Talk given by Alex Evans to a UK government cross-Whitehall session on the four key multilateral processes culminating in 2015: trade, climate, Sustainable Development Goals, and finance for development. (May 2012)
Remember how Iceland got flattened by the financial crisis? How, as an IMF official put it to Michael Lewis at the time, “You have to understand, Iceland is no longer a country. It’s a hedge fund”?
Right, so, unsurprisingly, they slashed their aid budgets right back after the crisis, and gave just 0.22% of gross national income to official development assistance in 2012 (total spend: $26 million). But get this: they’ve set a target of giving 0.7% by 2019.
There are only 300,000 of them, for heaven’s sake. A community the size of Swansea or Reading are going to be giving something like seventy million dollars in aid - just a few years after facing a national near death experience. Can anyone even imagine that happening here?
This made me curious about what else has been going on in Iceland since the crisis, and led me to this fascinating paper on Iceland’s Financial Crisis and Level of Living Consequences, by Stefán Ólafsson. Some snippets:
The government went into a standby program with the IMF that ended in the autumn of 2011, with most of the goals relating to resurrection of the financial system and containment of public finances having been achieved. The IMF declared Iceland as a graduate with flying colours. Growth of 3-4% is expected in 2011 and some growth for the next years, while the extent of government debt seems set to be reduced from 2013 onwards. The government had also declared that it aimed to safe the welfare state against cuts as far as possible. In effect that meant less expenditure cuts for welfare issues than for other fields. That has in effect been the case. The public budget situation was mended with a mixed way of expenditure cuts and tax increases, in similar proportions, with taxes raised particularly on higher income groups.
Unlike pretty much everyone else everywhere, Iceland has come out of the crisis a more rather than less equal country:
The more vulnerable groups and lower income groups in general have had less extensive cuts in real living standards than the higher income groups. While the whole nation has suffered a setback in living standards that take it on average back to the state it was at around 2003-4, the lower income groups have not gone as far back as that and higher income groups are closer to the level they were at
around 2000. This was achieved by raising specifically minimum pensions for old age and disability pensioners, the minimum wage was also increased a little while general wages remained little changed, the social assistance allowance was raised significantly and the universal flat rate unemployment benefit was increased a little in 2009-10. Pensions for higher earning pensioners were however cut somewhat …
Direct tax rates on lower incomes were in effect cut a little both in 2009 and 2010 while they were raised on higher incomes. That was done by introducing higher tax rates for higher income groups and also by raising the tax on financial earnings as well as by introducing a new wealth tax aimed at those who had accumulated great fortunes during the preceding decades.
Any bailouts? Yes, actually, but not the ones you might be thinking of:
The government introduced various debt relief programs, in cooperation with financial institutions, pension funds and the labour market partners. These were generally targeted at households in greater need rather than flat rate across the board. Some interest groups and politicians had called for a flat rate cut but that was estimated to be both too costly for taxpayers and inefficient in alleviating the greatest problems.
Last week saw Oxfam’s big new report on inequality, timed to coincide with WEF in Davos, garnering a huge amount of attention in the media – even attaining a rebuttal from the American Enterprise Institute.
The report was also the subject of Tim Harford’s column in the FT’s weekend edition. Tim takes a somewhat sceptical view, observing that while “the thrust of Oxfam’s argument is that in a lot of countries, the gap between the incomes of the rich and poor is widening” – which he accepts – the report underplays the wider context: for the world as a whole, income inequality appears to be falling (“which is why it’s so baffling that Oxfam has jumped in here feet first”).
I agree with Tim that the data show incomes rising a lot for most people in developing countries from the late 1980s onwards, whereas they’ve remained stagnant for middle classes in developed countries – c.f. this superb graph from Branko Milanovic (posted here a couple of months back), which shows relative change in incomes for each percentile over the period 1988-2008.
But I have to admit I’m befuddled as to why Tim should be baffled on why Oxfam’s taking a strong position on inequality. Here are four reasons why.
