Below is graphic from ANZ Bank showing the change in real income between 1988 and 2008 at various percentiles of global income distribution (calculated in 2005 international dollars). Global inequality has improved except for the upper middle class.
Some comparisons of income distribution:
- An American having the average income of the bottom U.S. decile is better-off than 2/3 of world population.
- The richest 1% of people in the world receive as much as the bottom 57%, or in other words, less than 50 million richest people receive as much as 2.7 billion poor.
- The three richest people possess more financial assets than the poorest 10% of the world’s population, combined.
- In 2005, the three richest people in the world have total assets that exceed the annual combined GDP of the 47 countries with the least GDP.
- In 2005, the 125 richest people in the world have assets that exceed the annual combined GDP of all the least developed countries.
- In January this year Oxfam calculated that the eight richest men in the world own the same wealth as the 3.6 billion people who make up the poorest half of humanity.
The world’s 8 richest people are, in order of net worth:
1. Bill Gates: America founder of Microsoft (net worth $75 billion)
2. Amancio Ortega: Spanish founder of Inditex which owns the Zara fashion chain (net worth $67 billion)
3. Warren Buffett: American CEO and largest shareholder in Berkshire Hathaway (net worth $60.8 billion)
4. Carlos Slim Helu: Mexican owner of Grupo Carso (net worth: $50 billion)
5. Jeff Bezos: American founder, chairman and chief executive of Amazon (net worth: $45.2 billion)
6. Mark Zuckerberg: American chairman, chief executive officer, and co-founder of Facebook (net worth $44.6 billion)
7. Larry Ellison: American co-founder and CEO of Oracle (net worth $43.6 billion)
8. Michael Bloomberg: American founder, owner and CEO of Bloomberg LP (net worth: $40 billion)
Sources: ANZ Bank, Wikipedia, Oxfam International
A colleague alerted me to a Terrie Lloyd a New Zealand businessman in Japan who writes a weekly newsletter. With the election of Donald Trump his recent writing looked at bullies and ways in which you deal with them. Shinzo Abe, the Japanese prime minister, has been proactive in getting to know Trump and his team and how the two countries can work together.
Research on bullies
Lloyd suggests that there are generally three ways to deal with a bully.
Run – UK seem to be taking this option
Fight – Chinese will do this
Suffer and appease – Japan, having a bullying culture already, will go for appeasement
Abe will be meeting with Trump on 10th February for a second time in as many months and will want to convince him that Japan is one of the good guys and if he has to pick on someone in the area he should pick on China. For this to work Abe also needs to feed Trump’s ego publicly
Lloyd looks at the work of Dacher Keltner who has written about appeasement and related
human emotion and social practice. He looks at two general classes of appeasement.
1) reactive – the person provides appropriate responses after incidents and these responses are usually public displays of embarrassment and shame.
2) anticipatory appeasement where a person is proactive and engages in certain strategies to avoid conflict. Polite modesty and shyness are also considered anticipatory appeasement.
Japanese Model for dealing with bullies
With Japan taking the latter option, Keltner is suggesting that Abe must appease Trump with gifts of value and that they are seen publicly to assist Trumps power and reputation. Last month the Japanese gave access to US car manufacturers but will that be enough to keep Trump happy? At the meeting on 10th February Abe will propose a package that could generate 700,000 U.S. jobs and help create a $450-billion market. It includes the building of infrastructure projects such as high-speed trains in the northeastern United States, and the states of Texas and California, and renovating subway and train cars. It also includes cooperation in global infrastructure investment, joint development of robots and artificial intelligence, and cooperation in cybersecurity and space exploration, among others.
Toyota the car manufacturer has also been taking the appeasement option after the Trump administration criticised their building of a second car assembly plant in Mexico and also threatened to impose a 20% tariff on Japanese automobile and auto parts makers with plants in Mexico. Toyota quickly announced it would invest $10 billion in its U.S. operations over the next five years.
Abe has definitely been massaging the ego of Trump not only being the first international leader to visit Washington after his election but also telling Trump that he “hopes the United States will become a greater country through (your) leadership,” adding Japan wants to “fulfill our role as your ally.” It will be interesting to see what happens after their meeting on Friday 10th February.
Sources: Terrie Lloyd, The Japan Times
HT to Kanchan Bandyopadhyay for this piece from Bloomberg by Noah Smith entitled ‘5 Economics Terms We All Should Use’
He suggests that rather than the usual economic terms that are banded about like recession, downturn, boom, unprecedented trade deficit etc, there are other words that are far more useful especially when you think about policy. He suggests the following:
Something is endogenous when you don’t know whether it’s a cause or an effect (or both). For example, in the simple supply and demand model, suppose that there is a change in consumer tastes or preferences (an exogenous change). This leads to endogenous changes in demand and thus the equilibrium price and quantity.
Marginal versus average
Economists like to say “on the margin.” This refers to small changes instead of big overall effects. Another example is the importance of effort versus natural talent. Natural talent might matter a lot on average, but a little more effort could go a long way.
Present value and discounting
Present value means trying to figure out how much some long-term thing is worth today. Discounting means you have to decide how much less you value things that come far in the future.
Conditional versus unconditional
One common example of this is life expectancy. People like to point out that life expectancy in the Middle Ages was only about 35. But that includes lots of infant mortality. If you lived in the Middle Ages and you made it to adulthood, you would probably live well past 35. While conditional life expectancy has increased since then, it hasn’t gone up by nearly as much as the unconditional version — reductions in infant mortality have been the biggest difference.
