The income of the world’s poor is going up, but they’re $1 trillion poorer. What’s going on?

Oxfam number cruncher Deborah Hardoon tries to get her head round something weird – according to the stats, Deborah Hardoonthe poorest half of the people are getting poorer even though their incomes are rising.

It has become something of a tradition that in January every year we take a look at the Forbes list of billionaires and the Credit Suisse Global Wealth databook and calculate how many billionaires it takes to have the same amount of wealth as the bottom 50% of the planet. Since we started doing these calculations, we have watched the wealth of the top grow at the same time as the wealth of the bottom 50% has fallen. The data tells us that the bottom 50% have approximately $1 trillion (that’s $1,000 billion) less wealth than they did 5 years ago, whilst the richest 62 have about $0.5 trillion more.

The extremely wealthy are able to accumulate more wealth in a day than a whole factory full of workers could earn in a year. On 21st April, in a 24 hour period, Carlos Slim made more than $400 million. Thomas Piketty famously points out that the rate of return on capital is higher than the general growth rate, such that capital owners are at a distinct economic advantage.

Hardoon figMeanwhile those 3.6 billion people in the bottom 50% include people in debt, people with nothing and people with a net wealth of up to about $5,000. People with little, no, or negative wealth, especially in developing countries with poor social insurance mechanisms (four out of five people in the bottom 50% live in Africa or Asia – including China and India), will not only find it hard to respond to financial shocks – like a poor harvest or a medical bill, but will also find it much harder to invest in their families’ future. Having little wealth may be concerning, but having less and less wealth year to year is even more worrying.

So when it comes to wealth, the rich are getting richer and the poor are getting poorer. However this is counter to what the income data tells us. That’s not to say that income inequality isn’t increasing – it is in most countries around the world. This has been because the incomes of the richest have been growing faster in relative and absolute terms than the incomes of everyone else – but not in most cases because the incomes of the poorest are actually falling. In fact to the contrary, the incomes of the poorest have been rising, millions of people have been escaping poverty and in 2015 it was estimated that the extreme poverty rate had fallen to less than 10%. (note – this result is based on both income and consumption data, whichever is available for each country)

So what’s going on here? Mark Goldring asked Tony Shorrocks of Credit Suisse, and their conversation highlights a

OK, that's the assets, but what's happening on income?
OK, that’s the assets, but what’s happening on income?

need to dig deeper. I have some ideas I think are worth exploring and I invite you to comment on these, tell me if I am barking up the wrong tree, but also if you want to do some work with us to help answer this conundrum, I’m all ears! Here are my initial thoughts:

Firstly we need to unpack whether the statistics that are telling us extreme poverty is falling are based on income or consumption – this matters if we are to then work out the relationship with wealth. We also know anecdotally that the wealth poor are not always the same people as the income poor (eg a high earning professional with a student debt lacks wealth, but not income), so establishing a clearer link at the individual or household level between being income poor and wealth poor could be helpful.

If we assume that the improvement in the poverty data is based on consumption, it could be that incomes have not being increasing but that in fact people have been turning turn to wealth/debt to fund their consumption. Better functioning credit markets could be helping the bottom 50% borrow money to pay for food, healthcare and school books. From microcredit loans in poorer countries to credit cards and finance agreements in richer countries, this is a plausible explanation as to why we might see consumption increase whilst wealth decreases. However the data from Credit Suisse breaks down wealth into assets and debt and shows no marked increase in debt over the 2009-2015 period. Rather than taking on debt, the bottom 50% could therefore be funding their consumption by drawing down their limited assets, which is concerning as it makes them more vulnerable in the long run.

If however consumption and incomes are rising together, people could be feeling more confident about the future, such that they may choose to spend more and save less – the ‘future income hypothesis’. In countries where social insurance mechanisms become stronger, wealth becomes less important as a safety net and people can also afford to take on larger debts. People are better off and more confident about the future, albeit making themselves more vulnerable to financial shocks where social safety nets fail.

Another explanation could be that the data, particularly for the wealth of the bottom 50% isn’t good enough at the level of detail we want it to explain – this is especially the case for poorer countries where good quality data sources are hard to find and therefore whilst the scale of the global wealth distribution is informative, we are limited to what we can learn about changes of less than 1% of the total wealth stock.

Great to hear from the P2P readership on this one!

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14 Responses to “The income of the world’s poor is going up, but they’re $1 trillion poorer. What’s going on?”
  1. Rob

    The link to the conversation between Mark Goldring and Tony Shorrocks seems to be broken.

    The question of whether you are talking about the same people in the bottom 50 per cent by wealth and by income seems important to me. Is it possible to recalculate the figures for the wealth of the bottom 50 per cent after excluding indebted people in rich countries? Would this make any difference to the pattern of how wealth of the bottom 50 per cent has changed over the past few years?

    • Deborah Hardoon

      Hi Rob, We did indeed do that calculation,according to Credit Suisse figures there are 109 million adults worldwide who have negative wealth, and they collectively owe USD 844 billion. This is just one third of 1% of total global wealth and as it hasn’t changed substantially over the last 5 years, it really doesn’t affect the headline result of the significant drop in wealth of the bottom 50%.

      • Rob

        OK, that’s surprising. Just to clarify, the sudden drop in wealth of the bottom 50% between 2007 and 2008 shown in your graph presumably *was* mostly due to large numbers of Americans becoming net debtors during the sub-prime mortgage crisis? Or is there some other explanation for that earlier change?

