Power blog

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Author: Oxfam
Archive blog. Originally posted on Oxfam Policy & Practice.