Saturday, November 2, 2013

Be careful what you wish for, do-gooders edition

As human beings, we all have a natural tendency towards some degree of empathy, which has led to the desire to help the less fortunate. This has translated to the involvement charities, church groups and NGOs like Médecins Sans Frontières in a whole host of worthy causes. But this kind of do-gooder syndrome is not immune to the law of unintended consequences.

What has happened since all these decades of effort to work in the Third World and to lift up the lives of those people? In a word, globalization. John McDermott at Off Message (via FT Alphaville) highlighted a paper by Branko Milanovic about the shifts in the global economy.

McDermott explains:
The vertical axis shows changes in real income between 1988 and 2008, measured in 2005 international dollars, i.e. adjusted for inflation and how the cost of things varies in different countries. The horizontal axis divides the incomes of the world into percentiles. Note that Prof Milanovic, the World Bank’s lead economist, is looking at the distribution of people’s incomes, not that of countries’.

On the far right of the chart is one of the two biggest “winners”: the 60m or so people who constitute the world’s top 1 per cent. About half of these are the richest 12 per cent of Americans. The rest of the top 1 per cent is made up by the top 3-6 per cent of Britons, Japanese, French and German, and the top 1 per cent of several other countries, including Russia, Brazil and South Africa.

The even bigger “winner” is the new global middle class, particularly in China and India. In 1988, a median earner in China would be richer than only 10 per cent of the world’s population. Twenty years later, that median income would put the average Chinese in the top half of the global income distribution.

On the far left of the chart is one of the two biggest “losers”: the very poorest. (This picture is probably too rosy given problems with data collection. Researchers find it tough to get data from people at the very bottom and very top of the global income scale.) The other, around the 80th percentile, is what Prof Milanovic calls “a global upper middle class” – including many people from former Communist countries, “as well as those citizens of rich countries whose incomes stagnated”.
In other words, the biggest winners were the rising middle class in emerging market economies (a.k.a. the Third World) and the 1%, who engineered the globalization and labor arbitrage revolution, while those still living in subsistence economies continue to lag.

The "unexpected consequence" was that the middle class in the developed markets has paid the price for the creation of the rising prosperity in emerging economies. This chart from FRED shows that US median household incomes have languished since 2000 (blue line) while the Gini coefficient (red line), which is a measure of social inequality, has steadily risen.

Indeed, the use of food stamps has skyrocketed in the US (as per Nicholas Colas of ConvergEx Group via Business Insider):

Indeed, income stagnation has gotten so bad that the LA Times reported that McDonald's counseled financially troubled workers to seek out public assistance:
Nancy Salgado has worked at McDonald’s for 10 years and struggles to support her children with a wage that keeps her under the poverty line.

So she called the fast-food behemoth’s employee hotline, known as McResources, in hopes of finding help making ends meet.

But instead of getting any company assistance, the McDonald’s operator suggested Salgado try food pantries, federal food stamps and Medicaid.
In effect, in trying to help the less fortunate, the middle class in developed countries saw their own fortunes stagnate.Year ago, I remember seeing a book for those who wanted to save the world which asked amusing but provocative questions like:
Would you spend a year in traction to save the life of a whale?
Be careful what you wish for, you might just get it and pay the price in ways you didn't imagine.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

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