  2. Didier Jacobs

    Isn’t it primarily a question of exchange rates? The wealth data you quote is expressed in current US dollar at market prices. Most poor people hold their wealth in local currencies like rupees. When the value of the dollar rises, poor people’s wealth expressed in US dollars falls. However, that does not change their standard of living because they do not transact in US dollars: their wealth in rupees stays the same. The currencies of many emerging markets fell sharply relative to the dollar as their economic growth slowed down during the period you study. Exchange rate fluctuations might account for pretty much all the trillion dollar-fall in the wealth of the bottom 50%.

    The income and consumption data usually used to compare poverty and inequality internationally is expressed in “international” or “purchasing power parity” ($PPP) dollars indexed to the price of goods in a particular year. So when the dollar rises on financial markets, it does not decrease $PPP consumption or income much for poor people who consume goods denominated in local currencies. (It can have an impact over time, through rising import prices for instance.)

    If this explanation is true, it means that poor people have been getting better off, which is reflected in rising $PPP income and consumption, while the decline in $ wealth is not really relevant.

    All that said, I am not a huge fan of $PPP. It is useful for the study of poverty. But for the study of inequality, using market exchange rates makes more sense to me. The fact that the dollar rose relative to emerging markets’ currencies does mean that the economic power of the latter declined. As Oxfam’s Even It Up billboard showing a poor Indian pulling his bike next to an advertisement with a white guy relaxed in his first class airline seat illustrates, poor people aspiring to join the global jet set will need to buy their dollars at market exchange rates, not at purchasing power parity.

      • Rob

        I saw that comment on the other blog post, but didn’t quite understand. Since the exchange rate of the rupee to the dollar has gradually decreased over the last five years ( ), then we should see a gradual decrease in the value of wealth held in rupees compared to wealth held in dollars. But perhaps you mean that the size of these exchange rate effects isn’t large enough to account for the drop shown in your chart?

      • Didier Jacobs

        Shorrock and I can both be right: exchange rate fluctuations do largely cancel each other out over the long term (although there are some long-term trends in exchange rates), but they do matter over the short (year to year) and medium term (up to five years). Looking at your graph, the two times when the wealth of the bottom 50% declined correspond to years of rapid appreciation of the dollar relative to emerging market currencies: 2008 (right at the beginning of the financial crisis when the dollar became a refuge asset) and 2010-13 (when economic growth slowed in many emerging economies). By contrast, the wealth of the bottom 50% grew rapidly in 2004-2007 and again in 2008-2010 when emerging markets were booming and their currencies appreciated against the dollar. (The Chinese yuan is mostly pegged to the dollar with little fluctuations; look at other emerging currencies.)

        To Shorrock’s point and looking at the whole period you show (2002-2015), it is striking to see that both the top 65 (who hold their wealth mostly in dollars) and the bottom 50% (who hold it mostly in emerging market currencies) had about the same wealth at the beginning of the period (2002-2004) and then again in 2015 – which means by the way that inequality did not increase by that measure over that period. So, yes, exchange rate fluctuations may have largely canceled each other’s out over that whole period (although of course exchange rates are not the only driver of the wealth of the top 65 relative to that of the bottom 50%). But it does not mean that exchange rates are not relevant for the period that interests you: 2010-2013.

        In any case, the proper way to definitely answer your question is to dissect the Credit Suisse data: which countries account for the bulk of the decline in the bottom 50% wealth between 20010 and 2013? How did their exchange rate fare against the dollar in those three years? What specific assets account for the drop in those countries in that period?

  3. Chris Hoy

    Hey Deborah,

    Great post and an important issue you highlight. I think one of the main things driving this is most of the ‘income’ data collected in household surveys is actually consumption (as you mention in your post). In fact, outside of Latin America and Eastern Europe, pretty much all household survey data is just based upon consumption. I would expect that if income data was collected we would not see as strong growth as there has been in consumption. One way to begin to look at this is to compare the income and consumption data for those countries that do report on both.

    Another issue is that ‘income’/consumption surveys in the developing world tend to under report on the richest people in the distribution. As such the bottom 50% in household surveys could actually be more like the bottom 40% or 45% of the actual population. What could be interesting is to see is how well the household surveys data for the ‘richest’ say 10% corresponds to the richest 10% in the wealth data.

    Just a random thought, have you looked at comparing DHS wealth data with the Credit Suisse wealth data?

    Anyway just a few thoughts. I hope that helps!

  4. Hi Deborah

    It is clearly far more difficult to get reliable comparisons of wealth than of income. Whereas income has only to be adjusted for inflation (or local purchasing parity) year to year, the value of assets can fluctuate hugely based on the basis of valuation. For the wealthy this is easier as the vast majority of their wealth will be in property or tradeable financial assets, for which market values are readily available. For the poorest we need to understand how their wealth is made up – cash, property, land, etc? – so we can see how the market value of these assets change over time. In any case the much greater volatility on your chart for the poorest 50% raises questions about accuracy of the data. Did the wealth of this group really double between 2005 – 2007 ?

    Either way, I think your work on wealth comparisons is very valuable, and helps us to look at Global inequality in a new light. The Credit Suisse report has shown an eye-catching graph of aggregate global wealth, split by geographical region. This shows that total Global wealth is not only greater than at any time in history, but continues to grow at a rapid rate. Even, the 2008 financial crisis appears only as a temporary blip in the long term trend. This clearly demonstrates that we CAN afford to invest in the UN Global Goals to eliminate poverty, and give economic opportunities to the poorest. The World is not short of money, the issue is one of distribution which sees the greatest share of Global wealth invested in tax havens or driving up asset prices (particularly property in the World’s largest cities) while we continue to under invest in schools, hospitals, and sustainable development needed to transform lives in the poorest regions of the World.

    It would perhaps be interesting to see one more graph, showing total Global wealth split not geographically, but by level of wealth (eg,. top 62 people, bottom 50%, and the rest.

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