Rising incomes in the developing world do not a new age of equality make

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. 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 – I defy anyone to come up with data showing that the global distribution of wealth between rich and poor people (as opposed to countries) is becoming more equal.

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.

After the vote – politics in an age of uncertainty

It’s a fitting end to the British general election.

We have had thirty years of entrenched majorities – as a dominant party defined the terms of the debate, and the media made sure the opposition never caught a break. In 1997, the swing from Conservative to Labour dominance was sudden and decisive.

Now we have an utterly unpredictable polling day. Tiny shifts in the share of vote between parties and, especially, its geographical distribution could have a disproportionate impact on the political landscape that emerges on Friday.

If it’s close, it will all come down to spur-of-the-moment decisions by three very tired men. Constitutionally, Brown remains Prime Minister until someone else can command ‘the confidence of the House.’

As incumbent, he also should get first dibs on forming a new government, though it is widely expected that Cameron will declare victory early, and use the media to establish his right to govern.

As Alex has warned, there’s also a possibility that the bond markets will push the pace, as they open at 1 a.m. tomorrow morning to react to election news. Yields on UK 10-year bonds have spiked this morning, but are still lower than they have been for much of the year.

If Cameron gets the most votes and the most seats, he’ll surely go on to form a government. If not, a period of Florida-style uncertainty seems more than possible. What, one wonders, will be the UK’s equivalent of the hanging chad?

Either way, we can expect some exceptionally close Commons votes, perhaps a referendum on electoral reform, and  – surely – a Parliament that won’t last for a full term. That means more elections for parties that have bankrupted themselves during this one.

This unaccustomed volatility in the electoral system seems curiously appropriate. As the past few years have shown, we now live in an era where the UK is far from being in control of its own destiny.

Look forward and we can expect the following forces to frame the government’s strategic choices.

First, global risks will continue to drive domestic policy. Voters will not actively call for a more effective foreign policy, but they will notice and bemoan its absence.

Global forces will continue to have considerable impact on their lives, with the main sources of strategic surprise coming from beyond the UK’s borders.

Over the next ten years, moreover, most risks will be on the downside. We have lived, as I have argued, through a volatile decade. There is every reason to expect risks to continue to proliferate.

Each new crisis will create political aftershocks with demands for governments to clear up the mess, matched by inquiries into why they failed to prevent the problem in the first place.

Finally, the government will find that, in most cases, it does not have the levers to manage risks as effectively as it would like to.

Whatever the next Prime Minister wants to do, he is going to find that global volatility, a lack of money, and government mechanisms that are equipped for the problems of another age, constrain his scope for action.

On top of that, he’ll only be able to solve problems if he can rustle up a coalition of other countries, all of whom will be beset by the same problems.

If – and it’s a big if – there is to be a new dominant paradigm in British politics, replacing those established by Thatcher and New Labour, then it will be because a leader emerges who has the skill to govern well in an age of global uncertainty.

I can’t imagine a more exciting time to pitch up in Downing Street, but it’s going to be a bumpy ride.

[Read the rest of our After the Vote series.]

UK election debate – the housing crisis

If the BBC leaders’ debate tonight devotes more time to bigotgate than to housing, I am going to dedicate the rest of my days to working for the Corporation’s demise.

Britain’s unsustainable housing market is at the root of many of the country’s problems and could wreak appalling damage on voters during the next parliament. It must feature in the debate.

Someone should start by reminding Gordon Brown of a promise he made in his first budget speech in 1997:

Stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it. I will not allow house prices to get out of control and put at risk the sustainability of the recovery.

As I argued recently:

When Brown spoke, the average house cost £75k  – about £10k above the early 1990s nadir. A long long boom was just beginning. Prices would peak in February 2008 at an average of… £232k!!!

In other words, Brown promised not to let house prices spiral out of control and then allowed them to treble, during a period when household disposable income increased by only 30% or so.

2007 saw what is often called a housing price crash, but as this graph shows, it was really only a blip.

As the government pumped money into the economy and pushed interest rates to unprecedented low levels, the bubble started to inflate again. House prices are now back to the levels of June 2007.

Second guessing the housing market is a mug’s game, surely this is unsustainable. British houses are overvalued by nearly a third, according to one measure. Worse is the amount of mortgage debt outstanding$1.238 trillion. By comparison, government debt is ‘only’ £950 billion.

Low interest rates and buoyant employment (relative to the economy’s woeful performance) have kept householder’s head above water – but the highly-indebted remain highly vulnerable to any increase in interest rates or to further job losses.

My best case for the housing market is a long period of stagnation (we desperately need lower prices). Worst case would be a sudden, vicious and self-fulfilling collapse. I believe this is currently the most serious economic risk facing the British people (one which is, of course, interrelated to Europe’s sovereign debt problems).

So what do the major parties have to say about this in their manifestos?

  • Labour wants to expand home ownership and exempt all houses under £250k from stamp duty (likely to push house prices up). It says it will build 110k houses over two years (likely to push prices down).
  • The Conservatives promise to exempt first time buyers from stamp duty if their house costs less than £250k. It wants to put communities in charge of planning, which is highly likely to reduce the number of houses built.
  • The Lib Dems plan to use loans and grants to bring 250k empty houses back into use.

