ANALYZING GLOBAL TRENDS for Business and Society Week 3 Inequality and the Global Middle Class Mauro F. Guillén
Mini-Lecture 3.1 This week we will analyze recent trends in: Global inequality and poverty. The rise of the global middle class. What companies are doing about the growth of middle-class consumption. The relationship between changing gender dynamics and wealth.
Let s Start by Analyzing Poverty Poverty has to do with the bottom segment of the income distribution. If you draw the line at $1.25 per day: In 1990 there were 1.9 billion poor people. In 2010 there were 1.2 billion poor people. Most of the decrease has to do with the growth of emerging economies. Meanwhile, poverty has increased in Europe and the United States.
Where are the Poor? 570 million in South Asia. 396 million in Sub-Saharan Africa. 284 million in East Asia. 50 million in Latin America.
Poverty in Europe and the U.S. In the United States, the government calculates that: 46 million (16%) are under the poverty threshold ($23,050 income for a family of four). Nearly 4 million are in extreme poverty (<$2 per day). In the European Union, a similar proportion (16% of the population) lives in poverty or at risk of being poor.
Discussion Question What s the difference between the concept of poverty and the concept of inequality?
Inequality Inequality refers to the distribution of income (or wealth) across the entire population, not just the poor. Is it on the decrease or on the increase? What are its causes? Does too little or too much of it reduce the incentive to work hard and to invest? What should we do about it?
Measuring Income Inequality You can just compare the difference in income between those at the top and those at the bottom. Gini coefficient: A measure of the deviation of the distribution of income among individuals, households or countries from a perfectly equal distribution. A value of 0 means each has the same income, while a value of 100 means that just one of them enjoys all of the income.
Discussion Question Is there more or less income inequality in the world than 20 years ago? You will notice that the answer is not simple.
Income Inequality Across Countries Gini Coefficient between Countries Mauro F. Guillén. Source of the data: World Development Indicators.
Income Inequality within Countries (Gini Coefficients for Developed Countries) Mauro F. Guillén. Data Source: All the Ginis Dataset, World Bank.
Income Inequality within Countries (Gini Coefficients for Emerging Countries) Mauro F. Guillén. Data Source: All the Ginis Dataset, World Bank.
Another Indicator: The Top 1% During the Great Recession, the income and wealth of the top 1% came under scrutiny. In the United States, the one percenters have: More than $394,000 in income. More than $8.4 million in wealth.
Income of the Top 1% as a Percent of Total Income Mauro F. Guillén. Data Source: World Top Incomes Database.
Mini-Lecture 3.2 The Causes of Rising Inequality Technological change. Trade. Foreign investment. Growth of the service sector. Welfare state retrenchment. Growth of wealth accumulation (capital gains). Changes in taxation. Growth of emerging economies.
Technological Change The skills gap, or the mismatch between the technological requirements of jobs and people s skills. Technology is not the great equalizer
Trade Has reduced inequality in emerging economies by stimulating economic growth. Has increased inequality in developed markets due to job migration.
Foreign Investment Part of it involves eliminating jobs in the home country of the firm. (That type of foreign investment is called vertical. ) It has been a net contributor to inequality globally, according to the IMF (World Economic Outlook 2007).
The Service Sector According to Paul Osterman, a Professor at the MIT Sloan School of Management, The migration of manufacturing jobs to other parts of the world has generated a decline in the share of income accounted for by labor. Meanwhile, jobs created in the service sector have proved to be much more heterogeneous in terms of skill level, stability, and pay than those in manufacturing. Source: Lauder Institute Global TrendLab, Poverty and Inequality (2013).
Welfare State Retrenchment The welfare state reduces both poverty and inequality by making education and healthcare available, by redistributing income, and by protecting children, the elderly, and the unemployed. Austerity measures in Europe and the U.S. have cut programs and hence increased both poverty and inequality.
Wealth Accumulation Labor s share in national income has dropped in Europe and the U.S. in favor of capital s share. High income often translates into higher savings, and cumulates over time into greater wealth. Capital gains often receive better tax treatment than wage income.
Taxation I just mentioned that capital gains often receive favorable tax treatment. In the U.S. the top 0.1% of taxpayers average tax rate for income purposes was: Over 50% in the 1940s. Just under 40% during the 1960s and 70s. Under 30% since the 1990s.
Or is it just because of the Growth of the Emerging Economies? The Kuznets curve: Inequality is highest when countries are making the transition from developing to developed.
Source: Branko Milanovic, More or Less? Finance & Development (September 2011).
To Summarize: Gini Income Coefficients Mauro F. Guillén. Data Source: World Top Incomes Database; Milanovic, More or Less? Finance & Development (September 2011).
Mini-Lecture 3.3 Is too little inequality good? Is too much inequality bad? Is there an optimal level of inequality?
Well, it depends Are you adopting an economic, a political, or perhaps a moral perspective? What s the impact of inequality of human behavior? What s the effect of inequality on financial markets? And on consumer markets?
Too little inequality Some economists, policymakers, and politicians argue that too little inequality or not enough differentiation in rewards undermines the incentives to invest in education and to work hard.
Too much inequality Clearly, too much inequality leads to: Less investment in education. The undermining of the work ethic. Less effort. More social conflict. More political mobilization (e.g. Arab Spring, Occupy Wall Street, etc.).
Is there an optimal level of inequality? One can certainly calculate it. But the point is that inequality is the result of complex forces. Inequality patterns shift over the course of economic development. Most importantly, inequality squeezes the middle class, which is the topic of the next lecture.
Mini-Lecture 3.4 What s the middle class? How big is it? Is the middle class growing globally? Where is it located? How much purchasing power does it have?
What s the Middle Class Historically defined as the segment between the peasantry and the working class, on the one hand, and the upper class, on the other: It was assumed to have different values and to exhibit different political behavior. Its rise had to do with the growth of cities, and the new occupations created in them. At the global level, it is defined today as the segment between the poor and the rich: It has discretionary spending power. It really did not exist until the early 20 th century, starting in Europe and the U.S.
The Middle Class is A foundation of modern democracy. A key nexus in the chain of social mobility. A pillar of social stability. The largest consumer demographic. The largest beneficiary of the welfare state: education, healthcare, pensions, unemployment benefits. (In many countries, the tax system subsidizes the middle class.)
The Global Middle Class It s an ambiguous term. The middle class can only be defined within each country. Nevertheless, the Organization for Economic Cooperation and Development (OECD) defines it as: People with at least $10 to spend per day, but no more than $100 (adjusting for the cost of living in different countries). This translates into between $14,600 and $146,000 annual income for a family of four.
Middle class defined as people with more than $10 per day to spend but less than $100 (using purchasing power parities). Source: Homi Kharas, The Emerging Middle Class in Developing Countries (Presentation at Brookings, 2011). Reproduced by permission.
Source: Homi Kharas, The Emerging Middle Class in Developing Countries (OECD, 2010). Reproduced by permission.
Discussion Question Why does the OECD project that India will have more middle-class consumption than China within 20 years?
India > China There are three main reasons: India will soon have the world s largest population. Income inequality in India is not growing as much as in China. Chinese economic growth is too reliant on exports and investment to the detriment of consumption.
Middle-Class Consumption (trillion 2005 dollars) Today 2030 World 21.3 55.7 North America 5.6 5.8 Europe 8.1 11.3 Central & South America 1.5 3.1 Asia Pacific 4.9 32.6 Sub-Saharan Africa 0.3 0.8 MENA 0.8 2.0 Source of the data: Homi Kharas, The Emerging Middle Class in Developing Countries (OECD, 2010).
African Middle Class still Small (dollars per day) Source of the data: African Development Bank, The Middle of the Pyramid: Dynamics of the Middle Class in Africa (2011).
Mini-Lecture 3.5 India s rising middle class. A business example.
India Since 1991 India has managed to grow in spite of the many bottlenecks facing the country in terms of politics, infrastructure, and access to education. Not only services, but also manufacturing has become more competitive. Although in 2013 and 2014 the economy is slowing down, the long-term growth prospects remain optimistic.
India s Middle Class In 2014 no more than 15% of the population was middle class ($10-100 per day). By 2030, the proportion may rise to 50%. As a result, social, political, and consumer behavior is changing in India. Companies are taking good notice.
What s this car?
The Tata Nano Launched in 2009 by Tata Motors, part of the Tata group, India s oldest. Family transportation for the new middle class of consumers: Priced at $2,500. 634 cc engine. Target: sell 1 million units annually. An alternative to two or three-wheelers. Billed as the world s cheapest car.
Tata Nano: An Abject Failure Sold just above 250,000 Nanos in the first four years combined. Lost market share in India overall, and profits have plummeted. Discussion question: what went wrong?
Reasons for the Failure A few Nanos caught on fire. The Nano lacked A/C. The middle class is aspirational in its tastes. Cars are a projection of the owner s selfimage. Competitors like Suzuki, Hyundai and Ford offered better models at a slightly higher price.
Source: Washington Post January 3, 2011. A Typical Middle-Class Consumer Shushank Sharma, 22, a computer operator said he had a choice between a Nano and a two-wheeler motorbike, which was around the same price. He bought the bike. I don't like the way the Nano looks to people and it s all about the look, Sharma said. I take the bike to work. But if I have to go hang out with my friends or go for a marriage, then I prefer a car. But I would prefer to sit at home if I have to go in a Nano.
Mini-Lecture 3.6 Gender, income, and wealth. Women continue to be discriminated against. Are there any changes on the horizon?
Patriarchy A social system in which males own/control property, occupy the most important economic, political and moral roles, and have authority over women and children. Some anthropologists suggest that patriarchy spread around the world beginning 6000 years ago with the transition from hunter-gatherer to agricultural society. Some argue it is on the retreat. Is it true?
Legal Discrimination of Women In 45 out of 128 countries women do not have the same legal capacity to act or to engage in economic transactions. In 49 out of 128 countries women cannot work in all industries. In 32 out of 128 countries women do not have equal inheritance rights. Source: Women, Business, and the Law. Washington, DC: The World Bank, 2010.
Gender Inequality in Wages Driven in part by job segregation. Significantly large differences persist within occupational groups and positions, even after controlling for education and experience. The mommy penalty : part-time work and career progression interruption. Poverty among female-headed households.
Gender Inequality in Wealth Historically, driven by: Low female labor force participation rates. Gender discrimination in pay. Patrilineal inheritance rules. Nowadays, the gap is narrowing due to two trends: Greater female labor force participation rates. Longer life expectancy for females, given that most wealth is owned by people 50+ years.
High Net Worth Individuals (millions) Those with $1 million of investable assets excluding primary residence, collectibles, consumables, and consumer durables. Source of data: Capgemini and RBC Wealth Management, World Wealth Report 2013.
HNWIs Wealth ($ trillion) Source of data: Capgemini and RBC Wealth Management, World Wealth Report 2013.
Country: Number of HNWIs (thousands) 2011 2012 USA 3,068 3,436 Japan 1,822 1,902 Germany 951 1,015 China 562 643 UK 441 465 France 404 430 Canada 280 298 Switzerland 252 282 Australia 180 207 Italy 168 176 Brazil 165 165 South Korea 144 160 Source of data: Capgemini and RBC Wealth Management, World Wealth Report 2013.
HNWIs by Age Source of data: Capgemini/Merrill Lynch Global Wealth Management Advisor Surveys 2009, 2011.
Female Advantage in Life Expectancy (years) Source of data: United Nations Population Division, World Population Prospects: The 2012 Revision.
Population Age 65+ by Gender (millions) Source of data: United Nations Population Division, World Population Prospects: The 2012 Revision.
The End of Patriarchy? HNWIs % Women World 2008 24 World 2010: 27 North America 37 Japan 31 Asia-Pacific ex Japan 24 Europe 18 Latin America 18 Middle East 14 Source of data: Capgemini/Merrill Lynch Global Wealth Management Advisor Surveys 2009, 2011.
Women are from Venus % in the USA who are concerned about: Men Women Ensuring retirement assets last throughout their lifetime 54 66 Future of Social Security benefits 59 76 Rising cost of children s college education 44 56 Prospect of what caring for an aging parent could do to their own financial security 25 37 Source of data: Merrill Lynch, Affluent Insights Survey 2012.
Reading Please read the report by the Lauder Institute s Global TrendLab, Poverty and Inequality: Persistent Problems and New Solutions. ALL READINGS ARE FREE AND AVAILABLE ONLINE.
Week 3 Test I hope you have enjoyed learning about global trends in inequality, and about the implications of the rise of the global middle class. Now, please take the quiz on Inequality and the Global Middle Class. It only takes a few minutes to complete.