Inequality Is the Wrong Indicator – Why We Should Focus on Poverty Instead

One of the most talked-about social issues today is inequality. Numerous media outlets from CNBC to Brazil’s Jornal O Globo have published the results of Oxfam’s global report on inequality which alleges an ever-rising gap between the rich and the poor.

In its 2018 report, Oxfam claims that “82% of all growth in global wealth in the last year went to the top 1%, while the bottom half of humanity saw no increase at all”; “New data from Credit Suisse means 42 people now own the same wealth as the bottom 3.7 billion people”; and “Over the last decade, ordinary workers have seen their incomes rise by an average of just 2% a year, while billionaire wealth has been rising by 13% a year – nearly six times faster,” among others.

However, before flipping the table and occupying Wall Street, we should take a closer look at what these figures really mean. Is inequality as bad of a problem as it seems to be? Or are the poor better off today than before?

The Problem with Inequality

First of all, observing inequality on its own is insufficient for any means of understanding. By definition, it measures the level of income or wealth that a group of people receive or own relative to another group of people within a society. The key word here is relative. That means it provides no information in regards to whether the bottom quintile has a low or high level of income or about the quality of life of any other subdivision whatsoever.

Considering the standard measure of inequality, a country with a low Gini index (relatively equal) may not necessarily be more developed or richer than a country with a high Gini index (relatively unequal).

For instance, Cuba, with a Gini index of 0.38 and Liberia with 0.32 have much less inequality than the highly-developed Singapore and Hong Kong, with Gini coefficients of 0.45 and 0.53, respectively. Citizens in a poor country with low inequality are equitably poor. In this example, inequality fails to indicate whether Singapore’s or Hong Kong’s lowest quintiles have a better quality of life than that of Cuba and Liberia or vice versa.

Elaborating on this point, rising inequality may not necessarily be a negative outcome just as declining inequality may not necessarily be positive. A developing society where both the rich and the poor have growing incomes, but the rich are rising faster than the poor, will experience a surge in inequality. However, since both the rich and the poor have increased incomes, everyone is better off than before.

Conversely, a struggling economy that experiences a reduction in real incomes of both the rich and the poor, but the rich are declining at a faster pace, will witness a decrease in inequality. Yet, both groups are now worse off even though their income gap narrowed. In this example, a reduction in inequality was actually negative.

This argument is better explained by the work of Simon Kuznets (1955) regarding the relationship between economic growth and income inequality. He suggests that in pre-industrial nations, inequality is low because most of their population is equally poor (think again about Liberia and Cuba).

As nations advance to more productive industrial activities, inequality rises as a result of uneven rates of development. Many Latin American countries would fit in this category today.

Finally, once a nation fully develops and becomes richer, urban and rural gaps are reduced, most members of society catch up, and welfare is extended to all participants, thus lowering inequality once again. Nordic countries most closely resemble this stage.

Another limitation is that inequality advocates often study the wrong indicators. Using wealth or net worth as a measure of inequality is not only misleading but also incorrect. Net worth is merely the result of one’s “assets minus liabilities” and does not reflect the subject’s quality of life. For example, a Harvard student repaying his $100,000 loan has a negative net worth although he may live comfortably with Netflix and other amenities at home and vacations once a year.

By these standards, he is considered poorer than a 6-year-old girl with $0.10 in her pocket or poorer than a man in Africa living on $2 a day, even though it is clearly not the case. In fact, according to Oxfam’s report, it takes a net worth of roughly $68,800 to be part of the richest 10 percent of the world. In developed countries, most people with a paid house would more than meet this requirement. To be in the top 1 percent of the world, the threshold is $760,000.

The Real State of the Poor

So, if inequality has its limitations, what indicators can give us a glance at the real state of the poor? The most significant is the global headcount of people living under the poverty line. But other development indicators include life expectancy, infant mortality rates, access to drinking water, literacy, schooling rates, and many more.

All these variables measure living standards (and thus, poverty), and despite the alleged levels of inequality, they have been improving at a rapid pace since the Industrial Revolution, especially in recent years. Linked below are a few charts compiled from World Bank data. Unfortunately, not all data is available in the same time frames.

Global Poverty Line

The global extreme poverty threshold, as defined by the World Bank, is an income of $1.90 a day (2011 PPP). Other poverty thresholds are $3.20 and $5.50 a day. All three headcounts have dropped since the World Bank started measuring them.

Back in 1981, 42.2 percent of the world’s population was living in extreme poverty. By 2013 it had fallen to 10.7 percent. That is a reduction of a whopping 74.3 percent in 32 years. In 1990, the United Nations set the first Millennium Goal to cut 1990s poverty levels by half by 2015. This goal was achieved five years before the deadline, in 2010.

Life Expectancy at Birth

Similarly, life expectancy is at all-time highs and rising.

Infant Mortality

Infant mortality rates were at 6.5 percent in 1990 and have now been cut more than half to 3.05 percent as of 2016.

Access to Drinking Water

Although access to drinking water in urban areas was already relatively high at the start of 1990, significant progress has been seen in the rural areas.

Literacy Rates

Global literacy rates hit 86.2 percent in 2016 and continue rising.

Children’s Schooling

The percentage of children not attending school has dropped from 27.6 percent in 1970 (35.4 percent for girls) to 8.7 percent in 2014. Females remain at a higher percentage than males (9.5 percent vs. 8.0 percent respectively).

So next time you hear about inequality figures, think about their limitations, and all the other ways in which the world’s poor are growing better off today. Global quality of life is better today than ever before.

José Ponce is a young entrepreneur. He is a member of Students for Liberty Ecuador, and is a regular contributor for PanAm Post.

Source: FEE

The views expressed on AustrianCenter.com are not necessarily those of the Austrian Economics Center.
2018-07-03T14:08:32+00:00

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