There are many estimates of income inequality,
both between and within countries, and even a flourishing debate about
the extent to which income inequalities have been growing in the recent
past. And it is also commonplace to assume that income inequalities are
closely related to asset (or wealth) differentials. After all, wealth
allows households to use their resources to greater advantage and therefore
get higher incomes; more income enables households to accumulate wealth.
Despite this, there has been little or no careful investigation into the
actual extent of wealth inequalities in the world. Part of the problem
has been defining wealth; another has been the relative paucity of data
that would allow for cross-country comparisons and assessments of wealth
distribution over time within countries.
A new study by the UN University's World Institute for Development Economics
Research ("The world distribution of household wealth" by James
B. Davies, Susanna Sandstrom, Anthony Shorrocks, and Edward N. Wolff,
UNU-WIDER 5 December 2006) is therefore especially interesting, for it
provides the first careful consideration of the extent of wealth inequalities
in the world as a whole as well as within countries.
Broadly speaking, personal wealth covers all the resources controlled
by households, although of course that can be difficult to define and
measure. In this study, wealth is interpreted as "net worth",
that is, the value of physical assets (such as land and tangible property)
and financial assets minus liabilities. This therefore is essentially
the ownership of capital by households, and excludes the assets held by
corporate entities. So the study is really about the distribution of purely
personal wealth.
Obviously, such assets are only part of personal resources, and recently
there has been much focus on the aspect of "human capital" or
skills, as an important factor in determining economic opportunity. However,
the authors recognise that control over physical and financial capital
can have a disproportionate impact on household well-being and economic
success. It also affects overall economic development and growth in societies
as a whole.
The study finds, not surprisingly, that there is extreme inequality in
wealth distribution in the world as a whole, both across countries and
within countries. Also, the distribution of personal wealth in the world
turns out to be much more concentrated than the distribution of personal
income. According to the study, for the world as a whole the share of
the top 10 per cent was 85 per cent in the year 2000 and the Gini coefficient
(a measure of inequality between 0 and 1) equalled 0.892 at official exchange
rates.
This is an extraordinarily high value of the Gini coefficient and indicates
extremely high concentration of wealth. For comparison, it can be noted
that a recent study by Branko Milanovic found the Gini coefficient of
world income to be 0.795 in 1998.
As expected, the US is found to be the richest country even in personal
wealth terms. The average wealth per person in the US is estimated to
have been $144,000 in 2000. This compares with around $6,500 per person
(in purchasing power parity or PPP terms) in India, which is at the bottom
of the list of countries with wealth data. However, this does not mean
that this is actually the lowest per capita wealth of all countries. The
data used in the study are not comprehensive, and so a number of poor
countries have been excluded for want of adequate data. So the actual
wealth inequality across countries is likely to be even higher.
The study also finds that the concentration of wealth within countries
is high. Typical Gini coefficients for wealth distribution within countries
lie in the range of about 0.65 - 0.75, and there are several above 0.8.
In contrast, the mid-range for the Gini coefficients for income distribution
is from about 0.35 – 0.45. So the concentration of wealth has become more
acute than the concentration of income.
Many people argue that it is better to use Purchasing Power Parity (PPP)
rather than official exchange rates in inter-country comparisons of income,
and this has generally become the common practice. It is certainly true
that the concentration of wealth is less marked when it is measured on
a PPP basis, and also less on per adult (rather than per person) basis.
However, the authors argue that using PPP is not so relevant for wealth
comparisons. The reasoning is that in most countries, a substantial proportion
of wealth is owned by people who can travel easily and increasingly invest
their assets globally rather than within their own countries. This means
that converting at official exchange rates provides a more accurate indicator
of the actual distribution.
Using these official exchange rates and the available data from countries
that do have wealth statistics provides some information that is startling
even when we are inured to inequality. In 2000, the richest 1 per cent
of adults alone owned 40 per cent of global assets, and the richest 10
per cent of adults accounted for 85 per cent of total world assets. In
contrast, the bottom half of the world adult population owned barely 1
per cent of global wealth.
While there are differences across countries, the common worldwide phenomenon
that is reiterated by this study is the rise of the super-rich, especially
but not exclusively in the rich countries. Socio-political trends across
the world have contributed to this greater tolerance of wealth inequality,
but this will not last forever.