Oxfam began as the Oxford Committee for Famine Relief. It still does valuable disaster relief work today, but it often functions like a political campaign group. Each year it releases a report on inequality just before the World Economic Forum in Davos. This purports to show the failure of the global economic system.

The conventional view of capitalism—shared by people from across the political mainstream such as Ed Miliband and Theresa May, despite their differences—is that it generates a lot of wealth, but distributes it unevenly. Oxfam’s figures are supposed to illustrate this: the latest numbers show that eight billionaires own 0.25 per cent of the world’s net wealth, as much as the 3.6 billion who make up the poorest half (in terms of net wealth) of the world’s population. Those at the bottom of the net wealth distribution include, for example, recent Harvard graduates with high levels of student debt and yet huge earning potential: they are supposed to be amongst the poorest people in the world according to Oxfam.

The irrelevance of Oxfam’s figures

Indeed, it is worth thinking a little more about what Oxfam’s figures mean (if anything). A lot of people in the world have little or no net wealth. There can be several reasons for this. If you are reading this as a 6th-form student, chances are that you will not have any net wealth to speak of, and nor will most of your peers. People accumulate wealth over the course of their life cycle, and even the better-off in this country do not tend to accumulate significant net wealth before their 30s. So if you consider that the global median age is about 28 years, it is hardly surprising that a huge proportion of the world’s population does not own any wealth. Basically, Oxfam is just adding up a lot of zeros.

In the developed world, many older people receive their pension from the state (alongside free services). That is a source of income, but it does not technically constitute wealth. Many pensioners receiving state pensions neither have nor need other forms of wealth. This is one of the reasons why Sweden, with its generous state pensions, has a high level of wealth inequality: most Swedes just do not need to save.

What is important for people is their income, which finances their lifestyle. There is good data available on incomes, which Oxfam could use if they wanted to talk about inequality. But that would not suit Oxfam’s narrative. Global income inequality is falling, as the poor have gained disproportionately from globalisation.

The rich get rich by only by making the poor better off

Oxfam highlights how the eight richest people who top their list are mostly Americans, with four of them being tech billionaires. But tech billionaires are a paradigmatic example of entrepreneurs who earned their fortunes by creating products that benefited everyone. Facebook has enabled us to keep in contact with old friends and relatives in a way that was impossible before. Thanks to Amazon, we can purchase even rare, out-of-print books that would only otherwise have been hard to track, and get them delivered tomorrow. In America, fortunes mostly reflect exceptional contributions to society—not the exploitation of others.

Globalisation has helped such tech billionaires to become much richer than they could have in times when markets were protected. But, this reflects the fact that their products are used worldwide, and that they help pull people out of poverty. For example, over 60 per cent of Kenyans use mobile phones to make payments. Mobiles are used by farmers to compare and check prices so that they are not exploited by local monopolies. Globalisation in general, and mobile phone technology in particular, are major contributors to the huge recent improvements in living standards in poor countries. Worldwide, there are 1.6 billion Facebook users – you are probably one of them. But, the founder of Facebook did not get rich by making others poorer. Trade is a process of mutual enrichment. Facebook has made a lot of people better off. However, Mark Zuckerberg is much better off because he benefits from the fact that so many people are using Facebook. Meanwhile, there will be many, many more entrepreneurs who have tried and failed – entrepreneurship is a risky business.

Globalisation and poverty

And it is this tendency of many countries towards embracing market institutions—a development which is by no means complete—that Oxfam fails to mention in their annual screed. This year they highlighted Vietnam as a case of deprivation, and it is true that Vietnam is still a very poor country. But it started from a very low base: they only began to move towards capitalism in 1986. Since then, their income per capita has increased from $100 per annum to $2,000, and it continues to grow at high rates, mirroring the much-acclaimed success of China and, to a lesser extent, India. China and India are still very poor by Western standards, but a report focused on how capitalism was failing them would rightly have been deemed ludicrous—it is obvious that they have done a lot better since abandoning full state control of their economy, even if, again, there is still a long way to go. China’s real national income per head was $193 in 1980. Today, it stands at $6,807 per head (IFAD, 2014, p.5). This is not due to redistribution, it is due to trade and the liberalisation of some markets.

Globally, extreme poverty has fallen from 44 per cent in 1980 to around 10 per cent today. The literacy rate has risen from 56 per cent to 85 per cent over the same period. The world could do much better still, but not by hiking wealth taxes and closing down ‘tax havens’, but by improving the basic institutional framework (property rights, the rule of law, impartial courts) that we know allows countries to grow out of poverty.

Kenya and South Korea were about equally rich – or rather, equally poor – in 1960. Kenya has seen some significant improvements in very recent years, and is one of the better-off countries in East Africa. But incomes in South Korea have grown more than fifteen-fold, and are now almost on a par with Western Europe. It was sound institutions, the freedom to establish businesses and to engage in mutually enriching trade that lead to the elimination of poverty, higher literacy rates and better health.

However, increases in income translate into increases in wealth only over a very long time, because most people immediately consume the bulk of what they earn. And it is the growth in incomes that really matters. Redistributing wealth would be a poor policy choice. Let us suppose that we went even further than Oxfam would like, expropriated the wealth of the world’s eight richest people, and distributed it evenly among the world’s population and over their lifespans. Depending on how you calculate it, you would end up giving everybody a pay rise of between 65p and £1 per year – or about 0.03 per cent for your average Kenyan. And, at the same time, you would have destroyed the system by which entrepreneurial-led innovation promotes economic growth and which has enriched previously destitute countries in a way that Oxfam could never have imagined back in 1980. Of course you could follow more moderate policies and just expropriate these people partially, say, via a 10 per cent wealth tax. This would cause less damage, but the amount you can redistribute becomes even smaller.

It is not redistribution, but mutually enriching trade and economic growth which is the hope for the world’s poor today – just as it was in the past. To put it another way, we should stop focusing on the rich as if they were the problem, and, instead, focus on policies to reduce poverty.

 

This article was first published in EA magazine