First, while it’s true that many people in developing countries have been catching up in relative terms, let’s not lose sight of just how far they have to go in absolute terms. For all the focus on the travails of the ‘squeezed middle’ in the North and for all the breathless commentary about emerging economy rates of growth, China’s GDP per capita is still only $6,091 – compared to $38,514 in the UK, $41,514 in Germany, and $49,965 in the US. It’s a little early to be hailing a new global age of egalitarianism just yet.
Second, Milanovic’s graph also shows that the incomes of the very poorest didn’t rise at all over the period 1988-2008. That’s not to denigrate the real achievements of the MDG period: halving poverty seven years ahead of the MDG deadline was no small feat. But as David Steven and I noted in our paper on the ‘business as usual’ outlook on poverty to 2030 for the Post-2015 UN High Level Panel, the people still remaining in poverty will be much harder to reach than those who escaped poverty in the MDG era.
They’ll be increasingly concentrated in fragile states (or parts of them), often in the absence of a functioning government, and frequently at risk of violence or displacement. They’ll tend to be in geographically or politically marginalised communities – the places, ethnicities, or castes that are at best neglected, at worst actively discriminated against or repressed. “Getting to zero” on poverty by 2030 – the likely headline target of the post-2015 development goal framework – will be much harder than halving it by 2015.
Third, while the incomes of developing country middle classes are catching up in relative terms with developed country middle class incomes, the incomes of the global rich are powering ahead – and that’s before we even consider wealth, which is where inequalities get really spectacular.
Tim raises an eyebrow about Oxfam’s headline stat, that the richest 85 people on Earth control the same amount as the poorest half of the global population, accusing Oxfam of “sophistry” given that the poorest people have less wealth than his toddler son: he has zero wealth whereas poor people have negative wealth, i.e. their debts outweigh their assets. But, he goes on, that argument takes no account of e.g. earning potential. Which is a fair point in one sense: I and most readers of this blog have mortgages and hence negative wealth, but it’s manifestly absurd to bracket us in with people who live on less than a dollar a day.
Fair enough. But it’s still the case that the global distribution of wealth is utterly skewed. And if Tim doesn’t like the 85 people / half the world’s population factoid, then how about this one: 8.4% of the world’s five billion adults own 83.4% of the wealth, while just 32 million people, less than 1% of adults, own 41% of the wealth. So it’s a bit of a stretch to call Oxfam, or Credit Suisse (from where Oxfam’s, and my, data comes) of “distortion” on the basis of his toddler argument.
Finally, we ought also to consider the global distribution of risk, as well as income and wealth. You might reasonably expect that as emerging middle classes in developing countries have become better off, they’ve also become more secure. But not necessarily.
True, more people have escaped poverty since 2000 than ever before. Yet the members of this ‘breakout generation’, whom you can find in large numbers in any of the rapidly expanding cities of the global South, are increasingly finding themselves playing a high stakes game of snakes and ladders: while they are finding new opportunities to improve their lot, they are also encountering all kinds of new risks that could halt their progress – or push them back into poverty.
To start with, they’re particularly vulnerable to any slowdown in national growth rates – something that now appears to be happening in many emerging economies that initially proved largely immune to the effects of the financial crisis and Great Recession. They’re also much more likely to be working in insecure, informal, or low-paid employment, all of which affect young people in particular.
On top of that, they rely on urban infrastructures that risk buckling under the strain of rocketing demand: you don’t have to spend long in a city like Addis Ababa or Karachi to see how overstretched systems for providing water, sanitation, electricity, or transport are. They’re also in the front line of the impacts of growing resource scarcity, particularly in the form of price spikes or inflation in the cost of fuel and food. They’re heavily exposed to the social strains of high rates of inequality, and usually lack access to safety nets or social protection systems. And increasingly, they also face the rise of trans-boundary shocks ranging from financial and economic crises through to accelerating climate change impacts.
One of the best sets of data available on attitudes to sustainability around the world is the ‘Greendex’ produced by the polling company Globescan for National Geographic magazine. Its most recent version, published in 2012 (highlights; full pdf), paints a fascinating – and often surprising – picture.