Economists say that something that works individually doesn’t work in aggregate. Another good example is debt. Individually, borrowing and spending money reduces your wealth. But in aggregate, debt doesn’t reduce the value of the whole world’s wealth, since one person’s debt is another person’s asset.
I do like his comment at the end of the article:
So there are five econ terms I think should enter our everyday vocabulary. As long as this doesn’t happen endogenously, the marginal increase in the aggregate present discounted value of our public discourse would have a high conditional probability of being positive!
I have written on this blog about the limitations of GDP as a measure of the standard of living in a country and would recommend reading Diane Coyle’s book ‘GDP: A Brief but Affectionate History’. Edoardo Campanella wrote a piece for Project Syndicate about abandoning GDP and how people have concerns with the pace of growth and how it is defined. He mentions two specific reasons for this:
1. Growth in the developed world has brought little benefit to the vast majority of citizens – the recovery in 2010 say the top 1% earn 93% of income growth.
2. Growth doesn’t actually take into consideration a lot of those things that contribute to human wellbeing. There is nothing about environmental conditions, the benefits of communities, the stability of individual and group identities etc
However today GDP determines a country’s status and access to clubs such as the OECD, G8, G20 thereby affecting the balance of global power.
Limits of GDP
GDP is a measure of the market value of all final goods and services produced in a year however it leaves out things that make us richer as people. For instance:
GDP declines if energy-efficient products reduce electricity consumption but rises with polluting activities that deplete the stock of natural resources. Also if we invest in anti-smoking campaigns or fight global terrorism, GDP will increase, without creating any wealth.
GDP is fixated on more not better – a car with air conditioning and a state of the art stereo system and GPS may be the same as one with no gadgets, regardless of differences in users’ experience. How do we measure the success of medical advancements especially in heart surgery that lead to greater life expectancy and a much better quality of life. One of the aspects that GDP misses are those things that are free in society, most notably the services provided on the Internet whether it be Wikipedia, Facebook, Twitter etc. But some have argued that innovation actually reduces GDP even though it may increase the welfare of individuals. Today you can book accommodation, flights, buy products etc online and at a cheaper price than before as the middle person is now excluded from the process. Another example is the price of a smartphone is lower than the prices of its components that used to be sold separately.
Adjusting the numbers
In an effort to update their methodologies, countries add new activities to its calculations. Most recently drugs, prostitution, and other undercover activities have been included in the calculation. However as Edoardo Campanella points out these changes can distort the value of GDP across time. In 2010 Ghana announced a 60% increase in GDP after updating its data-reporting methodology but the the standard of living for Ghanaians hadn’t changed. Likewise the changes in the tax domicile of some multinationals in Ireland resulted in an increase in GDP by 16% but no one felt any richer.
Cross Country Comparisons using GDP – China v USA
There are problems in the cross-country GDP comparisons. 2014 saw the overall GDP of China surpass that of the USA. But a more accurate indicator would be GDP per person and China’s per person income amounts to only 27% of the USA. See figures below:
Are we any happier with more growth?
Countries maximize their output through technology, free trade (with comparative advantage) with the belief that greater GDP improves the well-bing of its population. Herek Bok of Harvard observed that “people are essentially n happier today than they were 50 years ago, despite a doubling or quadrupling of average per capita income”.
Another area that GDP does not consider is the distribution of income – two countries may be equal in overall GDP figures but differ greatly when you consider individual welfare. The elite have been rewarded disproportionately while many have been made worse off – the income of the top 1% has doubled since the late 1970’s at approximately 22% of GDP.
The way forward
As Edoardo Campanella suggests, rather than getting rid of GDP it should be refined and include socioeconomic indicators including GNH*. GDP cannot measure much of what people would consider crucial for a ‘good’ life – community, relationships, security etc.
*GNH – Bhutan is famous for its Gross National Happiness indicator which revolves around four pillars:
1. Sustainable Development
2. Preservation and promotion of cultural values
3. Conservation of the natural environment
4. Good governance
The Economist produced a graph showing world GDP data and made the following points:
- India and China account for 65% of world growth
- Emerging markets contributions in 2016 were down to its lowest figure since 2008 – falling commodity prices would have been a factor
- Norway contributed less to global GDP with lower oil prices being prevalent.
- USA with increased government spending and greater export volumes improved its position
- Brazil has been in negative territory since mid 2014 – interesting point with significant government spending on hosting the Football World Cup and the Olympics.
Maybe a good starter for your classes asking the question who contributes most to world GDP?
Below is an image from National Australia Bank (NAB) with regards to the prospects for credit markets in 2017 looking at various scenarios – Bearish, Bullish and Base Case.
Below is a recent clip from Paul Solman of PBS who interviewed Behavioural Economist Dan Ariely. Ariely states that behaviour is driven by emotion not rewards like money; the ability to help other people, feel that we’re useful, feel that we’re getting better or living up to our potential are much stronger motivators than cash. The interview discusses an experiment that he at a computer chip production line in Israel. Workers who made their chip quota got either
- Voucher for pizza to take home to the family
- A“well-done” text from the boss.
In the actual experiment, workers who made the quota and received the $30 and those that got a pizza voucher and the group that got a compliment were all more productive than workers who received nothing.
But, on the second day, when the workers who got the $30 were not paid a bonus, regardless of how many chips they turned out, their productivity actually dropped below those who got nothing.
In total, by giving people $30 bonus, Intel lost almost 5 percent of productivity. That’s a lot. Now, think about it. You give money because you think this would increase motivation. It actually decreases motivation.