Wednesday, January 22, 2014

Oxfam's Poor Study on Global Economic Inequality

A recent study published by Oxfam, an international organization dedicated to fighting global poverty, has gone viral. The main finding that has grabbed people's attention is that "the bottom half of the world's population owns the same amount of wealth as the richest 85 people in the world (p. 2)." When hearing that statistic, I'm sure many of us are thinking, "How unfair! How unjust! How can we live in a world where the wealthy thrive, and the poor are suffering?" Oxfam's issue is not with economic inequality per se, but rather when it's so concentrated that the rich dictate policy, such as financial deregulation, skewed tax systems and rules facilitating evasion, and austerity economics (p. 3).  To counter this 'disturbing trend,' Oxfam's recommendation is to create "the right mix of government policies that focus on poor people by increasing social public expenditures (p. 24)," or as I like to call it, creating redistributionist welfare states. Oxfam's facile, anti-capitalist narrative notwithstanding, I had quite a few issues with how they portrayed global economic inequality in the past thirty years.

First is the problem with economic inequality itself. When looking at the rising inequality in five middle-income countries (Figure 2), the poor have a smaller percentage of wealth than they did about thirty years ago. Looking at the disparity between the rich and the poor in this manner makes the flaw of looking at wealth in relative terms, not absolute terms. Everyone would like a bigger piece of the pie. That's part of human nature. Now, if the pie stayed the same size over this time period, I would find this trend to be disturbing. However, when having this discussion, what people tend to forget is that the pie has grown substantially over the past thirty years. Just take a look at real GDP growth over time. Like most people, I would rather have more pie [in absolute terms], even if that means having a smaller percentage of the overall pie.

This is why I wish Oxfam would have finished the sentence of "the rich get richer." While the rich get richer, what the people over at Oxfam neglect is that the poor also get richer. Looking at the United States, this is certainly the case, even when looking at the growth rates in real dollars. And that does not even consider the increased purchasing power that comes about when looking at the improved quality of what can be consumed compared to thirty years ago! On a global level, let's look at the fact that extreme poverty, which is measured as those earning less than one dollar per diem, has dropped eighty percent over the past thirty years (Pinkovisky and Sala-i-Martin, 2009), but you'll never here this statistic as part of the narrative. And let's not forget that income inequality between nations has decreased substantially in the past forty years (Liberati, 2012).

Also, I wish Oxfam had some historical perspective when looking at the issue. For one, in pre-capitalist times, if you were not one of the very few who was lucky enough to have been born into wealth, you were destined to an impoverished life in squalor. If you want to talk about concentrated wealth, pick up a history book! Capitalism has been the single greatest impetus for helping people get out of poverty. Second, I don't think Oxfam really bothered to ask why the trend occurred in the first place. By reading Oxfam's report, one would be under the disillusion that the wealthy having a disproportionate pull in politics, not to mention the general corruption in politics, were unique phenomena that have only existed in the past thirty years. Simply not so. The biggest drivers of the enlarged disparities over the past thirty years are globalization, technology, and the expansion of various sectors that amass and utilize large amounts of capital and wealth, most notably the financial and technology sectors.

A bit of nitpicking before I conclude. Oxfam blames Europe's woes on austerity (p. 13), which I found perplexing because with the possible exception of Greece, Europe has not partook in austerity. Furthermore, why is Oxfam not looking at individuals while measuring economic inequality? By tracking individuals, instead of quintiles or other groupings, you get a better sense of economic mobility. Moreover, if you're going to kvetch about tax avoidance (p. 16), maybe you shouldn't make tax regulation so burdensome where the rich feel incentivized to stash their money in the Cayman Islands or a Swiss bank account. Oxfam also uses Latin America as its success story when it comes to advocating for increased social spending (p. 24). I don't think Oxfam has enough of an understanding of Latin American political history because simplifying it to "the government needs to collect more tax revenues for social spending" is specious. Taking Chile out of the equation because it actually embraced economic freedom, I would, at best, consider Latin America's economic growth to be modest. Argentina is a good example of how interventionist policies impede economic growth.

Although Oxfam's report is slightly more nuanced, its conclusion (p. 24-25) is that with a wave of the magic redistributionist wand, poverty will go away. Even if we were to concede that economic inequality is an issue, which I necessarily don't (at least in a prima facie sense), I fail to see how wealth redistribution would remedy the situation because it does not address wealth creation. Even though the solutions will have to be tailored for each country, the general solution is twofold. First, make sure that countries have strong enough institutions because without institutions, how would property rights, civil rights, and other necessary freedoms be enforced? This is especially important for developing countries who have a weak sense of institutionalization and are thus more prone to corruption, misallocation of resources, and human rights abuses. Second, while getting those institutions solidified, and even afterwards, the general direction has to be towards more freedom, not less. If Oxfam were to heed this advice about the importance of freedom, perhaps I would take their report more seriously. But as it stands, Oxfam is nothing more than a socialist organization that does not have any regard or appreciation for economic freedom.

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