For me, the key headline finding from the survey is all about the gap in perceptions between people in emerging economies and those in developed countries. Despite the fact that emerging economy citizens have much lower per capita consumption levels, the survey found that:
- Emerging economy citizens are substantially more concerned about environmental problems than developed country citizens. The six countries in which most people agree with the statement “I am very concerned about environmental problems” are Mexico, China, Brazil, South Korea (which is a developed country, of course), Argentina, and India. The bottom six (with the least concerned last) are Japan, the US, Germany, Britain, Australia, and (weirdly) Sweden. When prompted about global issues, environmental challenges like climate change, air and water pollution, fresh water shortages, and species and habitat loss all score consistently highly as concerns in emerging economies. In developed countries, on the other hand, consumers are less concerned about the environment and more focused on the economy and the cost of energy and fuel.
- People in emerging economies are much more likely than people in developed countries to say that they feel guilty about their environmental impacts – despite the fact that their per capita environmental impacts are much lower. The countries in which most people agree that they feel guilty about their impacts are India, Mexico, China, Brazil, and Argentina; the lowest scoring are Britain, France, America, Australia, Germany, and (last and least) Japan. Yet when these findings are plotted on the same graph as countries’ actual Greendex score – a measure of the sustainability or unsustainability of their consumption patterns – it emerges that those countries that feel least guilty are in fact those with the highest environmental impacts.
- Emerging economy citizens are far more likely than those in the rich world to agree with the statement that “as a society we will need to consume a lot less to improve the environment for future generations”. The countries that most endorse this view are Mexico, Argentina, Brazil, and China; the US, Australia, Germany, and Japan are least convinced. And even though developed countries are least convinced of the need to consume less, they are also the most sceptical of the view that “people in all countries should have the same standard of living as people in the most wealthy countries”, with Germany, Canada, America, South Korea, and Japan all in the bottom five. (Interestingly, though, Britain and Spain score significantly higher than most other developed countries on both fronts.)
A similar story emerges on the specific issue of climate change. Of the 17 countries covered in the Greendex survey, the six in which most concern is expressed about climate change are Mexico, South Korea, Brazil, Argentina, India, and China, with over 70% of people in each country saying that they are either concerned or very concerned about the issue. Britain, America, and Australia, on the other hand, rank lowest, in every case with less than 45% of people in these two categories.
People in emerging economies are also much more likely to agree that “global warming will worsen my way of life within my own lifetime” than those in developed countries, and to support the statement that “most scientists are convinced that human activity causes climate change and global warming”.
Vaclav Smil is Bill Gates’ favourite author, and he’s interviewed in this month’s Wired. The whole thing’s a treat, but I especially liked this passage:
Innovation is making products more energy-efficient — but then we consume so many more products that there’s been no absolute dematerialization of anything. We still consume more steel, more aluminum, more glass, and so on. As long as we’re on this endless material cycle, this merry-go-round, well, technical innovation cannot keep pace.
Yikes. So all we’ve got left is reducing consumption. But who’s going to do that?
My wife and I did. We downscaled our house. It took me two years to find a subdivision where they’d let me build a custom house smaller than 2,000 square feet. And I’ll test you: What is the simplest way to make your house super-efficient?
Right. I have 50 percent more insulation in my walls. It adds very little to the cost. And you insulate your basement from the outside—I have about 20 inches of Styrofoam on the outside of that concrete wall. We were the first people building on our cul-de-sac, so I saw all the other houses after us—much bigger, 3,500 square feet. None of them were built properly. I pay in a year for electricity what they pay in January. You can have a super-efficient house; you can have a super-efficient car, a little Honda Civic, 40 miles per gallon.
Your other big subject is food. You’re a pretty grim thinker, but this is your most optimistic area. You actually think we can feed a planet of 10 billion people—if we eat less meat and waste less food.
We pour all this energy into growing corn and soybeans, and then we put all that into rearing animals while feeding them antibiotics. And then we throw away 40 percent of the food we produce.
Meat eaters don’t like me because I call for moderation, and vegetarians don’t like me because I say there’s nothing wrong with eating meat. It’s part of our evolutionary heritage! Meat has helped to make us what we are. Meat helps to make our big brains. The problem is with eating 200 pounds of meat per capita per year. Eating hamburgers every day. And steak.