Pretty weak beer, all told. No party questions the shibboleth that Britain needs more homeowners. None is prepared to explain how they will manage risks that have been increased by the response to the financial crisis.

Far less do they have policies to fulfil Brown’s promise from 1997 – to end boom and bust in the housing market radical proposals (see my Long Finance paper) to prevent the mortgage market from screwing borrowers every twenty years or so.

So here’s my question for tonight’s debate:

In 1997, Gordon Brown promised he’d never let house prices get out of control again, but then presided over a housing bubble that has left British householders owing £1.2 trillion on their mortgages. In government, what will you do to stop the housing dream from becoming a housing nightmare?

Hey FCO – tell us what you’re doing on Eyjafjallajökull (updated x3)

Yesterday, I warned that governments were losing control of the Eyjafjallajökull crisis:

In the UK, it doesn’t help that there’s an election on. But Lord Adonis, the Secretary of State for Transport, is not running for office. It would be good to see greater signs that he – or someone else – is being much more decisive about taking charge.

Apparently, there are more than a million British citizens still stranded abroad and the MET Office has said there will be no flights on Monday 18 April (no confirmation from NATS on that as yet).  Both the media and airlines are clearly getting restless. A new narrative is crystallizing: that the threat from the ash cloud has been substantially exaggerated.

Albeit belatedly, British ministers have finally shown they are now more fully engaged with events, with five lining up in Downing Street for a press conference. COBRA will meet tomorrow morning.

In my opinion, however, the Foreign and Commonwealth Office should be much more specific about what its consular staff are doing. I’m talking about concrete and detailed briefing for the media.

How is it using its consular surge capacity (the Rapid Deployment Team)? How many extra staff have been deployed? In which airports does it have staff dealing directly with passengers and airlines? How, practically, are these staff managing to assist people?

The generalities on the FCO website are not nearly enough… [Relatedly: KLM masters social media. Air France fails.]

Update [19/04 9.30 am]: A few other thoughts. The UK government social media response has – so far – been distinctively unimpressive, despite the fact that many government departments, the FCO included, have very good social media team. (Good this morning, though, to see the gov Twitter feeds finally starting to use the Twitter #ashtag and #ashcloud tags)

In contrast, Eurocontrol – which oversees European airspace – has emerged as a model of best practice. Whoever it behind its Twitter feed is doing a stellar job – detailed factual updates, numerous responses to people’s questions, and all in an identifiably human voice.

Also, the pressure is clearly building on governments to downgrade the threat, based on test flights. But, say, a plane had a 1/1000 risk of getting into trouble (e.g. hitting a slightly thicker patch of ash during its flight), then you could run a dozen or so tests and have a very slim chance of hitting trouble. So you open Heathrow, which has 1300 flights every day…

Once again, the complex risk calculations at the heart of this crisis are making Anthony Giddens’s 1999 Reith lecture look very prescient:

There is a new moral climate of politics, marked by a push-and-pull between accusations of scaremongering on the one hand, and of cover-ups on the other. If anyone – government official, scientific expert or researcher – takes a given risk seriously, he or she must proclaim it. It must be widely publicised because people must be persuaded that the risk is real – a fuss must be made about it. Yet if a fuss is indeed created and the risk turns out to be minimal, those involved will be accused of scaremongering.

Suppose, on the other hand, that the authorities initially decide that the risk is not very great, as the British government did in the case of contaminated beef. In this instance, the government first of all said: we’ve got the backing of scientists here; there isn’t a significant risk, we can continue eating beef without any worries. In such situations, if events turn out otherwise – as in fact they did – the authorities will be accused of a cover-up – as indeed they were.

Things are even more complex than these examples suggest. Paradoxically, scaremongering may be necessary to reduce risks we face – yet if it is successful, it appears as just that, scaremongering. The case of AIDS is an example. Governments and experts made great public play with the risks associated with unsafe sex, to get people to change their sexual behaviour. Partly as a consequence, in the developed countries, AIDS did not spread as much as was originally predicted. Then the response was: why were you scaring everyone like that? Yet as we know from its continuing global spread – they were – and are – entirely right to do so.

This sort of paradox becomes routine in contemporary society, but there is no easily available way of dealing with it. For as I mentioned earlier, in most situations of manufactured risk, even whether there are risks at all is likely to be disputed. We cannot know beforehand when we are actually scaremongering and when we are not.

When dealing with risk, governments are almost always going to emerge at least somewhat discredited. The question is how badly

Update II [19/04 16.30]: The FCO website is still maddeningly unspecific. For example:

Meanwhile, here’s Marcus Fairs with some information that’s (i) much more specific and helpful; (ii) directly covers what named FCO consular staff are up to.

Also, it is increasingly clear that NATS – the UK’s air traffic control organisation – is floundering. No Twitter feed. A website that is still in emergency mode. And, worst of all, official updates on their site, but leaks to other news organisations with different information. Not good.

Update III [20/04 14.30]: Finally: