Sunday, November 22, 2009

The spread of wealth of nations

This post has taken me ages and I'm not sure it was worth it. It began because I was interested in understanding better how New Zealand's reducing relative wealth might manifest in a social sense. This lead me on a quest to better understand how wealth and the distribution of wealth affects a country. I'm not sure that I have reached any useful conclusions but it was an interesting voyage where I did at least learn a few things.

Let me start by, once again, remarking on the availability of data. One would think that the governments of the world's free countries would be interested in making data about their country available. I can't comment on many countries but if New Zealand and Australia are anything to go by then most governments are far from the forefront of data presentation on the internet.

One might expect that international organisations such as the United Nations might not only make data available but also provide good comparative data. However, it would seem that the United Nations is only interested in providing data once it has been 'correctly' interpreted by their experts.

I had high hopes for the likes of WolframAlpha and my solid fall back the CIA World factbook. The problem for WolframAlpha is that the world's data is horribly fragmented and unless someone sorts it out properly it is unuseable. The CIA, it turns out, seems to be the most open, available, transparent and objective supplier of world data - who knew? Nevertheless, even the CIA can't publish data that isn't there, which comes back to the problem of countries not being very open about their own data. For example (according to the CIA World Factbook), 237 countries publish their population data, 227 publish their GDP, 205 publish their external debt, 107 publish their current account balance and 133 publish their GINI index (a measure of the evenness of income distribution).
Anyway, I was interested in the perennial discussion of fairness vs wealth. Therefore, I wanted to look at the GINI index vs GDP per capita. The GINI index is a measure of inequality. It determines how far away a country's income distribution is from perfectly equal (everyone earns the same). A GINI of zero means that every household has the same income and a GINI of 100 means that one household earns the country's entire income. Published world GINI numbers vary from 70.7 to 23, which is quite a spread.
My hypothesis is that rich countries will tend to be more equal than poor countries. This was on the basis that prosperity spreads when people spend and a willingness to share comes from income surpluses. As the chart below shows there is a general relationship between individual wealth and the evenness of income distribution but it isn't as strong as I expected.


It certainly seems that being rich is the best indication of being likely to have a more equal income distribution but there is a lot of variation. The interesting thing is that poor countries have pretty much a random outcome with respect to income distribution. It should be noted here, however, that many countries do not publish their GINI indexes. The tax havens are absent as are some of the most oil rich nations in the world.

My second hypothesis was that the attitudes of a society are driven by its middle income earners. That is say that when a majority of people are well off then wealth spreads but if not then everybody, including the rich, tends to hoard. This is where finding data got very hard. The GINI index is relatively widely published and aggregated but this is about the limit of readily available income data. I probably could have searched through each country's data to find the morsels I was looking for but I would still be doing this well after Christmas and time is a scarce commodity. Therefore, I used what I had. GDP and population data provide an indication of the quantum of income and the GINI index tells us about shape. By doing some curve fitting I was able to come up with some interesting comparisons. These results are too inaccurate to publish any numbers but they did help lead to some logical conclusions.

The first thing that became obvious is just how poor some countries are. Many people already know this but in making comparisons it became more real for me. For example, (based on financial wealth only) one would rather be poor in Malaysia than rich in Ethiopia (and the poor of Malaysia are pretty poor). Here it becomes obvious why the equality of income distribution is random in the very poorest countries, because here the evenness of income distribution is meaningless. Zimbabwe is a very unequal country (a GINI of 50.1) and Ethiopia is a surprisingly equal country (GINI of 30). However, Zimbabwe's inequality is a distribution between those that have practically nothing and those that have the merest pittance. Zimbabwe is poor even compared to Ethiopia. The distribution of wealth in Zimbabwe probably comes down to which village's goat survived the drought season.

It is interesting to note the other extreme as well. Those countries that are very rich. A pertinent example is that one would rather (considering financial wealth only) be poor in Norway or Luxembourg than middle income in New Zealand. In fact, one would rather be poor in Luxembourg than middle income in the US, which is saying something. But richness is when the equality of income does matter. Here we look at the three outliers (of the countries that report GINI) Hong Kong, Singapore and the US. Here are rich countries that are also very inequal.

Here there is evidence that wealth can offset inequality. Not so much Hong Kong but the poor of Singapore and the US are still much better off than most of the world. The poor of New Zealand may only be marginally better off than the poor of Singapore and are roughly equivalent with the poor of the US. But, the rich of Hong Kong, Singapore and the US make the rich of New Zealand seem pretty poor. The rich of these countries even match (and probably exceed in the case of Singapore and the US) the rich of Luxembourg. They are the uber-rich. One can only imagine the numbers that would come out of the tax havens (no wonder they don't report).

Of the world's countries there are some which don't really have a poor. All countries will have a number of people who unfortunately or deliberately fall through the cracks. Nevertheless some countries have poor who generally aren't really poor. The line is obviously somewhat arbitrary but in my view these are countries who don't have a general poverty problem. There are the outliers, of course, Luxembourg (who is benefitting from centuries of careful diplomacy playing off its larger neighbours) and Norway (the most democratic and free of the oil rich nations) who really don't have a general poor. But I think you can add to these two Iceland, Sweden, Denmark, Austria, Belgium, Ireland, Germany, Netherlands, Slovenia, Finland, Australia, Canada and Switzerland. There are some close seconds but the numbers fall away quite quickly (there is quite a lot of difference even between Iceland and Switzerland).

What do these countries have in common? They are relatively rich and relatively equal. They are all democracies and most of them are Western European. Two of them (the I-lands) have been hit very hard by the world recession but still feature high. They vary in their economic leaning from Sweden (quite left of centre) to Switzerland (quite right of centre). They do not have large populations, except for Germany which has almost three time Canada's (no. 2)population. One of them (Slovenia) has recently been freed to democracy and is tearing up the economic growth charts. Two of them are former British colonies that maintain a Westminster parliament system (New Zealand alone fails to represent in this group).

It is inconclusive what makes these countries both fair and rich. Some on the left might argue that these countries are rich because they are fair. This doesn't seem right to me. Ethiopia is very fair but almost the whole population would rather be poor in the United States (or New Zealand). Kyrgyzstan is much wealthier than Ethiopia and is almost as fair but (based on financial wealth only) most of the population would still rather be poor in the US. Albania is much richer again than Kyrgyzstan, and is also fairer, but about half the population would be better off being poor in the US. The United States, Hong Kong and Singapre prove that wealth doesn't necessarily translate to equality of income but I think that it is still the right place to start.

So, what of New Zealand? I think New Zealand properly belongs to the group which includes Japan and the United States. All three of these countries are countries that have been relatively richer than they are now. All three feel that things are slipping away from them. All of them show some degree of a middle income bracket that are tightening their belts and hardening their hearts. All three have poor who are just on the edge of comfortable subsistence and with many more people falling into poverty as time passes. All three are relatively high on the inequality stakes (especially the US). All three, I think, are going to experience significantly more social upheaval and distress as population increases and economic growth doesn't match the rest of the world.

And which are the lucky countries? Norway is, perhaps, the clue. Luxembourg is a very special example but Norway is a real economy. Norway is a resource rich country with a relatively small population. The moral hazard with this post is that I have to firmly remind myself of the non financial benefits of living in New Zealand to avoid packing my bags and heading for Australia or Canada.

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