You know, you take some chicken breast, cut it up into little cubes, and make a Chinese stew—three people can eat one chicken breast. When you cut meat into little pieces, as they do in India, China, and Malaysia, all you need to eat is maybe like 40 pounds a year.
So the answers are not technological but political: better economic policies, better education, better trade policies.
Right. Today, as you know, everything is “innovation.” We have problems, and people are looking for fairy-tale solutions—innovation like manna from heaven falling on the Israelites and saving them from the desert. It’s like, “Let’s not reform the education system, the tax system. Let’s not improve our dysfunctional government. Just wait for this innovation manna from a little group of people in Silicon Valley, preferably of Indian origin.”
You people at WIRED—you’re the guilty ones! You support these people, you write about them, you elevate them onto the cover! You really messed it up. I tell you, you pushed this on the American public, right? And people believe it now.
What a dude.
Real terms median wages have been stagnating in developed countries since the mid-1970s, when – as David Schweickart notes in this terrific paper (h/t Casper Ter Kuile) – growth in wages first became uncoupled from growth in productivity. So what caused this shift, which is right at the heart of the issue of the ‘squeezed middle’?
Partly, of course, it’s about the effects of trade, as globalisation meant that developed country workers found themselves competing with workers in the developing world. But, argues economist David Autor, the more significant factor has actually been technology, and the automation of routine work. The effect, he continues, has been what he calls the ‘polarisation’ of the job market, with job opportunities declining in both white and blue collar ‘middle-skill’ occupations.
This week’s Economist has a cover story on technology and jobs, observing that what we’ve seen so far is just the beginning (emphasis added):
From driverless cars to clever household gadgets (see article), innovations that already exist could destroy swathes of jobs that have hitherto been untouched. The public sector is one obvious target: it has proved singularly resistant to tech-driven reinvention. But the step change in what computers can do will have a powerful effect on middle-class jobs in the private sector too.
Until now the jobs most vulnerable to machines were those that involved routine, repetitive tasks. But thanks to the exponential rise in processing power and the ubiquity of digitised information (“big data”), computers are increasingly able to perform complicated tasks more cheaply and effectively than people. Clever industrial robots can quickly “learn” a set of human actions. Services may be even more vulnerable. Computers can already detect intruders in a closed-circuit camera picture more reliably than a human can. By comparing reams of financial or biometric data, they can often diagnose fraud or illness more accurately than any number of accountants or doctors. One recent study by academics at Oxford University suggests that 47% of today’s jobs could be automated in the next two decades.
So what should we do about this? The Economist leader concludes by arguing that the approach favoured by the left (and now George Osborne too) – big hikes in the minimum wage – is dead wrong, in that it will just accelerate the shift from humans to computers. Instead, they argue, “better to top up low wages with public money so that anyone who works has a reasonable income, through a bold expansion of the tax credits that countries such as America and Britain use”.
That’s a fair point, but it doesn’t really engage with the larger issue, of who harvests the benefits of the extraordinary productivity gains we’ll see over the next 20 years. Last week, I quoted Keynes speculating on the world in 2030, and imagining an economy in which
…we shall use the new-found bounty of nature quite differently from the way in which the rich use it to-day, and will map out for ourselves a plan of life quite otherwise than theirs … What work there still remains to be done will be as widely shared as possible – three hour shifts, or a fifteen-hour week …
Might the avalanche of technology coming our way bring that vision within reach? One interesting ‘weak signal’ in the background is the new interest – from both left and right, as the NYT’s Annie Lowrey observed in November last year - in the idea of an unconditional basic income paid to all, as of right (not as a means-tested benefit that depends on being in work or in poverty, therefore).
As the Economist pointed out in a response to her piece, a universal payment along these lines wouldn’t do much to reduce inequality of income (never mind wealth). But it would go a long way towards giving everyone, rather than just capital, a share of the winnings from technology, and the beginnings of a strategy for dealing with a world in which there’s less work to be done.
Shot by Nicholas Buer in the Atacama region of Chile. Via Boing Boing & David Hodgson. Headphones and full screen recommended.